Slowdown in consumer spending will create headwinds for the U.S. economy in 2024

DENVER (December 14, 2023)—The U.S. economy has remained remarkably steady despite an unrelenting series of shocks over the last three years. America’s economic resilience was again on display throughout 2023, as the Federal Reserve continued the most aggressive round of interest rate hikes the country has seen in more than 40 years. Steadfast consumer spending has fueled the economy through much of the recent adversity. However, lingering high prices are expected to take a bigger toll on the economy in 2024, according to a comprehensive year-ahead outlook report from CoBank’s Knowledge Exchange.

“By conventional measures, the U.S. economy is doing quite well,” said Rob Fox, director of CoBank’s Knowledge Exchange. “But consumers are increasingly feeling the pinch of higher prices for food, housing and other essential goods. People have anchored mental expectations about what prices should be and those anchors take a long time to move. Consumers are beginning to realize some prices aren’t going back to where they were three years ago and changing their purchasing behaviors to reduce spending. That will create stronger headwinds for the U.S. economy in 2024.”

The CoBank 2024 outlook report examines several key factors that will shape agriculture and market sectors that serve rural communities throughout the U.S.

Global Economy: Growth Rates Will Fall in the Era of Deglobalization

The decades-long era of free trade agreements was a rousing success for global economies. Since 1990, global trade has increased more than 400% and global GDP has increased by 500%. During the heyday of free trade (2000-2018), global GDP grew at an average of 5.4% annually. But those days are over as the ideological pendulum has swung towards economic protectionism and political isolationism. Global growth in 2023 is estimated at around 2.5% and the consensus is for a continued slowdown in 2024. China’s economic growth rate has leveled off considerably. Business plans must account for the reality of permanently slower global economic growth moving forward.

U.S. Economy: Consumer Sentiment More Important than Economic Data

Key indicators point to the strength of the U.S. economy. Headline inflation has plummeted to 3.1%, the unemployment rate remains below 4% and inflation-adjusted wages are growing. However, large swaths of U.S. consumers remain anxious about their financial situations given high grocery prices, skyrocketing mortgage rates and other inflationary pressures. While grocery inflation is currently running at about 2%, the price of food at home has risen by 25% in the past three years. Consumer spending makes up almost 70% of the economy and consumers who are worried or angry will hold back on discretionary spending. Inflation-adjusted retail spending has fallen in 10 of the past 12 months, a trend that could carry into 2024.

U.S. Government: Vital Funding Bills Await Dysfunctional Congress

The difficulties of governing with slim majorities in both the House and Senate are in clear focus as 2024 draws near. While the House was ultimately able to pass a Continuing Resolution (CR) three days before a shutdown deadline, none of the 12 annual appropriations bills have been enacted. Until Congress can complete its work appropriating discretionary funding, little progress can be made on other major legislation like the Farm Bill. For rural America, there was a silver lining in the CR as it extended the current Farm Bill through Sept. 30, 2024. However, many reasons favor completing the new Farm Bill sooner rather than later. Cooperation will become increasingly difficult as the next election cycle begins.

U.S. Agricultural Economy: High Costs Spell Lackluster Profitability for Farm Incomes

Higher interest rates, a strong U.S. dollar and resiliency of the U.S. economy have weighed heavily on agricultural commodity prices. But the biggest problem for farm margins heading into 2024 is the elevated cost of production. While fertilizer prices have fallen, other costs of production remain stubbornly high. However, ag commodities will benefit from more upside price risk than down in 2024. Global grain and oilseed stock inventories are tight by historic measures and the northern hemisphere will likely have a strong El Nino weather pattern during the growing season for the first time since 2015. The dollar should continue its recent decline and global demand should return to its long-term growth trend.

Grains, Farm Supply & Biofuels: Renewable Diesel Will Shift More Acres to Soybeans

The renewable diesel boom and the smaller U.S. soybean harvest of 2023 will drive an expansion of soybean acreage in 2024, reducing acres available for other crops. The biofuel sector at large carries the momentum of historically large profit margins into the new year. Both ethanol producers and soybean crushers are benefiting from rising demand for biofuels. The grain and oilseed price outlook hinges largely on the value of the U.S. dollar, conditions of wheat in Russia and harvests of corn and soybeans in South America. Current 2024 futures prices suggest further price erosion across the sector in 2024.

Animal Protein: Input Costs Temper Expansion Plans, Production Growth

Profitability for the U.S. livestock sector should improve modestly in 2024, as lower feed costs and steadfast domestic demand offset weak global export conditions. Beef packers will continue to struggle with shrinking supplies of available cattle. Tighter cattle numbers, flat pork supplies and dampened broiler availability would normally be seen as supportive to margins, but all segments have been fighting rising costs of production. With expansion plans on hold due to the high-cost environment, the industry’s focus on efficiency and technology is expected to intensify and risk management will remain paramount. U.S. animal protein will remain competitive in global markets but open access to markets remains critical.

Dairy: Growth Will Continue, Exports Remain a Wild Card

The upside potential for dairy demand faces some uncertainty moving into the new year. Dairy product sales should grow, led by cheese, butter and yogurt. However, that growth will be at a slightly slower pace as U.S. consumers will be pressured by reduced household savings, growing credit card debt and higher interest rates. Ultimately, the wild card is international demand as the world’s growing middle class craves more high-quality proteins. If global dairy demand picks up, the U.S. is poised to fill orders as the other major dairy export regions all show signs of static milk production growth. Lower feed costs and improved cow productivity should spur additional U.S. milk production.

Food & Beverage: Consumers Seek Value Amid Elevated Prices

Food and beverage companies’ financial performance has largely relied on price increases at the expense of volume sales over the last year. That approach is rapidly running out of road, and the limits of price elasticity will slow further increases. But elevated prices will continue to impact consumer shopping behavior, even amid pockets of deflation in certain categories and expectations of lower prices in other grocery goods in the coming year. Cost-saving behaviors including purchasing from lower-cost retailers, trading down to private label brands and value shopping are likely to linger. Modest volume growth in food and beverage is likely as several factors are improving, including inflation.

Power & Energy: Global Discord Underscores Need for Energy Security

Global conflicts and geopolitical discord spanning the Middle East and Eastern Europe create significant uncertainty for commodity markets and energy prices. Complicating matters further, global suppliers are reconciling the prospect of an accelerated energy transition with the realities of today’s fossil fuel-dependent economies. Nevertheless, oil prices have fallen by 5% in the fourth quarter as the economy slows and inventories rise. But it is unlikely the current market calm will persist. The World Bank asserted that if conflict-driven market disruptions escalate, oil prices could potentially blow past $150 per barrel in 2024.

Communications: Despite Tailwinds, Broadband Buildouts Face Obstacles

The broadband market will continue to be a bright spot for the U.S. economy in 2024. The amount of public and private investment flowing into the industry is unprecedented as the era of digitization continues. However, telecom operators face several obstacles to executing their network buildout plans on time and on budget. The challenges include navigating the tight labor market, tightening credit conditions and managing through the permitting process, which has proven to be a bottleneck for fiber builds. The combination of low unemployment and a significant amount of network build work scheduled for 2024 means many contractors are already booked 6 to 12 months out.

Read the full report, The Year Ahead: Forces That Will Shape the U.S. Rural Economy in 2024.

CoBank is a cooperative bank serving vital industries across rural America. The bank provides loans, leases, export financing and other financial services to agribusinesses and rural power, water and communications providers in all 50 states. The bank also provides wholesale loans and other financial services to affiliated Farm Credit associations serving more than 76,000 farmers, ranchers and other rural borrowers in 23 states around the country.

CoBank is a member of the Farm Credit System, a nationwide network of banks and retail lending associations chartered to support the borrowing needs of U.S. agriculture, rural infrastructure and rural communities. Headquartered outside Denver, Colorado, CoBank serves customers from regional banking centers across the U.S. and also maintains an international representative office in Singapore.