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You're listening to the Economics & Country Risk Podcast from S&P Global Market Intelligence. In each episode, our experts will provide you with the where, how and when to make decisions that transform your business.

Kristen Hallam

In our first episode of 2024, we talked about our 10 predictions for the global economy. In this episode, we'll unveil our 8 U.S. regional economic predictions for 2024, a year of uncertainty as Americans prepare for elections in November.

I'm Kristen Hallam, Lead Content Strategist for Global Intelligence and Analytics at S&P Global Market Intelligence and your host for this episode of the Economics & Country Risk Podcast. Joining me are my colleagues from S&P Global Market Intelligence, Karl Kuykendall, U.S. Regional Economist; and John Raines, Director, North America Country Risk Analysis. Thank you both for being here today.

Karl, you will be talking about our economic data and insights, and John will be the one talking about the elections and the potential political implications of the economic data that Karl is sharing with us. So with that established, let's put our discussion in context with a quick overview of where the U.S. economy was at the end of 2023. Karl, could you put us in the picture?

Karl Kuykendall

Thank you for having me, Kristen. I'm excited to discuss regional economies and our expectations for 2024. And December 2023, the U.S. and state economies largely did well. Half the states achieved record low unemployment rates last year and the majority experienced healthy job growth.

All 4 census regions witnessed significant cooling of CPI inflation throughout the year, which offered Americans a welcome relief from price pressures and housing markets that experienced price declines, largely saw prices moving upward again by the end of last year. So the States entered 2024 on solid ground, but we do have concerns clouding the outlook.

Question and Answer

Kristen Hallam

Thanks for that, Karl. Now let's dive into the 8 predictions our U.S. regional economists have for 2024. Let's tackle the first two together. The first is that unemployment rates will trend higher in all 50 states. And the second is that job growth will tap the brakes for the third straight year. What will the magnitude of those changes be, Karl?

Karl Kuykendall

By the fourth quarter of 2024, the national unemployment rate is expected to exceed 4%. Now this is still very low from an historical perspective, but it will be the highest in 3 years. Job openings have been on a sharp downward trend that will continue as companies adopt a cautious approach to hiring, which, along with restrictive financial conditions will create some slack in regional labor markets.

Now the impact will be felt broadly with all states expected to see higher unemployment rates by the end of 2024. And this isn't really going out on a limb in the sense that the unemployment has gotten to unsustainably low rates in many states across the country, but it is an important trend to highlight nonetheless, and we'll be on the minds of the general public as rates start to creep up.

Kristen Hallam

Karl, where do you expect these trends to be most pronounced?

Karl Kuykendall

So we expect unemployment to be highest in the West, and this will be led by California, Arizona and Nevada, due in part to a slowdown in tech and tourism hiring. Meanwhile, we expect the South to have the lowest jobless rate and be the only region in the country where unemployment stays under the national average of 4%. So rates will be especially low in states like Florida, Virginia and South Carolina, which continues a multiyear trend of unemployment well below the U.S. average.

Now from the perspective of job growth, all regions will see gains moderate over 2024 as hiring decelerates for the third year in a row. Lingering tightness in the labor market, combined with this waning labor demand will impact job growth nationwide. The South will top all regions for the third straight year, powered by Texas, Florida, South Carolina and Georgia.

And the West will come in second, propelled by job gains in the Mountain states, the Midwest and Northeast with trail the U.S. in terms of job growth. And quite honestly, this regional ranking is unchanged from historical trends. So this is a trend that we've seen over the past several years, but all regions will see subdued job growth this year relative to the last three.

Kristen Hallam

John, this seems like a good time to bring you in for some political context. How big of an issue does the economy tend to be in U.S. elections? And what about in this particular election?

John Raines

Yes, that's a great question. And then in the old days, the economy was the defining issue for any campaign out there. If citizens felt good about their pocketbooks and their jobs, well, generally, they felt pretty good about their presidents and they reelected them. And in fact, there's some research out there that says that no president has lost their reelection campaign if they have not had a recession in the last 2 years of their administration.

The last time this happened, 1912. So it's been well over a century the last time we saw a president lose in this type of environment. So we would expect Joe Biden to be pretty good here, right? But if we look at the polls, that's not the case. Now there's a lot of different reasons for that. And you could say that it's people remembering the inflation that's happened over the last few years. You could say it's people looking back and seeing what their economic condition was pre-pandemic.

But there's also an element, I think, a lot of folks aren't considering as well, and that's the issue of polarization. We're living in an era now where really we have two decided camps, Republicans and Democrats, retreating to their own side. And so when the other party gets into office, they automatically have a negative view of the party in power.

We saw it under Donald Trump, we saw it under Barack Obama, and I think we're seeing it again under Joe Biden. And so therefore, when we're looking at these polls, what we need to recognize is that it's not only that these voters are likely to view the other party negatively, but also what's going to motivate them to come to the poles in the first place. And certainly, the economy is going to be one issue, but it's also going to be other issues that we hear in the news on a regular basis.

Kristen Hallam

Okay. Lots to think about there. And which states, John, would you say are the likely battleground states in 2024?

John Raines

For the most part, we're thinking it's going to be those usual suspects that we saw in 2016, 2020. So specifically, we're looking at Arizona, Georgia, Michigan, Nevada, North Carolina, Pennsylvania and Wisconsin. In fact, if we think about 2020, just three of those states, Arizona, Georgia and Wisconsin, were those tipping states that actually push the election towards Joe Biden. And those were decided by 0.6% or 42,000 votes.

Now some of these states are a little bit new. If we look back a decade, we might not think of these particular states being in the mix, and those include states like Arizona and Georgia and North Carolina, which, for the most part, favored Republicans by significant margins just a few years ago. And we do have a few wildcards out there that we're watching and those include Florida, which has traditionally been very, very close to Republicans, had a very strong turnout in 2022.

But traditionally, that's been a bellwether. We've watched to see who was going to win the presidency, New Hampshire, Colorado, Maine. Again, these are states that we tend to fill are in the Democrat column, but some polls suggest it might be closer this time. Texas, Democrats have always wanted to shift that in their corner and make that state purple.

Again, right now, Republicans look as though they have the advantage, but that could come into play. And also finally, maybe Minnesota, which, for the most part, has been favoring Democrats. But other states like Wisconsin, like Michigan have been starting to shift in the Republicans' direction and Republicans would certainly like to see that state be in play in this next election.

Kristen Hallam

Wow, lots of moving parts there, John. You've got your work cut out for you this year, for sure.

John Raines

It certainly keeps us busy.

Kristen Hallam

So shifting back to Karl and the economic predictions. The third prediction is on migration. Domestic migration, I should add. The movement of people from one state to another. Domestic migration is normalizing after significant inflows and outflows during the pandemic. Karl, tell us what to expect on this front in 2024?

Karl Kuykendall

Yes. This is a really big development from a regional economic perspective. So state-to-state migration is a critical driver of overall regional growth prospects. And post-pandemic, migration patterns had an outsized influence in the timing and the speed of their respective state recoveries. And the pandemic didn't as much change long-standing regional migration trends, but it magnified the existing ones.

So the South was the clear winner, the West Coast and the Northeast were clear losers. And we're at a point now where domestic migration patterns have been normalizing to a degree, and we expect migration patterns to move further toward historic norms over 2024. So Western outflows are expected to ease from inflated levels with California's exodus becoming less severe, and the Mountain region seeing a resurgence in inflows. Domestic migration to the South will further soften from current levels that are well above trend.

And the Midwest, we'll see outflows increase this year after softening in 2023. And lastly, the Northeast outflows are expected to ease further from the peak they reached in 2022. So while trends won't get back to normal, they will start trending towards that direction. Now the South for the 6-year running will be the only region experiencing net gains in domestic migration, but the gains will not be quite as high in the South and the loss is not quite as deep in the Northeast and Midwest relative to the past 3 years.

Kristen Hallam

And where are we seeing population decline on a state level?

Karl Kuykendall

Yes. So with the gap between the destination and departure states closing, the bottom performing states will do relatively better. As a result, the number of states experiencing population declines has decreased from 16 in 2020 to 8 in 2023. This was also helped, too, by the fact that international migration levels have come back from the pandemic lows.

Now we expect further easing in terms of the states, seeing population declines for 2024 with just seven. But there will still be a case where there will be major state economies marred by population losses. For example, California, Illinois and New York, which combined for 1/5 of the U.S. population are on track to see population decline for their 5th, 10th and 6th consecutive years respectively.

Kristen Hallam

Wow, very interesting. John, could this internal migration have any impact on U.S. congressional races?

John Raines

It's possible. I mean look at the stage where we've seen population growth over the past decade, and Karl mentioned a lot of them in the South, Georgia, Texas and North Carolina. And then conversely look at the states that have lost population like New York and Massachusetts, and they have a certain partisan predisposition, if you will.

The Southern states tended to vote Republican and those Northern states have tended to vote Democrat over the last few decades. So obviously, the advantage towards the Republicans, right? Well, it's a bit more nuanced than that. First off, these folks have to move some place and oftentimes the places where they're moving, they can actually start changing the voting patterns of those individual congressional districts or the states themselves.

So remember, like, for example, Democrats won seats in Georgia, the Senate seats in 2020, and they also won again in 2022. On top of that, we'll see that when you reapportion congressional districts, it's the state legislatures that are doing that. Now Republicans do have an advantage here. They do control more state legislatures than Democrats, but it depends on how they want to reapportion. Do they want to do so in a manner which increases their advantage?

Or do they want to do something a little bit different where they want to actually project their incumbents? So those come into play as well. And then finally, we need to look outside those population moves when it comes to the redistricting. It's not only population movements that we also need to consider. We also need to think about the role of the judiciary. We've had two Supreme Court cases that have worked their way through the system, which are going to actually force these legislatures to reapportion.

Those include Alabama and also Louisiana. And we also see redistricting battles in New York and also North Carolina. So as critical as it is for these population moves, it's a bit far more complex, and we have to actually look at the inner workings of these individual states to determine which party has the advantage.

And one final thing to remember is that these small margins, whether one party gets one seat or another seat, can actually be critically important because remember, the margin currently in the house is 2 seats. So if we just have 2 or 3 seats going in one direction for one party versus the other, it really can make the overall difference between which party actually has control of Congress in the years ahead.

Kristen Hallam

Now our fourth prediction is that home prices will rise across all 4 census regions. But our fifth prediction is that housing affordability will gradually improve in the U.S. Karl, how is that possible?

Karl Kuykendall

Yes, Kristen, so this is a very interesting dynamic. And I want to start by highlighting just the affordability crunch that we're currently in because we're in a situation now where the affordability and the drastic decline in affordability is broader and deeper than even the one in the mid-2000s. So we're essentially looking at historically low affordability across most states.

And really, how we got into the situation, it was a combination of surging home prices across much of the country in the aftermath of the pandemic and then followed by a spike in mortgage rates that dramatically eroded housing affordability even when home prices started to decelerate to a degree. And while the severe home price correction improved affordability coming out of the mid-2000s bubble, that isn't in the cards this time around.

So we're in a situation now where builders haven't been able to keep up with demand and many existing homeowners are locked into low interest rate loans, which have kept inventories very lean. So the lack of supply will keep upward pressure on home prices this year. So really, any notable improvement in affordability hinges on a decline in borrowing costs. And that is something that we are assuming in the forecast.

So we are projecting the conventional 30-year fixed mortgage rates to dip from their 7.1% average in the fourth quarter of 2023 to 5.8% by the fourth quarter of 2024, and this will happen in tandem with the Fed starting to gradually lower interest rates this year. And that's going to help broadly improve our regional affordability metric. But of course, that impact will be dampened by rising prices. So all in all, we do expect affordability to improve this year, but any improvement will be gradual.

Kristen Hallam

And where will we see the strongest gains in home prices? And where will we see the greatest improvement in affordability?

Karl Kuykendall

We do expect that all regions, we'll see home prices rise this year with the strongest gains in the West and Northeast. By the fourth quarter of 2024, we expect the West will bounce back from an especially weak 2023 when it ranked the last among regions by a pretty wide margin in some states, particularly in the Mountain region and California, a modest home price corrections over late 2022 into early 2023.

But from an affordability standpoint, even though the West in California, we saw a slight retreat in home prices last year. We do expect the West to retain its crown as the least affordable region with the Midwest remaining the most accessible. And even with the projected improvement in affordability, median-priced homes will be beyond the reach of median-earning households in 27 states by the end of 2024.

That's an historically high mark. It's not quite as bad as it was in 2023, but it's still very much above what we typically would see during kind of a normal time in the housing market. So it's going to very much be a situation where the struggle for attainable housing will continue in 2024 and improvements in the year after will again be gradual.

Kristen Hallam

John, how might that struggle for affordable housing factor into election day?

John Raines

One of the big criticisms of Biden has been that rents are too high and that mortgage rates are just simply unaffordable. Now obviously, Joe Biden would argue with that and say he doesn't control interest rates. Now as Karl mentioned, the Fed chairman has just recently come out and said that he expects rates to get cut 3 times over the next year. And obviously, if that occurs, that's going to help Joe Biden. But in the interim, he's paying the price politically.

Kristen Hallam

Okay. And now we come to inflation. Our sixth prediction is that headline consumer price index inflation will continue to moderate in 2024. Karl, what's the magnitude of that? And where will we see the biggest slowdown in inflation?

Karl Kuykendall

CPI inflation tumbled across all 4 census regions throughout 2023, but there has been a clear regional divide with CPI inflation running notably hotter in the South and West compared to the Northeast and Midwest. High growth in shelter costs is a significant driver in the South, while the West is experiencing outsized gains in energy and medical care costs. Now going into 2024, we do expect progress to continue.

So rebounding supply chains and a more subdued labor market will act as price anchors. Now shelter cost, which is a substantial component of the CPI will continue with their descent from recent peaks. So we think by the final quarter of 2024, inflation will range from 2.6% in the South to 2.4% in the Midwest. The South and the West will see the most pronounced softening in CPI growth because costs have more room to fall in these regions.

Kristen Hallam

Thank you, Karl. Now our seventh prediction is that real wages will rise across all U.S. census regions. By the way, if you'd like to learn more about wage growth trends in 2024, please do you check out our podcast episode on labor market trends for the year ahead. Now Karl, that sounds like good news to me. Tell us more about what's driving that? Is it that inflation is taking less of a bite out of wages?

Karl Kuykendall

So labor markets will remain tight and continue to exert upward pressure on nominal wages, although at a moderate pace this year compared to 2023. But yes, Kristen, to answer your question, the dramatic slowdown in inflation last year and its further decline in 2024 will be the key driver of real wage increases. The Northeast will lead the nation by a slim margin recovering from a weak 2023.

While real wages have certainly taken a hit in recent years, the downward trend in inflation will be a positive to spending power across the U.S. So while consumers will still be feeling the pinch from the high price environment preceding this recent softening, at least the trend is now moving in a favorable direction.

Kristen Hallam

So John, we've got slowing inflation and rising real wages in 2024. How might that influence voters?

John Raines

It's really a conundrum or almost a paradox because as Karl mentioned, we have decent growth, we have low unemployment and inflation has been falling. So you would think most Americans would feel pretty positive about this economy and therefore, they would feel pretty good about Joe Biden. But that does not seem to be the case when we look at polls. Like I said before, it's really one of his weakest issues.

And when the American public has to judge Joe Biden versus Donald Trump, really, Donald Trump has a significant advantage on that issue. And the big question is why. Well, one of those reasons, as I mentioned before, was polarization. But I think another one is that people might understand that the inflation rate seems to be coming down or at least that's what people are telling them.

However, when they look at prices today, they see them as significantly higher than they were pre-pandemic, right? And it's one of the reasons why Joe Biden is struggling here. Now obviously, if things begin to change as we've seen and voters begin to acclimate to these new prices, as some research is beginning to suggest that they are, then obviously, Joe Biden can turn this around. But as it stands right now, it's not really one of his stronger issues.

Kristen Hallam

Thanks for that insight there, John. Now our eighth and final 2024 prediction from our U.S. regional economists is that manufacturing employment will decline across regions for the first time since 2020. Karl, tell us more about what's behind that and where we might see the biggest impact of that trend?

Karl Kuykendall

Sure. So there will be a move to keep inventories lean, while businesses shift into a cautious environment. Homebuilding and home sales will remain weak in 2024, which spills into supplier industries and related spending on household goods and the energy sector will continue to grow at a reduced pace. Automotive production will continue to trend higher, but well-off the pace it was over the previous 2 years.

And on the plus side, the massive build-out of battery in semiconductor plants will be a positive. But the bulk of the related manufacturing hiring will occur after this year. So really, it's more a story of the business cycle. So overall, tepid economic growth and a further shift from durable spending to services will be key headwinds to navigate for the industrial sector this year.

And as a result, we do expect manufacturing employment to be firmly negative in all 4 regions in 2024. So the South and Midwest will do relatively better due in part to a bump in automotive manufacturing hiring coming out of the UAW strike, but it will be the case where states that rely the most on manufacturing payrolls such as Alabama, Arkansas, Indiana, Iowa, Kansas, Kentucky, Mississippi, Ohio and Wisconsin, they will bear the brunt of the slowdown. So it will be a case where all of these states will experience employment growth below the national average.

Kristen Hallam

John, what's the significance of that decline in manufacturing employment that Karl just talked about? What's the significance of that for the election?

John Raines

Really, over the last few election cycles, not only in the U.S. but also really across the industrialized world, we're starting to see that incumbents are having a far more difficult time getting reelected, far more difficult than they got in the 1990s and the early 2000s. And part of the reason for that, some research suggests is the fact that wages are not keeping pace with growth. And so therefore, this sense where maybe they tell me the economy is going relatively well, but it doesn't seem to be the case when I look at my own economic standing.

And so what we have to do here is when we're looking at either one of these candidates, whether it's Trump in 2020 or Biden in 2024 is that these incumbents, despite the fact that they promote themselves as being pro manufacturing, whether it's Trump with the tariffs or Biden with the bipartisan infrastructure build and chips. Regardless of this, many folks inside those communities that might be attracted to that pieces of legislation or policy are not necessarily giving the credit to the incumbents, which they might have done in the past.

And I think it sets certain ceilings for these candidates along with that polarization debate that we brought in before, which says, hey, listen, regardless of what you're doing here on the manufacturing front and in addition with the idea that we might see lower manufacturing employment growth in the future, that could really set certain ceilings here for any politician looking forward that's looking for election or even looking for reelection in this case.

Kristen Hallam

All right. Well, we have covered a lot of ground. It's time to wrap up our discussion. Karl, what key economic indicators will you be watching as 2024 unfolds?

Karl Kuykendall

Sure. So the state and metro employment data are always an important indicator for us to follow since it's one of the most timely and reliable releases at the regional level. But it will be especially important in this environment where employment growth is decelerating and the unemployment rate is rising.

This will be a very important signpost and something we'll be tracking closely just to see how employment growth is shaping up as 2024 progresses, how it's shaping up relative to our expectations and which regions are seeing the most pronounced slowdown in overall growth and the biggest increases in the unemployment rate.

Now we'll also continue to closely track the CPI releases. So the U.S. CPI figure is usually the most widely reported, but I will be studying the regions with a keen interest on the West and South since they have the most ground to cover before approaching the 2% target. And quite frankly, if we're going to see moderation in overall U.S. CPI growth, the moderation in the West and South will be a very important driver for the overall downward trend at the U.S. level.

And I'll also be looking closely at the housing and home price trends, which remain important signpost. In particular, will the West continue to hold on to the home price gains coming out of the late 2022 to mid-2023 soft patch. And really, the health of the housing market, very much a regional dynamic, but something that plays in is a very important dynamic in how people feel about their economic well-being.

Kristen Hallam

I can almost say that all economics is local, huh?

Karl Kuykendall

Yes, absolutely.

Kristen Hallam

And John, what signals are you keeping an eye on as you track this extremely closely watched election?

John Raines

Well, I think one thing is obviously the economy. Do we start to see voters shift their opinion on the economy and then, of course, how they view Joe Biden in respect to that? But then on top of that, one thing I'm really looking at is, what's going to happen with these third-party candidates.

Right now, we're seeing support for third-party candidates, 10%, 15% of the vote at levels that we have not seen since 1992 or 1996, and they could have a fundamental impact on the course of this election. Do we start to see these folks breaking off into either Democrats or Republicans because those are the most viable candidates? Or do they stay home and they actually support these independent candidates that they do? It's certainly going to change the dynamics and how our understanding of where this race is going in the future.

Kristen Hallam

All right. Well, all that's left for me to do is to thank you, Karl and John, for sharing your insights with us. And thanks to you, our listeners, for tuning in. Please join us next week to learn more about the trends we see unfolding in 2024.

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