As the end of 2023 approaches, it would be safe to say that many people don’t know exactly how to feel about the economy. On the one hand, consumer sentiment in the United States remains low, albeit with a significant improvement in December 2023 compared to the previous several months. On the other hand, the stock market reflected economic optimism, with the Dow Jones Industrial Average closing at record highs last week.

With seemingly opposite viewpoints on the current economy, how should we consider the past year? For Marylanders in particular, is there reason to be optimistic or should we be worried about the year to come?

According to the Bureau of Labor Statistics (BLS), Maryland added 37,000 jobs between December 2022 and October 2023. Over the same period, the unemployment rate dropped from 3.0 percent to 1.7 percent. This gives Maryland the distinction of having the lowest unemployment rate of any U.S. state, as well as the largest decrease in the unemployment rate over the past 12 months. The labor force participation rate improved by 0.6 percentage points, driven by a combination of new young workers and people returning to the workforce after some time away. The strong labor market has also resulted in higher wages, with the Bureau of Economic Analysis (BEA) reporting that per-capita personal income in Maryland increased from $71,467 to $73,997 over just the first half of 2023, with further increases likely to be reported for the second half of the year.

Despite these strong indicators, it has still been a rough economy for many Maryland residents in 2023. Although year-over-year inflation for the U.S. was down to 3.1 percent in November, consumers are still suffering from the consequences of inflation that was more than twice that rate in both 2021 and 2022. The increases in personal income mentioned above are effectively wiped out when considering actual purchasing power, as the increase in prices over the past several years has outpaced those gains in wages. The Federal Reserve continued to increase interest rates in 2023 in order to fight inflation, resulting in nationwide 30-year mortgage rates that averaged higher than 6 percent for the entire year, reaching a high of nearly 7.8 percent before beginning to decline over the past several months. Fortunately, the Federal Reserve has signaled that it is unlikely to increase interest rates further in 2024 and will instead look towards the possibility of reducing interest rates slightly over the next year.

The increase in interest rates has succeeded in slowing the housing market nationwide, resulting in a substantial drop in the median sales price of houses between the fourth quarter of 2022 and the third quarter of 2023. Whether this qualifies as good or bad news for the economy may differ depending on whether you currently own a home, although high mortgage rates continue to price out many potential homeowners regardless of the asking price. The slowdown has been less impactful in Maryland, where home prices have continued to increase over the past year, regardless of higher mortgage rates.

As we look towards the future, there is good reason for optimism despite the current difficulties. Gross domestic product (GDP) has shown continued growth over the past year with increases in consumption, investment, and government spending. With inflation starting to approach normal levels, the overall economy looks poised to avoid a recession that many economists believed was a certainty only a year ago, even as high interest rates reduce the overall rate of growth. The Regional Economic Studies Institute will continue to track these economic trends as we keep an eye out for the major economic stories of 2024.