December labor market numbers show great strength in our nation’s economy: Some 216,000 jobs were added to the U.S. economy last month, making a 2.7 million job growth within the yr, the third-best showing on this century.

The unemployment rate remained at 3.7%. This was the twenty fifth consecutive month below 4%, something not seen for the reason that Nineteen Sixties. Diane Swonk, chief economist for KPMG, said, “In some ways, the labor market is at its best place it has been, not only since (before COVID), but by some measures in a long time.”

The worth of total output grew at a blistering annualized rate of 8.2% within the third quarter of 2023, the last for which now we have data. Compared with the identical quarter in 2022, it was 6.2 percentage points higher. This could be very strong.

On the inflation front: Consumer prices rose at a 1.2% annual rate in November and were 3.1% higher than 12 months earlier. The number for all of 2023 might be in that range and might be among the many lowest among the many world’s major industrialized economies. Average earnings are outpacing inflation and that is most true for lower-income employees. Stock market indexes remain near record highs and rates of interest are beginning to drop.

So the economy is in great shape by most objective measures — yet polls show a big fraction of the voting public still think it’s terrible. This perception/reality gap is an issue for political scientists and pundits, not to say President Joe Biden’s reelection campaign.

For economists though, the query is how these economic variables will perform going forward. That’s all the time an unknown. But the present abyss underlying the inspiration of 1’s reasonable expectations is big. As with the primary days of 1914, or 1930, or 1942, a variety of shocks today lie in wait that would have all of it come crashing down.

Why?

Some distinctions should be understood. The primary is the difference between “risk” and “uncertainty.”

Nobody knows the long run. But risk is the more common situation, where one has some historical trend or actuarial information or financial instrument prices on which to make estimates or forecasts. If you happen to can protect your interests by buying insurance or futures contracts or options, you face risk.

Uncertainty is scarier. It involves not knowing the long run and never having any source of knowledge on which to make an objective forecast. For instance, firstly of the years they occurred, forecasters couldn’t know that San Francisco would have a significant earthquake in 1906, that World War I’d break out in 1914, that the Latest York Stock Exchange would collapse in 1929 or that Russia would launch a significant war against Ukraine in 2022. On this date in 1918 and 2020, we didn’t know probably the most deadly pandemics in modern history lay only months or weeks ahead.

Not that there aren’t indications. As with 1862 and 1942, it is evident momentous things may soon unfold. Those were years when america stood on the brink, or already firstly, of major wars. Today the fuse is already sputtering, or actively burning, in places all all over the world — but we don’t know exactly which peril we face or how great it might be.

A second distinction for economists is between “endogenous” and “exogenous” shocks. Endogenous ones are internal to an financial system: Even though it spread internationally, the market bubble in collateralized mortgages that was constructing 20 years ago was internal to our economy; so too was the big boost the Federal Reserve gave to the cash supply in 2021-22 to mitigate the consequences of COVID, on the assumed risk of ballooning inflation.

Exogenous aspects, or “shocks,” arise outside an economy. Though we saw these constructing, the Japanese attack on Pearl Harbor in 1941, the outbreak of COVID in 2020, Russia’s assault on Ukraine in 2022 and the violent rebellion of Hamas in Gaza three months ago are exogenous shocks. So is the potential of a significant presidential candidate upending the worldwide trade and tariff regime, if he gets elected, at the same time as he faces multiple criminal indictments. So too are impoverished tribesmen in a barren Arabian Peninsula country using drones to shut down probably the most economically vital waterway on this planet.

So too does the potential of a long-simmering cold war between the haves and have-nots erupting right into a full-scale global conflagration.

Unpredictable results stem from unusual situations. After a half-century of lots of of economists spending hundreds of thousands of dollars to construct mathematical economic forecasting models, few are of greater use than the ruler in a sixth grader’s backpack. Forecasters will be quite precise at variations around a trend — as long as the trend continues. Nevertheless, they’re terrible at predicting when a trend will suddenly and sharply change.

So the numbers, minus external shocks, one can say that the U.S. economy in 2024 is prone to be good — with continued growth of real output and earnings, low inflation and unemployment and increasing jobs. Stock prices might be stable or possibly up. Rates of interest will fall a bit.

Unfortunately, perhaps tragically, the likelihood of external shocks slamming the U.S. economy is high. The query of which of them will hit, when, and the way hard,  is unanswerable in any objective sense.

The Mideast today frighteningly parallels Europe in 1914. On June 27 of that yr, diplomatic tensions in Europe were at their lowest level in years. The following morning a frail Bosnian student shot an Austrian archduke. Austria threatened Serbia, which had fomented the assassination. Russia backed its ally Serbia. Germany backed its ally Austria. France had signed a treaty to assist Russia in case of war with Germany. Britain had an unwritten commitment to assist France and a treaty guaranteeing it might defend Belgium against attack by anyone. Before long, america got involved. It will take 51 months and 40 million dead before peace in Europe returned.

In October of last yr, Hamas in Gaza launched a barbaric attack on Israel. A politically weak Israeli government responded with great force. This outraged many Arabs and Muslims of other ethnicities. Hamas, like Hezbollah in Lebanon, is backed by Iran. Sunni Muslim Saudi Arabia and smaller Persian Gulf states hate and fear Iran — a nation that’s Shiite Muslim and never Arab. Yemen is a client state of its wealthy neighbor Saudi Arabia, but is locked in an internal war with Houthi rebels supported by Iran.

The Houthis only had primitive rockets, but following the instance of Ukraine are mastering using drones to deliver explosives with precision. Just a few good hits on the bridges of container ships within the Red Sea headed toward or from the Suez Canal could shut a worldwide economic artery. Saudi Arabia might then launch harsher and indiscriminate attacks on Houthis and the dominoes could start falling. Iran might come to the Houthis’ aid by shutting down the Persian Gulf and attacking Saudi installations. Brakes would slam on the world economy. At worst, Iran might use a nuclear weapon. Israel then might respond in kind.

One could spin similarly grim scenarios for Ukraine and Russia, for Asia if China’s Xi Jinping is emboldened and makes a military grab for Taiwan — Japanese, South Korean, Australian and Indian submarines join U.S. and Taiwanese subs in choking off all China’s imports. At worst, the U.S. sends a naval task force to defend Taiwan and a Chinese hypersonic missile succeeds in the primary sinking of a U.S. aircraft carrier since 1944.

One may think up internal U.S. “shock” scenarios — comparable to further political violence involving Donald Trump and his supporters — where, as a substitute of respecting objective rules of law and democracy, the very legitimacy of those rules are questioned because they’re inconvenient to 1 man’s desired ends.

In summary, the U.S. economy probably might be high-quality in 2024 unless something goes unsuitable. As my mother would say, “Hope for the very best and expect the worst.”

St. Paul economist and author Edward Lotterman will be reached at stpaul@edlotterman.com.