Economic Outlook - December 2024
- Mixed economic data has led to a debate at the Federal Reserve. Economists are divided on whether further rate cuts could reignite inflation, something the Federal Reserve has worked hard to reduce over the past few years. The Fed’s dual mandate—maximum employment and stable prices—requires a cautious approach. The recent rate cut to a range of 4.5%-4.75% while unemployment is 4.1% suggests that the Fed is maintaining a balance between supporting growth and managing inflation.
- Inflation is still above the Fed’s target, though it has eased significantly from its peak. The PCE Price Index, the Fed’s preferred inflation gauge, shows a year-over-year rise of 2.3%. While this represents a slowdown from earlier in 2024, it still shows that inflation is stubbornly above the 2% target. Lowering inflation to this target may remain a difficult task moving forward, particularly as prices for food and energy remain volatile.
- The Republican sweep in the November elections, including the victory of Donald J. Trump as President and gains in the Senate and House, could have substantial implications for economic policy. The market will closely watch how the incoming administration will implement policies (like tax cuts, tariffs, and deregulation) that the administration promised on the campaign trail.
- Consumer spending has supported economic growth, but pandemic-driven savings buffers are depleting according to banks. Large retailers report growth but point to a shift in consumer spending from discretionary items to necessities. This shift is consistent with a weakening demand for big-ticket items and home improvement projects, suggesting that while consumer sentiment is still strong, spending behavior has shifted toward more practical purchases.
- The housing market remains subdued, with declines in building permits and housing starts in October, reflecting the impact of high interest rates and borrowing costs. Interestingly, homebuilders’ stocks (as measured by the S&P Homebuilders Select Industry Index) have outperformed the broader S&P 500, rising over 28% year-to-date.
- Nonfarm payroll employment was flat in October, indicating a slowdown in job growth. The unemployment rate remained steady at 4.1%, but the increase in long-term unemployment (up 23% year-over-year) is a concerning trend, signaling challenges in the labor market for those out of work for extended periods. This stagnation in employment growth could suggest that the job market is cooling off after a period of strong recovery, which could further influence the Fed’s policy decisions.
Sources: FactSet, Board of Governors of the Federal Reserve System, U.S. Department of Commerce, Federal Reserve Bank of St. Louis, U.S. Department of Labor
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