Economic Outlook - October 2024
- Last month, the Fed lowered short-term interest rates by a half-percentage point. This was a strong start to the Fed’s first rate reduction cycle since 2020. The US central bank’s benchmark rate is now in a range between 4.75% and 5%. Lower interest rates reduce costs across the economy and may stimulate demand leading to an economic “ripple effect.” Officials said they hope to achieve a so-called “soft landing.” The goal is to reduce inflation without a sharp rise in joblessness. “While the task is not complete, we have made a good deal of progress toward that outcome,” Fed Chair Powell said.
- The Federal Reserve’s preferred inflation gauge, the personal-consumption expenditures price index (PCE), showed price pressures continue a cooling trend, rising 2.2% in August from a year earlier compared to economists’ expectations for a 2.3% rise. In July, the index rose 2.5% from a year earlier. The readings suggest inflation continues to move towards the Federal Reserve’s 2% annual target.
- We believe the US real gross domestic product (GDP) will grow by 2.4% in 2024. There may be upside risk to this projection. Why? The recently announced upward revision of Q2 GDP to 3% is significant, suggesting an even stronger economy than previously understood. Stronger GDP than first reported means greater output, which translates to higher productivity and lower labor costs. Lower labor costs tend to lead to lower price inflation.
- Productivity growth is a fundamental economic factor that drives the economy, wages, consumer spending and lowers product costs into a virtuous cycle. The upwardly revised GDP measurement suggests that the recent surge in productivity growth to 2.7% has been understated. Improved productivity means people become more valuable and supports wage growth that exceeds the rate of inflation, leading to better standards of living, expanding corporate profit margins, and inflation-adjusted economic growth. In the history of technology innovation, today’s chapter is artificial intelligence (AI). AI is essentially more effective software (smart agents) that drives efficiency with potential improvements in every sector of the economy. Major investments are underway in AI with both technology providers and end user organizations. We are in the early stages of experimentation and adoption. The question is, will these investments result in a new source of sustained productivity growth and economic benefit. Initial indications are encouraging.
- US Payroll employment rose by 254,000 in September, about 100,000 more than expected. The prior two months were revised upward to a gain of 72,000. Average hourly earnings rose 0.37% month-over-month in September. This gain puts the year-over-year increase at 4.0%. The employment rate fell to 4.1% in September from 4.2% in August with the participation rate unchanged at 62.7%. Household employment rose a robust 420,000 and the labor force climbed by 150,000. More employed means more spending. These numbers indicate economic strength, reduced recession risk and presage higher bond yields.
Sources: FactSet, Yardeni Research, Evercore ISI, US Bureau of Labor Statistics, US Bureau of Economic Analysis, The Wall Street Journal
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