Economic Outlook - September 2024
- US economic resilience persists with second quarter Gross Domestic Product (GDP) growth rates being upwardly revised to 3% from an initial 2.8%. July consumer spending surprised to the upside with retail sales notching a 1% monthly sequential increase, the biggest increase in twelve months, bolstered by vehicle sales which rebounded after a June cyberattack disrupted auto dealer sales software. These positive economic data surprises de-risk full-year real GDP growth rate estimates of 2.4%. We expect the removal of election uncertainty and lower interest rates later in the year will give way to business investment, consumer spending and inventory replenishment. A “no-landing” scenario where the US avoids recession is still probable.
- Inflation data continues to improve. The July Producer Price Index (PPI), rose just 0.1% month-over-month and 2.2% year-over-year. The Federal Reserve’s preferred inflation gauge, the core Personal Consumption Expenditures (PCE) Index which excludes volatile price swings in food and energy, rose a benign 0.2% in July. The annualized core PCE increased 2.6%, unchanged from the prior month. The Federal Reserve has nearly achieved its 2% inflation target consistent with price stability. During his annual Jackson Hole speech in August, Federal Chairperson Jerome Powell foreshadowed a rate cut when the Federal Open Market Committee (FOMC) meets mid-September. We believe the FOMC will cut rates by 25 basis points to a funds target of 5% – 5.25%.
- Labor market data is weakening. Data revisions by the Labor Department showed more than 800,000 fewer jobs may have been created in the 12 months through August than estimated. Monthly unemployment claims are still low by historical standards, but rose to 4.3% – the highest in several years. The unemployment rate tends to rise slowly before spiking higher, which may lead to a credit crunch followed by a recession. The Federal Reserve must carefully balance inflation considerations against the implications of rising unemployment.
- Real estate has an affordability problem. The average rate on 30-year mortgages declined to 6.47% in August according to Freddie Mac, but is still well-above the 3% rate offered in late-2021. August existing-home sales declined 0.7% from a year earlier, according to the National Association of Realtors, as many would-be buyers are deterred by high prices and are waiting for mortgage rates to decline further. The Housing Market Index, a survey of home builders, fell to the lowest level this year as single-family sales slowed causing inventory to rise.
- Small businesses surveys show signs of optimism. According to the National Federation of Independent Businesses (NFIB), the July outlook for general business conditions improved more than 2 points to 93.7 which was the best reading since early 2022. Business owners cited easing inflation pressures together with expectations that the Fed will soon cut rates as key factors for improving conditions. Businesses surveyed expect price stability will improve sales growth going forward while lower financing costs improve affordability for expansion. These dynamics are not isolated to small businesses and represent conditions supportive of broader economic growth.
Sources: FactSet, Dow Jones Publishing, Bloomberg, Standard & Poor’s, JP Morgan Asset Management, US Department of Labor, National Federation of Independent Businesses, National Association of Realtors, National Association of Home Builders, US Federal Reserve, Yardeni Research
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