By Gary C. Sanger, Ph.D., CFA
Although not all news is good, economic conditions have improved modestly over the past quarter. Inflation has finally receded to very near the Federal Reserve’s target rate and as a result the Fed cut rates by 50 basis points in September. Fed Chair Jerome Powel also signaled additional rate cuts before the end of the year. This increases the probability that the US economy will avoid recession. The conflicts in Israel and Ukraine continue, but so far without spreading or causing any major global economic damage. But the very recent escalation of fighting in and around Isreal could broaden into a regional conflict. According to the Bureau of Economic Analysis, real US annualized GDP rose by 3.0% in Q2 2024 compared with increases of 1.4% in Q1 and 3.4% in Q4 2023. Projections for real US annual GDP growth for 2025 average 1.6% – 1.9%. In contrast to projected positive real US GDP growth, the Conference Board’s Leading Economic Index was down 0.2% in August, to 100.2, for the sixth consecutive monthly decline. For reference, the index was 112.0 in January 2020. Details in key areas follow below.
Consumers – Conditions in the consumer sector have improved over the past three months. The Bureau of Labor Statistics reported that the unemployment rate reversed course and dropped to 4.1% in September from a high of 4.3% in June. Initial jobless claims remain historically low at 218,000 for the week of September 21 and the Labor Department reported 254,000 new jobs in September, also a reversal from July and August. Although businesses are not hiring at a rapid rate, they are also not laying off workers at a high rate. So current labor market conditions do not predict recession. The Bureau of Economic Analysis reported that both personal disposable income and personal consumption expenditures rose 0.2% in August. In another positive note, Freddie Mac reported that the 30-year fixed-rate mortgage dropped to 6.08% in late September to the lowest level in two years. Finally, the University of Michigan’s consumer sentiment index rose to 70.1 in September, the highest reading in five months. However, the index remains well below its high of 101 in February 2020.
Businesses – Conditions in the business sector remain somewhat weaker than in the consumer sector and services continue to be stronger than manufacturing. According to the Bureau of Labor Statistics, labor productivity rose by 2.5% in Q2 2024 and is up 2.7% year-over-year. The Federal Reserve reported that industrial production increased by 0.8% in August. However, the US Institute for Supply Management manufacturing index decreased to 47.2 in September from 48.5% in June and has now been in contraction for six straight months. The ISM services index rebounded to 54.9% in September up from a low of 48.8% for June. This is the highest services number in 18 months. A neutral number for both indices is 50%.
Government – The Federal Reserve has started to lower rates, cutting the Fed funds rate by 50 basis points to a range of 4.75% – 5.00% at its September meeting. Annualized inflation for August as measured by the PCE index was 2.2% just slightly above the Fed’s target of 2.0%. So, the inflation battle is largely won, and the Fed can turn to supporting economic growth and full employment. Jerome Powel has indicated that if things go as expected there should be two more 25 basis point cuts in 2024. If the Fed can achieve a “soft landing” for the economy without a recession they will have done what most skeptics have said they could not do!
International – The September OECD Economic Outlook projects that global real economic growth will stabilize at 3.2% for 2024 and 2025. These forecasts are unchanged from the OECD’s previous Outlook. Inflation is coming under control in developed economies. China has experienced a significant reduction in growth led by contraction in its real estate sector. Growth in the Eurozone remains slower than in the US.
Markets – The US equity market continued to perform strongly in the third quarter. The broad market, measured by the S & P 1500 was up 5.68% in Q3. Large-cap stocks (S & P 500) earned 5.53%, mid-cap stocks (S & P 400) earned 6.55% and small-cap stocks (S & P 600) outperformed with a return of 9.65%. For fixed-income, the S & P US Aggregate Bond Index was up 5.79% for Q3. This performance reflects the market’s belief that the US economy will avoid recession.
Closing – Overall, economic signals have improved over the past quarter. The best news is that lower inflation and a modest weakening in the US labor market have led to the Fed cutting interest rates. The biggest threat is that global political tensions have continued to increase. The November US election has had an insignificant impact on markets.