By Gary C. Sanger, Ph.D., CFA
Overall economic conditions have continued to improve this quarter. The new Trump administration brings hope for US economic growth and improved efficiency in government. However, new tariffs, if actually enacted, could raise prices and slow growth. According to the Bureau of Economic Analysis, US real annualized GDP rose by a healthy 3.1% in Q3 2024 up slightly from 3.0% in Q2. Projections for GDP growth for 2025 are modestly lower but these forecasts are often inaccurate. The Conference Board’s Leading Economic Index was up 0.3% in November to 99.7 which is the first increase since February 2022. For reference, the index was 112.0 in January 2020. Details in key areas follow below.
Consumers – Conditions in the consumer sector have remained steady over the past quarter. The Bureau of Labor Statistics reported that the unemployment rate rose slightly to 4.2% in November. Initial jobless claims remain low at 211,000 for the week of December 28 and are at an eight-month low. The Labor Department reported 227,000 new jobs in November, so new hires and layoffs remain fairly balanced. The Bureau of Economic Analysis reported that personal disposable income rose 0.3% in November while personal consumption expenditures rose 0.4%. On a negative note, Freddie Mac reported that the 30-year fixed-rate mortgage increased to 6.91% in December, the highest rate in six months. Despite this the National Association of Realtors reported a 2.2% increase in pending home sales in November. This is the fourth straight monthly increase, and the highest level since February 2023. Apparently, consumers are adjusting their expectations regarding the level of mortgage rates. The University of Michigan’s consumer sentiment index rose to 74.0 in December for a fifth consecutive increase. However, the index remains well below its high of 101 in February 2020.
Businesses – Conditions in the business sector remain 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 2.2% in Q3 2024 and is up 2.0% year-over-year. The Federal Reserve reported that industrial production decreased by 0.1% in November. However, the US Institute for Supply Management manufacturing index increased to a nine-month high of 49.3 in December. Except for one month the index has signaled contraction since November 2022. The ISM services index expanded to 54.1% in December up from 52.1% In November. This is the sixth consecutive increase in services. A neutral number for both ISM indices is 50%.
Government – The Federal Reserve has continued to lower short-term interest rates, cutting the Fed funds rate at each of its last three meetings. After an initial 50 basis point cut in September, it made two additional 25 basis point cuts to a current range of 4.25% – 4.50%. However, the market is expecting the pace of rate cuts to slow, with two more cuts expected in 2025. This is partly due to a slight increase in inflation as measured by the PCE index to 2.4% for November relative to a low of 2.1% in September. The Fed targets 2% inflation, and as in the past in the Powel administration, the path of future rates will be “data driven.” Although there is much uncertainty, fiscal policy under the new Trump administration is expected to be expansionary, possibly putting additional upward pressure on prices.
International – The December OECD Economic Outlook projects that global real economic growth will be 3.3% for 2025 and 2026. These forecasts are slightly higher than 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, though its central government plans to add fiscal stimulus. Growth in Canada, Japan and the Eurozone remain slower than in the US. Potential tariffs under the Trump administration could negatively affect growth in several regions.
Markets – The US equity market continued to offer positive returns in the fourth quarter. The broad market, measured by the S & P 1500 was up 2.22%. Large-cap stocks (S & P 500) earned 2.41%, mid-cap stocks (S & P 400) earned 0.34% and small-cap stocks (S & P 600) underperformed with a return of -2.61%. For fixed-income, the S & P US Aggregate Bond Index was down 2.61% reflecting a rise in interest rates. Expectations for markets in 2025 are positive, but not as good as the past two years.
Closing – Overall, economic conditions continued to improve over the past quarter. US inflation is not much higher than the Fed’s target and the US labor market remains strong. The biggest threat is that global political tensions have continued to increase. The new Trump administration brings some initial uncertainty but also new hope for a stronger US economy. Finally, global economic conditions could be impacted if we enter a “tariff war.”