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Monthly Economy Update

John Merrill, Tom Bruce, November 4, 2024

ECONOMY. This economic cycle has outperformed almost anyone’s expectations. Over the past two years, the economic outlook has gone from an almost certain recession all the way to a debate between steady economic growth (around 2%) or exceptional growth (closer to 3%).

Behind this evolution is the resilience of the U.S. economy. All three engines of growth – the consumer, business investment, and government – are contributing.

Consumer. A solid jobs market and rising wealth have supercharged American consumer spending.

Job growth remains healthy despite the poor number this past Friday which was distorted by flood victims and striking workers. The modestly declining trend of new jobs remains in place.

Importantly, Friday’s report confirmed unemployment remained low at 4.1% and also that wage growth remained solid at 4.0% over the past year.

The wealth effect, which we have discussed in recent Commentaries, continues to have a growing impact on our economy. With stocks and real estate at all-time highs, a large segment of the population feels more financially secure with greater spending power.

The combination of abundant job opportunities, strong wage growth, and increasing wealth have boosted consumer spending. This was evident in the most recent blowout retail trade report.

As one would expect, the top income groups and those with significant financial assets show some of the largest spending increases. In addition, homeowners of all income levels have generally benefitted as well.

A recent study by the National Association of Realtors shows the stark difference in accumulated wealth between homeowners and renters after more than a decade of house price appreciation. See Chart 1.

Many within the lower income groups are struggling to make ends meet. They struggle most with the cumulative impact of post pandemic inflation on the basic necessities of life. See Chart 2.

Business Investment. Business investment has continued to surge in 2024, fueled by a wave of innovation and entrepreneurship.

In the post-pandemic era, Americans have launched new businesses at an unprecedented rate. Easier access to venture capital and private equity funding has provided many entrepreneurs with the resources they need to turn their ideas into reality. This has led to a rise in investment to seed their businesses, and it has also been a key contributor to the robust labor market as these new ventures meet their staffing needs.

At the other end of the size spectrum, big tech companies are investing heavily to enhance their artificial intelligence (A.I.) capabilities. This has created a frenzy for computer chips as well as massive demand for new energy infrastructure to power A.I. data centers. Companies such as Google, Microsoft, and Amazon have even turned to nuclear energy solutions to meet this need.

The remarkable innovation in the U.S. is widening the gap between the U.S. and other developed nations. As the U.S. solidifies its position as a leader in A.I., it is beginning to transcend other developed nations, establishing itself in a category all its own. This is clear from Chart 3 which compares the economic growth of the U.S. since the beginning of the pandemic with other developed economies.

Government. Major deficit spending has injected excess liquidity into our economy. The federal government’s deficit for fiscal year 2024 was 6%—double the historical average. As we noted in our October Newsletter, neither presidential candidate has prioritized balancing the budget.

However, economists are increasingly questioning the long-term sustainability of such high deficits. Critical decisions may soon be needed to reduce spending and/or increase taxes to realistically reduce this deficit.

While the stronger than expected economy has largely been positive (outside of the deficits), it has slowed progress on core inflation. This has led economists to reassess how much and how soon the Federal Reserve (Fed) can cut interest rates. Their choices will have significant impact on economic activity.

As everyone has seen, higher long-term interest rates put more pressure on housing. Mortgage rates rose over 0.5% this past month, which halted the rise in new mortgage applications. The combination of high home prices, low inventories, and high interest rates have resulted in the lowest number of home sales since 1995.

Global Economy. Inflation continues to trend lower in most advanced economies around the world (though it has been somewhat more persistent in the U.S.). This enables most central banks to lower their interest rates.

This global trend in interest rate reduction should bolster growth as credit becomes more available. Lower rates also have the potential to boost investment in emerging markets as investors are attracted by the appeal of higher growth with lower rates.

Bottom line: The U.S. economic performance remains consistent with the “no-landing” scenario we outlined in the September Commentary. Global economies have been more sluggish, but should improve as rates come down.

Disclosures