By Gary Aiken | December 12, 2024
With the U.S. election behind us and some policy uncertainty still ahead, economic data point to steady growth. Weekly jobless claims remain low, with initial claims holding steady around 220 thousand and continuing claims just below 2 million in the weeks following the election. These resilient figures persist despite challenges such as union strikes and hurricanes in the Southeast. Meanwhile, personal income, particularly real personal income, continues to show steady gains as inflation gradually eases.
The latest data comes from the University of Michigan’s Consumer Sentiment Index, which tracks how consumers and businesses perceive their current situation and future outlook. Before the election, we advised clients to keep an eye on this key indicator, as it often reflects broader sentiment shifts. Following the election, consumer sentiment has shown noticeable improvement—a pattern that’s far from surprising. Uncertainty about the future tends to weigh on consumers before an election, a fear often captured in surveys. But once the election concludes, regardless of the outcome, this uncertainty dissipates, as an element of uncertainty is resolved.
The Federal Reserve should pay close attention to the inflation expectations portion of the University of Michigan survey. December inflation expectations increased from 2.6% in November to 2.9% for the year ahead starting in December. This may reflect participants’ beliefs about President Trump’s across-the-board tariffs. Many economists estimate tariffs may raise the price level by approximately 0.4% if fully enacted. Participants’ short-term views may also be drifting towards their sticky five-to-ten-year inflation expectation, which seems to be stuck above 3%. While the Federal Reserve may have a stated goal of 2% inflation, both Wall Street and Main Street market expectations indicate widespread skepticism.1
Atlanta Fed’s GDPNow and PCENow Estimate Growth and Inflation
Source: Source: Bloomberg Finance, L.P.; Board of Governors of the Federal Reserve System (U.S.)
The Atlanta Fed’s PCENow Indicator uses incoming data to continually update a quarterly forecast. The Fed’s estimates show inflation rising from 2.6% to 3.2%. The PCE is the Federal Reserve’s preferred inflation measure. The chart also shows that economic growth (GDPNow) is similarly trending higher as well. If these estimates are close to quarter end actuals, fourth quarter nominal GDP will be about 6.5%. As many economists have rightly said, it’s hard to imagine a recessionary scenario when nominal GDP growth is that high.
Nevertheless, the Federal Reserve is likely to cut interest rates one more time this year at its December 18 meeting for three reasons. First, actual inflation is still moderating even as expected inflation is rising. Second, the Federal Funds rate is well above PCE inflation (and inflation expectations), indicating monetary policy is still restrictive at a time when the unemployment rate is slowly rising. Finally, the Trump Administration will implement policies initially that lower net immigration and raise uncertainty with respect to tariffs. Giving the economy one more rate cut could offset some of that potential shock before the medicine of tax, spending, and regulatory cuts induce another potential growth spurt.
Author
Gary Aiken, Chief Investment Officer
Gary Aiken is the Chief Investment Officer for Concord Asset Management and is responsible for macroeconomic analysis, asset allocation, and security selection, as well as trading and investment operations.
Gary has over 21 years of investment experience and holds an undergraduate degree in economics from the University of Maryland and an MBA from The George Washington University School of Business.
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1Surveys of Consumers, University of Michigan: Consumer Sentiment (Accessed on December 9, 2024)
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