Notes on the Economy – Q4 2024 Summary

ON APPROACH FOR LANDING

U.S. real GDP grew a robust annualized 2.8% in the third quarter of 2024, following 3.0% in the second quarter. The strong third quarter advance can be traced to outsized gains of 3.7% in consumer spending and 9.7% in federal government purchases. Still, the advance was well-grounded in growth of aggregate demand; real final sales to domestic purchasers advanced an annualized 3.5%. The bad news is that such high growth of demand is incompatible with low inflation. 

However, the third quarter’s GDP results probably represent peak growth for some time to come. Key data suggest that economic activity is likely to slow down. For example: demand for labor is falling, wage gains are weakening, business fixed investment is easing, housing activity is in the doldrums, and monetary policy remains restrictive. Currently, it looks like the economy is on approach for a soft landing—i.e., slowing enough to bring and keep inflation under control without tipping into recession. However, a wind shear could cause a hard landing, or pilot error could lead to a go-around.

Global economic growth has maintained a moderate pace. The global Composite Purchasing Manufacturing Index (PMI), for example, registered 52.3 in October, distinctly above the breakeven line of 50.0 between contraction and expansion. It was propelled by the global service sector, which registered a Services PMI of 53.1 in October. The global manufacturing sector was struggling, however. The October Manufacturing PMI was 49.4.

HEADLINES – What’s important

1. Inflation Will Ease Further – Monthly readings of core consumer price inflation may give the impression that progress on lowering inflation has stalled. This is not the case. Progress may be lumpy, but further easing of price pressures, notably in service prices (shelter in particular), is already in the pipeline.
2. Interest Rates Will Probably Continue Downward – Absent a surprise development, the Federal Reserve (Fed) will lower its policy rate target in December, but additional rate cutting has become problematic. Still, the Fed is likely to retain a bias toward further policy easing into 2025.
3. A Soft Landing Is Far From a Sure Thing – Economic growth is poised to slow down, but right now it is too high for any inflation-fighter’s comfort. The risks of a hard-landing, or a no-landing scenario for the economy in 2025 are material.
4. The Outlook for Equities Remains Unsettled – In comparison to other developed market economies, the United States is currently in a better position to drive long-term economic outcomes, retaining a strong U.S. dollar. Investors are more likely to do well over a multi-year period with a diversified equity portfolio that emphasizes select profitable small- and mid-sized U.S. stocks.

LOOKING AHEAD

Economic growth has retained substantial momentum in spite of an anti-inflationary tightening of monetary policy. However, as noted above, key data points suggest a slowdown is on the way. In addition, the robust consumer spending in the third quarter was boosted by a likely one-off jump of 8.1% in spending on durable goods, while federal defense purchases were boosted by an end-of-the-fiscal-year dash to spend down appropriations, which created a non-repeatable, blow-out spending increase of 14.9%.

It is important to understand that policymakers are determined to bring inflation down to the Fed’s 2.0% target. That is why from mid-March 2022 to the end of July 2023 they raised the target range for the federal funds rate by 525 basis points (bps). Only with inflation well off its mid-2022 peak, and a downward trend well established, did the Fed turn its attention to the sliding demand for labor, cutting the federal funds target rate range by 50 bps on September 18 and 25 bps on November 7. Another 25 bps cut is on tap for December 18, but it is not a sure thing. Cuts may continue at a slower frequency in 2025, but only as long as policymakers judge the policy rate to be above the level that is neutral for either acceleration or deceleration of economic growth.

During 2024, most of the world’s central banks shifted the direction of their policies, becoming more accommodative in order to halt and/or reverse deteriorations in economic growth. It appears that, in general, central bank efforts have had the desired effect. Global growth has stabilized. The International Monetary Fund’s (IMF) forecasts put global real GDP on track to expand 3.2% in both 2024 and 2025 with advanced economies up 1.8% and emerging and developing economies up 4.2%.

* The information contained within this edition of the Notes on the Economy Executive Summary is based on data released as of Nov. 25, 2024.

To receive a full copy of the Executive Summary or the entire 24-page Notes on the Economy report, contact your AMG advisor or submit a request for more information.