2024 Economic Outlook: Trends and Predictions

Traditions Wealth Advisors
Kristina Badrak/Brien L. Smith, CFP®
Financial Analyst Intern/Certified Financial Planner
1/26/2024

​Economy
In the fourth quarter of 2024, the U.S. GDP grew by 3.3% marking a modest slowdown while demonstrating economic resilience. Core PCE, which gauges household consumption, rose 2.9% in December, slowing from November's 3.2% and falling below the 3.0% for the first time in the past three years. Conversely, the CPI, tracking urban household expenditures, unexpectedly climbed by 0.3% monthly, lifting the annual inflation rate to 3.4%. This rise in CPI was primarily fueled by escalating costs in essentials such as rent, food, gasoline, and notably, used car prices.

Despite these trends, the PCE remains the Fed policymakers' preferred metric for interest rate decisions, particularly because it accounts for changes in consumer behavior. The current trajectory suggests only a 40% chance of a rate cut in March with many economists predicting one in either April or June due to existing uncertainties. On a different note, the job market remains strong keeping the unemployment rate steadily below 4%, this is mirrored in a 0.4% increase in average hourly earnings and a slight rise in labor force participation to 62.8%. In addition, unemployment claims the week of 20th have increased by 25,000 compared to last week, which recorded the lowest level of claims since September 2022.

The indicators within the job market are at an adequate level of stability and are not adding stress to the economy. Considering all these factors, including robust household spending and market uncertainties, the Fed’s meeting on January 31st will hopefully provide us with some insights into the decision regarding rate cuts in the spring.

Social Security
The Congressional Budget Office warns that by 2033, Social Security trust funds will face insolvency, with projections indicating only 75% coverage of scheduled benefits. This is due to the aging population growing faster than the workforce, decreasing the ratio of workers to Social Security beneficiaries from 5.4 to 1 twenty years ago, to 3.8 to 1 today. According to John Mauldin, addressing the debt crisis requires focusing on Social Security and Medicare reforms or raising middle-class taxes since other reforms are insufficient. Medicare and Social Security's combined long-term unfunded obligations represent 95% of the federal government's total unfunded obligations. Over the next decade, Social Security will add nearly $3 trillion to the national debt. At the moment, one of the popular drafted proposals by legislators is to limit the income cap for those earning over $400,000, thereby closing tax loopholes. With presidential elections on the horizon, the incoming administration's stance will be crucial in shaping the future of these vital programs.

Outlook of the Market
According to BlackRock, stock markets typically experience a “sluggish” first half but stronger second half during presidential election years, with the third quarter often yielding a 6.2% return. In addition, during post-Federal Reserve rate cuts, cash yields usually drop quickly. Additionally, high-yield bonds and small-cap stocks tend to be critical recession predictors, typically experiencing declines ahead of an economic downturn. Within the past month, small-cap stocks, particularly the Russell 2000 Index, outperformed large caps with a 14.0% return, correlating with the 3.3% GDP growth in the 4th quarter, supporting the notion that small caps thrive when GDP slows down. Concerns about an economic downturn, however, should be tempered as the government has the capacity to reduce interest rates, thereby facilitating a smoother, more controlled economic landing if necessary. Moreover, the increasing trend in index fund investments contributes to a well-diversified portfolios, effectively spreading out and mitigating risk.

Sources:
https://www.ssa.gov/policy/docs/ssb/v70n3/v70n3p111.html
https://www.bloomberg.com/news/articles/2024-01-18/us-jobless-claims-plunge-to-187-000-lowest-since-september-2022
https://www.atlantafed.org/cqer/research/gdpnow#:~:text=Latest%20estimate%3A%202.4%20percent%20%2D%2D,from%202.2%20
on%20January%2010
https://www.blackrock.com/us/financial-professionals/insights/student-of-the-market