Economic Horizon

Traditions Wealth Advisors
Greysen Golgert/Brien L. Smith CFP®
Economic Analyst Intern/Chief Investment Officer
November 19, 2024

Now that the election season is over and the dust has settled, it’s worth remembering that this political outcome is only a small piece of the economy puzzle. Fiscal policy and spending is certainly the prerogative of the federal government, but overspending the country into a pile of debt has been a bipartisan effort, creating an untenable situation that the incoming administration alone simply cannot change in four years. If we run a 2-trillion dollar a year deficit for the next decade as projections suggest, that will drive-up inflation and come back to bite us in a big way. Without extreme cost-cutting at the federal level and a consistent attempt to reduce the current debt ($36 trillion), this problem won’t go away any time soon. On a slightly more optimistic note, the Federal Reserve can use restrictive monetary policy to counteract the inflationary effects of overspending, but it could be painful for the economy. The past few years of Fed monetary policy have been restrictive and rampant post-Covid inflation has been largely reined in. Despite the extended period of high interest rates, growth persisted, and a recession never materialized. However, that may not be the case when it comes time for the Fed to address inflation caused by federal spending.

The broader economy, not considering the debt issue, is performing well. Financial markets gave back some of their election day gains but equities continue to trend upwards. A BEA (Bureau of Economic Analysis) advance estimate of the Q3 2024 GDP growth rate was 2.8%, slightly lower than the expected 3.1% growth, but still very strong. The Atlanta Fed’s GDPNow estimate of GDP growth is now projecting a robust 2.5% GDP growth rate for the current quarter. Since softening over the summer, the U.S. labor market has remained relatively consistent. However, Hurricane Helene, Hurricane Milton, and the Boeing strike muddied up the most recent employment situation report from the BLS (Bureau of Labor Statistics). As a result, only 12,000 jobs were added in October, and the unemployment rate remained unchanged at 4.1%. A wait-and-see approach is necessary to assess potential weakness in the labor market that cannot be explained by those three anomalous events. The current inflation situation is concerning, but clearly not surprising, as CPI and PPI readings for the previous month came in as expected. The Consumer Price Index, while not the measure preferred by the Fed, is still the most widely used gauge for inflation in the US. Core CPI—not including volatile food and energy prices—and headline CPI were both unchanged from their previous monthly increases of 0.3% and 0.2% respectively. However, year-over-year CPI is now at 2.6% and moving away from the Fed’s target year-over-year inflation rate of 2%.

The current data is beginning to suggest that another 25-bps cut is unnecessary, and that the Fed reduced interest rates by too much too soon. In a speech to Dallas business leaders on November 14th, Jerome Powell surprised some by saying that the Fed was in no hurry to lower interest rates further. The implications of that statement are contradictory to the dovish attitude that FOMC members have exuded since June. Powell’s speech demonstrated a keen desire to pursue the Fed’s dual mandate of maximum employment and stable prices with a balanced focus. In previous months, the Fed prioritized the labor market, but their decision in December will indicate whether they feel the current environment is too restrictive or just right.  As the holiday season approaches and 2024 comes to a close, Powell will be keeping his eyes on the economic horizon and hopefully leading us to a soft landing.

Sources:
https://www.crossmarkglobal.com/wp-content/uploads/Dolls-Deliberations-Weekly-Investment-Commentary_111824_FINAL.pdf
https://www.linkedin.com/pulse/politics-central-banks-what-matters-most-markets-kristina-hooper-8agye/
https://www.mauldineconomics.com/frontlinethoughts/the-trump-inflation-problem
https://www.bls.gov/news.release/cpi.nr0.htm
https://www.yardeniquicktakes.com/market-call-35