Key takeaways
The U.S. economy appears on track to produce annual growth above 2% in 2024.
The strength of the economy continues to buoy the stock market while contributing to rising long-term interest rates.
At the same time, the Fed has initiated what is expected to be a series of interest rate cuts.
Despite lingering inflation and higher interest rates, the economy produced second and third quarter annualized Gross Domestic Product (GDP) growth of 3.0% and 2.8%, respectively.1 Key to this growth has been consumer spending, driven in part by healthy wage gains that now outpace the nation’s inflation rate. The economy appears poised for another year of growth above 2%.
Source: U.S. Bureau of Economic Analysis, “Real Gross Domestic Product and Related Measures: Percent Change from Preceding Period,” October 30, 2024.
According to the U.S. Bureau of Economic Analysis, increases in consumer spending, exports, federal government spending and non-residential fixed investment were the key factors driving third quarter growth.
Persistently strong consumer spending is one of the major stories of the economy’s steady growth. Personal Consumption Expenditures, a measure of consumer activity, continue to increase, and represents by far the largest contributor to GDP.2
The economy’s strength is a major consideration as the Federal Reserve (Fed) calibrates monetary policy. In September, the Fed cut the federal funds target rate (the rate charged by financial institutions to lend funds overnight to each other), for the first time in four years. Another rate cut occurred in November, with markets anticipating a third cut in December.3
However, based on minutes of the Fed’s November 2024 meeting, it was noted that Fed policymakers deem “it appropriate to reduce policy restraint (interest rates) gradually.”4 That could temper expectations around the pace of rate cuts in 2025.
The Fed’s rate cuts are designed to impact the broader economy. Fed Chair Jerome Powell stated that “As inflation has declined and the labor market has cooled, the upside risks to inflation have diminished and the downside risks to employment have increased.”5 However to this point, the jobs market appears to be holding its own, with the unemployment rate just above 4% and new weekly jobless claims considered to be at manageable levels.6
“Capital markets are pricing in expectations of better economic growth,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. “We’re seeing that in continued upward movement for stocks and rising 10-year Treasury bond yields.” Although the Fed cut short-term rates, 10-year Treasury yields moved up from a low of 3.63% in mid-September (when the Fed began cutting rates) to a peak of 4.44% less than two months later.7 Yields have remained in a trading range since. Rates moved up on other long-term bonds as well, complicating matters for businesses, particularly as it relates to business capital investment. Nevertheless, corporate capital expenditures remain solid to this point.
“Modest, steady economic activity continues to be the path we appear to be on at this point, with no serious recession risk,” says Haworth. He believes ongoing labor market strength is the key variable that could impact consumers. “A sudden jump in layoffs would be a negative signal, but we’re not seeing that,” says Haworth. “Employers are hanging on to workers, particularly in areas where they struggled to fill positions before.” says Haworth.
“Modest, steady economic activity continues to be the path we appear to be on at this point, with no serious recession risk,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management.
The economy’s ongoing strength helped corporations meet or exceed earnings expectations, fueling further stock market gains. At the end of November, the S&P 500 is on pace to achieve 25%+ returns for the second consecutive year.8
In the current environment, investors may wish to consider a modest overweight of equities and a modest underweight of fixed income, with a neutral position in real assets. Haworth says this reflects an economic environment that, in the near term, appears to put equities in a position to outperform fixed income.
Consider reviewing your current portfolio with your wealth management professional to determine if it’s consistent with your long-term goals and positioned to meet your needs in today’s market and economic environment.
Note: Diversification and asset allocation do not guarantee returns or protect against losses. The Standard & Poor’s 500 Index (S&P 500) consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The S&P 500 is an unmanaged index of stocks. It is not possible to invest directly in the index. Past performance is no guarantee of future results.
A recession is a significant and prolonged downturn in economy activity. Some define a recession as two consecutive quarters of declining Gross Domestic Product (GDP) growth. However, more complex formulas are often used. The accepted arbiter of a recession, the National Bureau of Economic Research (NBER), considers a variety of measures to determine a recession’s timing and length. These may include nonfarm payrolls, industrial production and retail sales, along with key measures such as GDP. Quite often, the NBER makes a final recession determination months after it begins.
The most recent recession was an unusual one, related to the start of the COVID-19 pandemic. It lasted only from February through April 2020, one of the shortest recessions on record. But it also was one of the most severe. According to the U.S. Bureau of Economic Analysis, the U.S. economy declined at an annualized rate of 5.5% in 2020’s first quarter and declined again by 28.1% (annualized) in the second quarter. However, it quickly rebounded, growing by a 35.2% annualized rate in the third quarter. This was an unusual circumstance related to the partial closing of many businesses and schools and the sudden layoff of workers in response to the onset of the pandemic, followed by a rapid reopening for most businesses. The previous recession occurred more than a decade earlier, the so-called Great Recession of 2007-2009. This recession was tied to the financial crisis that rocked the global economy for an extended period.
While it is difficult to predict a recession in advance, the current state of the economy makes the possibility of a recession in the near term appear remote. “It seems likely the economy may avoid a recession in the near term, though we can expect that real Gross Domestic Product (GDP) growth will remain modest over time,” says Matt Schoeppner, senior economist at U.S. Bank. In 2024’s first quarter, the economy grew at an annualized rate of 1.6%, but improved significantly in the second quarter, growing at a 3.0% annualized rate, and followed up with 2.8% annualized third quarter GDP growth.1
After the slowest year for existing home sales in nearly 30 years last year, the housing market is still struggling to escape the doldrums.
After being inverted for much of the last two years, the yield curve is flattening across Treasury securities of varying maturities.
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