US Growth Remains Modest But Sustainable as Central Banks Cut Rates

Abstract

Board = Conference Board, New York, New York; Fannie Mae = Fannie Mae, Washington, D.C.; GSU - EFC = Georgia State University, Economic Forecasting Center, Atlanta, Georgia; Moody's Economy = Moody's Economy.com, Westchester, Pennsylvania; Mortgage = Mortgage Bankers Association, Washington, D.C.; National Restaurant= National Restaurant Association, Washington, D.C.; Perryman Gp = The Perryman Group, Waco, Texas; Royal Bank of Canada, Toronto, Ontario, Canada; S&P = Standard 8: [...]the Consensus expectation from Q4 of 2024 to Q3 of 2025 for the nation's GDP growth rate is to go up by only 1.29%. According to Dhawan, although the household consumption rate has softened, service-side spending beyond travel has picked up. According to Dr. Dhawan, the housing market will benefit from lower interest rates however the Fed rate cuts would not translate to deep cuts in mortgage rates since the mortgage premium remains stubbornly high due to an anticipated wave of refinancing coupled with continued large fiscal deficits muting the drop in long-bond yields to only 50 bps in 2025.

PARTICIPANTS | Conf. Board = Conference Board, New York, New York; Fannie Mae = Fannie Mae, Washington, D.C.; GSU - EFC = Georgia State

University, Economic Forecasting Center, Atlanta, Georgia; Moody's Economy = Moody's Economy.com, Westchester, Pennsylvania; Mortgage =

Mortgage Bankers Association, Washington, D.C.; National Restaurant= National Restaurant Association, Washington, D.C.; Perryman Gp = The

Perryman Group, Waco, Texas; Royal Bank of Canada, Toronto, Ontario, Canada; S&P = Standard 8: Poor's, New York, New York; US Chamber =

U.S. Chamber of Commerce, Washington, D.C.; Wells Fargo = Wells Fargo Bank, San Francisco, California.

The information in these forecasts is gathered by the Journal from sources it considers reliable. Neither the Journal nor the individual institutions providing the data can guarantee accuracy, nor do they claim that use of the data appearing herein will enhance the business or investment performance of

companies or individuals who use them.

ccording to the latest data from the Bureau of

Labor Statistics, the Consumer Price Index (CPI)

increased 2.5% over the prior year in August. Dr. Dhawan of the Economic Forecasting Center at Georgia State University believes the moderation in inflation will allow the Fed to aggressively cut rates to mitigate the weakness in the labor market, necessary for the economy to return to its trend level by late 2025. His estimates for the GDP growth rate are 2.50% in 2024 and 1.20% in 2025. Hiring, on the other hand, slowed as job openings fell more than expected to the lowest number since January 2021, bringing the unemployment rate to 4.20%

in August. Dr. Perryman of the Perryman Group suggests that the US economy has slowed to some extent and a recent downward revision of the employment numbers provides a more consistent picture of overall performance. Consequently, the Consensus expectation from Q4 of 2024 to Q3 of 2025 for the nation's GDP growth rate is to go up by only 1.29%.

For the same period, Consensus predicts M2 money supply (in July at $21,054.40b) to grow at a rate of 2.46%, up from Q4 of 2024 (21,650.91b) to Q3 of 2025 (22,183.09b) which would help economic growth while keeping inflation under control.

CONSUMERS: CAUTION ABOUNDS AMID ECONOMIC UNCERTAINTY

Consensus expects the change disposable income to increase by 4.16% from Q4-2024 to Q3-2025 while personal consumption expenditures is

forecasted to rise by 3.41% during that same timeframe. This percent change in disposable income vs consumption expenditures indicate that consumers are being cautious in their spending due to uncertainty in the economy. The ratio of Personal Consumption Expenditures over Personal Disposable Income forecasted by Consensus is to stay put at 92% throughout 2024 and through the third quarter of 2025.

Wells Fargo, on the other hand, see a consumer that is gradually losing momentum into year-end, reflected in weaker Q4-2024 and Q1-2025 growth rates in real spending. As such, they revised their estimate for real Personal Consumption Expenditure (PCE) growth to 2.30% for the third quarter of 2024 even though consumer spending has remained resilient.

According to Dhawan, although the household consumption rate has softened, service-side spending beyond travel has picked up. He indicates that healthcare spending has grown and people are scheduling elective medical procedures they postponed during the pandemic.

Consensus expects light vehicle purchases to increase by 3.67% from the fourth quarter of 2024 into the third quarter of 2025 with sales reaching 16.38 million units in Q3 of 2025. This is encouraging since it implies consumers are going to replace their vehicles at a faster pace, likely due to a downward trend in gasoline prices as oil prices decline (crude oil at $72.37 in September). Dr. Dhawan, however, expects vehicle sales to decline to 15.30 million in 2024 and drop further to 15.00 million in 2025.

Chained Price Index growth is expected to be at 1.68% which continues to be slightly more than the growth of the Consumer Price Index of 1.65% for the Consensus period. The Consumer Price Index (CPI) and Chained Price Index are both used to track changes in prices over time. The CPI measures the average change in prices paid by consumers for goods and services while the Chained Price Index is a more complex formula that attempts to account for consumer substitution when prices change. In general, the Chained Price Index is considered a more accurate measure of inflation compared to the traditional CPI.

FIRMS: SOFTENING JOB MARKET PRESENTS RISK, CONSTRUCTION DOWN DESPITE LOWER MORTGAGE RATES

Consensus expects the unemployment rate (4.20% in August) to decline from its projected 4.31% level in the fourth quarter of 2024 to a level of 4.25% in the third quarter of 2025, while Wells Fargo expects the unemployment rate to edge up further, reaching 4.50% in Q4 of 2024. They add that while layoffs remain historically low, job cut announcements and continuing claims for unemployment have moved up and the unemployment rate has also continued to rise. Furthermore, they state that although a meaningful share of the increase is attributable to more workers joining the labor force, a significant rise in job losers highlights the growing risk that the softening jobs market could set off a negative feedback loop between income, spending and hiring.

Regarding employment, Dhawan noted that less than 10 percent of job growth has been in high paying sectors such as corporate, manufacturing, finance, wholesale, and information technology, and most gains were in lower wage service sector jobs such as hospitality, retail trade, social assistance, and healthcare.

Mortgage rates continue to soften and fell to their lowest levels since February 2023 even though buyers are still concerned about high house prices and persistent supply shortages. Average interest rates in September for fixed-rate mortgages were around 6.20% for the 30-year and 5.27% for the 15-year. As such, Consensus expects Private Housing Starts to be at 1.39 million units during the fourth quarter of 2024, then to go up to 1.43 million units during the third quarter of 2025. This is a 3.05% increase in the construction industry during the consensus period.

For residential construction, Wells Fargo expects residential construction to drag on headline growth in the near-term even with recent declines in mortgage rates and expected further rate softening. This is due to a weaker growth environment for the economy and a subdued labor market. They believe single-family builders have scaled back construction alongside a slower pace of new home sales and rising inventory levels, prompting a five-month downdraft in single-family permits. Furthermore, they add multifamily investment should also continue to ease

Industrial Capacity Utilization is expected to decrease slightly from its fourth quarter 2024 level of 77.33% to 77.28% in Q3 of 2025, a slim decrease of 0.07%. Consensus expects non-residential fixed investment to increase by 1.74% from Q4 2024 to Q3 of 2025. Wells Fargo have revised their nonresidential structures forecast slightly higher in response to lower rate expectations over the forecast horizon. They add that nonresidential construction continues to battle significant headwinds as builders have significantly pulled back on commercial construction starts. Architecture firms have also reported a downdraft in billings activity for eleven straight months. Well Fargo believes that looking to 2025, lower financing costs should brighten the CRE demand environment and reduce barriers to nonresidential investment.

INTEREST, CREDIT, AND

THE FED: FED RATE CUTS MAY NOT CARRY OVER

TO CORPORATE BONDS, TREASURYS OR MORTGAGES

According to Consensus, the triple "A" quality corporate bond rate (4.65% in September) is expected to decline from the 4.95% level in the fourth quarter of 2024 to 4.87% in the third quarter of 2025. For the 10-year Treasury yield, Wells Fargo's target at year-end 2024 remains at 3.70% and for year-end 2025 to be at 3.65%.

The Consensus forecast for the Federal Funds rate is to decrease from 4.79% in the fourth quarter of 2024 to 3.94% in Q3 of 2025. Wells Fargo, on the other hand, expect the FOMC to cut the federal funds rate by 50 bps in September, 50 bps in November and 25 bps in December with an additional 75 bps of easing in the first half of 2025. These would certainly impact spending decisions of both consumers and businesses, boosting economic growth.

Similarly, Dr. Perryman suggests that the Federal Reserve is going to embark on a period of rate reductions to provide some stimulus to the housing and commercial real estate markets. According to Dr. Dhawan, the housing market will benefit from lower interest rates however the Fed rate cuts would not translate to deep cuts in mortgage rates since the mortgage premium remains stubbornly high due to an anticipated wave of refinancing coupled with

continued large fiscal deficits muting the drop in long-bond yields to only 50 bps in 2025. He foresees the 30-year mortgage rate to average around 6.60 percent in 2024, and to moderate sharply to 5.80 percent in 2025, but rise to 6.40 percent in 2026.

CONCLUSION: GLOBAL GDP TO SLOW, CENTRAL BANKS TO FOLLOW U.S. RATE CUTS EXCEPT JAPAN

Eurozone consumer price growth slowed to 2.20% in August, marking the slowest increase since July 2021. As such, the European Central Bank (ECB) reduced its interest rate during its September meeting by a quarter percentage point. Inthe US, the Fed is expected to cut rates during its September meeting as inflation cooled off and unemployment is gradually increasing with job openings declining and layoffs being announced. The benchmark rate has been in the range of 5.25%-5.50% since July 2023. A 25 bps or 50 bps cut would demonstrate that the central bank is ready to act without signaling deeper concerns of a broader downturn. Consequently, Dr. Perryman foresees sustainable, modest growth as the most probable outcome.

The U. S. goods and services trade deficit increased to $78.8 billion in July 2024 according to the U. S. Bureau of Economic Analysis and the U. S. Census Bureau as imports continue to exceed exports. The goods deficit increased $5.6 billion in July to $103.1 billion. The services surplus decreased $0.2 billion in July to $24.3 billion.

For global 2024 GDP, Wells Fargo have lowered their growth forecast to 2.90% with weaker growth in China and Mexico contributing to the softer outlook. They expect global GDP growth to ease further in 2025, to 2.70%. For China, they forecast growth of 4.80% in 2024, and 4.50% in 2025. For the UK, they anticipate growth of 1.00 % in 2024. As far as the outlook for foreign central bank monetary policies go, Wells Fargo expects faster easing by Canada due to inflation trends and economic linkages to the US and further rate hikes by Bank of Japan depending on the extent of US economic slowdown and how aggressive the Fed is in lowering interest rates.

Wells Fargo expects U. S. dollar depreciation through the end of 2025, perhaps with a slightly faster pace of decline over the first half of the forecast horizon, and a slower pace of decline over the second half of the horizon.