There is much to be thankful for in the U.S. economy: third quarter GDP growth at 4.9% is a gift from consumers as we are seeing slowing growth but no recession in the current fourth quarter, slowing wage and price inflation and likely achieving the Fed’s 2% inflation target in the middle of 2024. The S&P 500 closed the week up 1.1% and up 19.2% year-to-date.
- Consumer spending is lower in the fourth quarter, but the U.S. consumer is not yet out of the market. Higher interest rates have pushed 30-year fixed rate mortgages above 8% and home sales have fallen significantly, but the effective rate on outstanding mortgage debt is still below 4%, giving consumers confidence to spend what remaining excess savings they have and to incur new consumer debt.
- Employment growth is slowing, and the labor supply is growing. Both are helping to bring wage growth down.
- Core inflation is declining, and lower energy prices and lower final demand producer price growth will drive core inflation lower in the coming months. Gasoline prices are continuing to fall and are expected to restrain inflation further in November.
- Core goods monthly price inflation is likely to fall below zero in the next month or so, and the continued slowdown in newly signed rent inflation will push the CPI and PCE rent inflation data sharply lower next year.
- Although business investment is slowing as a result of higher new-borrowing costs, productivity growth has accelerated to over 2% which will drive down unit labor costs in both production and services.
- Notwithstanding the Fed’s minutes of its November meeting showing a wait and see mood among the FOMC members, markets are expecting the slowdown in growth, inflation, and wages to move the Fed to be cutting interest rates in the first half of 2024.
- Confident that the Fed’s tightening cycle is over, Treasury yields also have fallen back again with the 10-year Treasury yield falling from 4.988% on October 19 to close at 4.408% last Wednesday (November 22) before the Thanksgiving holiday.
Geopolitical tensions also are down. The better tone struck between China President Xi and President Biden and with U.S. business investors in China was followed last week with a cease-fire between Israel and Hamas and a negotiated release of hostages by Hamas and Palestinian prisoners by Israel.
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