Economic Update January 2025

Overview

Employment

In December 2024, the U.S. labor market showed resilience, adding 256,000 jobs, well above the anticipated 165,000, following November’s revised gain of 212,000 jobs?(down from an initial estimate of 227,000).?October's job growth was also revised up to 43,000. The unemployment rate edged down to 4.1%, a 0.1 percentage point decrease from November, while the labor force participation rate held steady at 62.5%. Average hourly earnings increased by 0.3% month-over-month, resulting in a 3.9% year-over-year?rise. Job gains were broad-based, led by healthcare and social assistance (+69,500), leisure and hospitality (+43,000), and professional and business services (+28,000). The public sector also contributed, adding 33,000 jobs, while the retail trade sector showed improvement, avoiding the declines seen in prior months. However, a significant portion of December's job gains came from part-time employment, which aligns with seasonal trends and heightened demand for temporary labor during the holiday period.

Inflation Update

The annual inflation rate in the U.S. rose for the second consecutive month to 2.7% in November 2024, up from 2.6% in October, aligning with expectations. The increase was partly driven by low base effects from the previous year. Energy costs continued to decline, but at a slower pace (-3.2% vs. -4.9% in October), influenced by smaller reductions in gasoline prices (-8.1% vs. -12.2%)?and fuel oil (-19.5% vs. -20.8%), while natural gas prices?edged higher by 1.8%, slightly below the prior month's 2% rise. Inflation also accelerated for food (2.4% vs. 2.1%), and prices for new vehicles?declined less significantly (-0.7% vs. -1.3%). However, inflation slowed for shelter (4.7% vs. 4.9%)?and transportation services (7.1% vs. 8.2%), while prices for used cars and trucks?continued to decline at the same rate as October (-3.4%). On a monthly basis, the CPI increased by 0.3%, the largest gain since April, slightly above October's 0.2% rise?and in line with forecasts. Nearly 40% of the monthly increase?was attributed to shelter, which rose by 0.3%. Meanwhile, the core CPI?(which excludes food and energy) rose by 3.3% year-over-year?and 0.3% month-over-month, maintaining the same pace as in October and matching expectations.

Stock Market Performance

As of late, stock markets have been on a notable retreat. The Dow Jones Industrial Average (DJIA)?is currently hovering around 42,000, down nearly 2,000 points month-over-month?and 3,000 points?from its most recent high on December 4, 2024. Similarly, the S&P 500?has dropped approximately 200 points?month-over-month and 300 points?from its recent peak, now sitting at around 5,800 points. The Nasdaq Composite?has also declined, losing about 1,000 points month-over-month, now trading around 19,100 points. The recent downturn is largely attributed to persistent sticky inflation, a more cautious rate outlook for 2025, and widespread uncertainty regarding tariffs and new policies?under the incoming administration. These factors have dampened investor sentiment, driving a pullback across major indices as markets recalibrate to a shifting economic and policy environment.

Federal Reserve Actions and Interest Rates

On December 18, 2024, the Federal Reserve implemented a quarter-point interest rate cut, lowering the federal funds target range to 4.25%–4.5%. This decision was influenced by recent labor market data indicating?a rise in the unemployment rate to 4.2%?and a moderation in wage growth, suggesting reduced inflationary pressures. In response to the Fed's rate cuts in September, November, and December, mortgage?rates have experienced fluctuations but as of late increased again. As of early January 2025, the average rate for a 30-year fixed-rate mortgage is approximately 6.93%, up from 6.91%?the previous week, marking the highest level since July. Despite the recent rate cuts, significant reductions in mortgage rates are unlikely in the near term. Forecasts suggest that the 30-year fixed rate will remain above 6%?throughout 2025, influenced by factors such as elevated Treasury yields and persistent inflation concerns.

Commodity Prices?

Brent crude oil?prices have recently risen to approximately?$80/ barrel, marking the highest level since October. This increase is influenced by potential new U.S. sanctions on Russia, which have raised concerns about supply disruptions.?Gold prices?have been relatively stable month over month. The current price per ounce is around $2,700.?

Currency Exchange Rates

The EUR/USD exchange rate?stands at approximately 1.030, indicating that one euro is equivalent to 1.030 U.S. dollars. This reflects a depreciation of the euro against the dollar, with the exchange?rate declining from 1.06?to 1.03?over the past month. The robust U.S. economic performance has led to a reassessment of the Federal Reserve's monetary policy trajectory, with markets now anticipating a more cautious approach?to interest rate cuts in 2025. In contrast, the Eurozone faces economic stagnation, driven by high energy costs and competitiveness issues, which may prompt the European Central Bank to consider interest rate cuts.

Jobs Report (January?report)

The U.S. labor market ended 2024 on a strong note, with nonfarm payrolls increasing by 256,000?in December, significantly exceeding the consensus forecast of 165,000. Revisions to prior months showed a mixed picture, with October’s job growth adjusted up by 7,000 to 43,000, and November revised down by 15,000 to 212,000, resulting in a net revision of -8,000. Despite these changes, December’s report underscores the resilience of the labor market, which added a total of 2.2 million jobs?in 2024—a solid year of hiring, albeit slower than the 3.0 million jobs added in 2023. Private payrolls accounted for much of the December gains, rising by 223,000, up from November’s 182,000. The largest contributions came from health care and social assistance (+69,500), leisure and hospitality (+43,000), and professional and business services (+28,000).?

The public?sector also added 33,000 jobs. These figures highlight broad-based strength across key sectors of the economy, with consistent growth in areas tied to consumer and business activity. The household survey painted an equally robust picture, with civilian employment surging by 478,000, more than reversing November’s sharp decline. The labor force expanded by 243,000, helping to nudge the unemployment rate down?by 0.1 percentage points to 4.1%. The labor force participation rate held steady at 62.5%, indicating stability in the share of Americans either working or actively seeking work. Wage growth showed some moderation.?

Average hourly earnings (AHE)?increased by 0.3% month-on-month (m/m), a slight decline from November’s 0.4% gain. On a year-over-year basis, wages rose 3.9%, a tick lower than November’s 4.0%. Meanwhile, aggregate weekly hours increased by 0.2% m/m, up from November’s 0.1%, reflecting modest growth in overall labor input. Looking at the broader trends, job growth averaged 170,000 per month?in the fourth quarter of 2024, down from Q4-2023’s 212,000 per month. Over the year, the unemployment rate increased by 0.3 percentage points but remained low at 4.1%, underscoring the labor market’s resilience in the face of moderating economic growth.

Existing?Home Sales (December)

Existing home sales increased by 4.8% month-on-month (m/m)?in November to an annualized pace of 4.15 million units, exceeding market expectations of a 3.2% gain. Sales were up 6.1% year-over-year (y/y), marking a second consecutive monthly improvement. Gains were broad-based across market segments, with single-family home sales?rising by 5.0%?and sales in the smaller condo/co-op segment?increasing by 2.6%. Regionally, activity improved in most Census areas. Sales rose by 8.5% m/m?in the Northeast, 5.6%?in the South, and 5.3%?in the Midwest. The West Census region?saw no change, holding steady at 770,000 units.

Total housing inventory at the end of November was 1.33 million units?(non-seasonally adjusted), down 2.9% from October?but up 17.7% from a year ago. On a seasonally adjusted basis, unsold inventory?stood at 3.9 months’ supply, a slight decline from 4.0 months?in October but higher than 3.5 months?in November 2023. This metric has hovered near balanced-market territory (typically 4 to 6 months) for the past four months. House prices gained momentum, with year-over-year growth reaching 4.7%, up from October’s 3.9%?pace. On a seasonally adjusted basis, median home prices rose by 1% m/m, building on October’s 0.8% increase.

U.S. Personal Income & Spending (December)

Personal income grew 0.3% month-on-month (m/m)?in November, a notable slowdown compared to October's strong 0.7% gain. On a year-over-year basis, personal income is 5.3% higher, significantly outpacing inflation. Adjusting for inflation and taxes, real personal disposable income?increased by 0.2% m/m, a step down from the 0.5% gain?recorded in October. Consumer spending remained resilient, rising 0.4% m/m?and 5.5% year-over-year (y/y). When adjusted for inflation, spending volumes increased by 0.3%, an acceleration from October’s modest 0.1% growth.?

Spending on goods was particularly strong, increasing by 0.7%, driven by higher outlays on vehicles, parts, and recreational goods. In contrast, spending on services?saw minimal growth, up just 0.1%. Inflationary pressures moderated in?November. The Fed’s preferred inflation gauge, the core PCE price deflator, rose by only 0.1% m/m, a slowdown from October’s 0.3% increase. On a y/y basis, core PCE inflation held steady at 2.8%, unchanged from the prior month. With spending growth outpacing income, the personal savings rate edged lower to 4.4%, down from 4.5%?in October.

Manufacturing Index (January)

The ISM Manufacturing Index improved to 49.3?in December, up from 48.4?in November and surpassing expectations of a decline to 48.2. This signals a slowing deceleration in the manufacturing sector, with more segments reporting growth. Seven out of 18 industries reported expansion, up from three in November. While none of the six largest industries experienced growth, the share of manufacturing GDP in contraction fell to 52%, compared to 66%?the previous month.

Demand conditions showed significant improvement, moving back into growth territory. The new orders index?expanded for the second consecutive month at 52.5, while new export orders?stabilized at 50.0, ending a prolonged period of decline. Production also improved, with the production index?reaching expansion territory at 50.3?for the first time since May. Backlogs of orders continued to shrink, though at a slower pace (45.9, up from 41.8?in November).

On the downside, the employment index?fell to 45.3, marking its 11th contraction in 2024. Price pressures also accelerated, with the price index?rising to 52.5, reporting price increases for the 11th time this year. This was a positive report for the manufacturing sector to close out 2024, as new orders maintained momentum and export orders rebounded from a long period of contraction. While additional interest rate cuts may proceed more cautiously, any monetary easing will likely support the sector's gradual recovery.

Vehicle?sales (January)

U.S. vehicle sales increased by 0.9% month-on-month (m/m)?to 16.8 million (annualized)?units in December, exceeding consensus expectations of 16.5 million units. Unadjusted sales volumes totaled 1.49 million units, representing a 2.0% increase?from year-ago levels. The average daily selling rate (DSR) was 59,543 units, calculated over 25 days, which is 6.1% higher?than December 2023’s 56,110 daily rate, calculated over 26 days. Passenger vehicle sales declined by 9.3% year-on-year (y/y), while light-truck sales rose by 4.6% y/y. Light trucks made up 84%?of December’s total sales, up from an 82% share?a year earlier.

Light vehicle sales outperformed expectations for the third consecutive month in December, bringing total 2024 sales to 15.9 million units, a 2.2% increase?compared to 2023. Holiday incentives and a continued gradual decline in financing rates supported December’s performance. Electric vehicle sales likely also benefitted as buyers sought to take advantage of federal subsidies before their expected elimination under the incoming administration.

What's Next

The final jobs report of 2024 painted a robust picture, with 256,000 jobs added, far exceeding consensus forecasts of 165,000. A closer look reveals a notable trend: part-time employment surged by approximately 250,000, while full-time roles increased by just 80,000. As we head into January, a key question looms—how many of these seasonal part-time jobs will transition to full-time positions? The broader labor market remains resilient but falls short of being exceptional. For instance, the jobs quit rate is at a decade low of 1.9%, excluding a few months during the pandemic. This suggests hesitancy among workers to switch?jobs, reflecting economic uncertainty?that has?employers exercising caution in new hiring.

Economic uncertainty isn’t unusual with a new administration, particularly when it’s from a different political party. President-elect Trump has added to this unpredictability, often employing strategies that keep markets and decision-makers off balance. While effective in some business contexts, this approach creates challenges for companies and markets attempting to plan strategically. One immediate impact has been the rise in inventory levels?among businesses, as they brace for potential tariffs proposed on goods from China, Mexico, Canada, and other countries. Whether these tariffs materialize remains uncertain, but the anticipation underscores the difficulty of navigating shifting political and geopolitical landscapes.

On the interest rate front, markets anticipate the next Federal Reserve rate cuts around mid-2025, with predictions ranging from 50 to 100 basis points (bps). This is a more cautious outlook compared to last year’s consensus of 200 bps but ultimately ended up in only 100 bps or 1% in cuts. Last year, I projected 75 bps - 100 bps in cuts and this year, I align with the 50-bps scenario, as the threat of new tariffs?and sticky inflation make aggressive rate cuts unlikely. Despite higher rates, the U.S. economy has remained resilient, buoyed by strong consumer spending—a trend likely to persist in the near term.

The growing U.S. debt presents a significant challenge. The newly created department of government efficiency (DOGE) might be able to help government reduce some cost but ultimately it will be on congress to rein in the spending. Treasury rates, and by extension mortgage rates, will struggle to see substantial reductions in 2025 unless spending is curtailed. The 10-year Treasury yield is currently at 4.75%, its highest level since October 2023. Elevated rates make debt refinancing, particularly in commercial real estate (CRE), increasingly difficult. In the CRE sector, class B/C office spaces and lower-tier malls?face mounting pressures due to high interest rates, tight lending conditions, and weakening fundamentals. Fitch projects that office delinquency rates?will rise sharply through 2025, peaking in 2026, as refinancing challenges persist. Other sectors—retail, hotel, multifamily, and industrial real estate—are expected to fare better, supported by strong investor demand?and new issuance activity.

The critical question for 2025 is whether the U.S. consumer remains strong enough to sustain spending. Elevated inflation and limited rate reductions could weigh on consumer sentiment and purchasing power. Any trade war could add to those challenges. While the Federal Reserve’s cautious approach and ongoing policy uncertainties will shape the year ahead, the resilience of consumer spending will be a pivotal factor in determining the economy’s trajectory.

Disclaimer

This report is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities, and should not be considered specific legal, investment or tax advice. The information contained in this report has been drawn from sources believed to be reliable but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets' performance. These are based on certain assumptions and other factors and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The author is, not liable for any errors or omissions in the information, analysis, or views contained in this report, or for any loss or damage suffered.