U.S. ECONOMY

While the U.S. economy has shown remarkable resilience during the past four years, several factors continue to create uncertainty, in the minds of many Americans, about its future trajectory and stability. The baseline economic forecast for the US economy remains optimistic, but concerns persist.

?A survey conducted by Pew Research Center reveals the following concerns on the minds of Americans:

-????? Inflation remains a top concern to many Americans.

-????? 72% of Americans are concerned about the price of food and consumer goods.

-????? 64% are concerned about the cost of housing.

-????? 51% are concerned about the price of gasoline and energy.

-????? Unemployment is at historic lows, with over 13 million new jobs created in the past 30 months versus the 5.2 million created in the previous 30-month period. Despite these positive job creation numbers and low unemployment rate, 31% of Americans are still concerned about people being unable to find jobs. The unemployment rate in the U.S. from 1948-2024 has averaged 5.69 percent. Economists and policymakers generally agree that full employment is between 4% and 6% unemployment.

-????? 27% are concerned about the stability of banks and financial institutions.

-????? 18% are concerned about the performance of the stock market.

In the most recent polls:

-????? Inflation remains one of the top worries for Americans, with 55% saying they worry "a great deal" about it.

-????? 53% of Americans express significant concern about crime and violence.

-????? 52% of Americans worrying a great deal about the overall economy.

-????? Healthcare availability and affordability of healthcare is a major worry for 51% of Americans.

-????? 45% of Americans express high concern about drug use in America.

-????? 43% of Americans are concerned about the Social Security system.

-????? 43% of Americans say they worry a great deal about future terrorist attacks, up from previous years.

-????? 28% of Americans say immigration remains an important problem facing the country.

-????? 19% of Americans cite government and poor leadership as the top problem when asked in an open-ended format.

A note about the above statistics: Between 2,000-2,500 adults were polled across the US to represent the U.S. population. This sample size provides a margin of error of about ±3 percentage points with a 95% confidence level for above statistics about the full U.S. population.

The 2024 Economic Puzzle

Traditional economic theories suggest an inverse relationship between unemployment and inflation. However, recent economic data has challenged these assumptions. The current economic situation in the US has been described as a puzzle, with high inflation, weak growth, and record-low unemployment coexisting. This is a paradox and has left many wondering how the Federal Reserve will respond for the remainder of 2024.

Financial markets have remained under significant pressure with many investors glued to each inflation print in an attempt to gauge future Federal Reserve policy moves. The concern: Stubbornly high inflation could delay interest rate reductions, locking the economy into “Slowflation.”

?????? One of the challenges officials and investors have faced in 2024 is assessing how the COVID-19 pandemic affected the U.S. economy. Four years after it struck, and the impact remains most visible in high U.S. inflation and near-record low unemployment.

?????? Federal Reserve officials initially viewed inflation as primarily due to these pandemic-related supply disruptions, expecting it to be transitory The spike in inflation was initially attributed to supply disruptions linked to the pandemic by the Fed officials. But as inflation rose well above the Fed’s 2 percent target, it was compelled to raise interest rates aggressively, which caused investors to worry about a recession or stagflation or "Full-employment stagflation". Fed officials now recognize that inflation was not solely due to transitory supply chain disruptions but is a result of broader economic factors.

?????? Strong consumer demand has continued to drive inflation, even as supply chain issues have eased. While supply chain disruptions were a major initial cause of inflation during the pandemic, the focus has now shifted more towards demand-side factors. Strong consumer spending has continued to put upward pressure on prices, even as supply chains have started to normalize. Recent data suggests this trend may be starting to shift. The most recent data (as of May 2024) suggests some weakening in retail demand, which should contribute to a dip in inflation in in the next six months. Core goods prices have experienced a decline, and this trend is expected to continue.

?????? Structural changes in the economy have altered the relationship between unemployment and inflation. 69% of U.S. employers are experiencing talent shortages, which has tripled in the last ten years. In February 2023, the unemployment rate was reported at 3.4%, which was the lowest in 54 years at that time. The overall U.S. unemployment rate has now been below 4% for over two years, which is the longest such stretch since the 1960s. The low unemployment rate has created a tight labor market, where employers are forced to offer higher wages to compete for a limited pool of available workers. This near-record low unemployment rate has contributed to wage pressures and has significantly feed into inflation.

?????? Greedflation is a term used to describe the phenomenon where companies exploit inflationary conditions to increase their profits excessively, often at the expense of consumers. A significant study of 1,350 firms across several major economies found that, on average, many company profits have increased by 30% in the past four years. Energy companies as well as food producers have been among the biggest beneficiaries of this trend. Higher profit margin targets accompanied with increased wage and cost adjustments have significantly impacted inflation. Beyond just energy and food, retail, information technology, transportation, consumer goods, beverage, and durable goods manufacturing companies have also benefited from this trend.

?????? The second surprise has been the unexpected strength of the job market, which remained tight even as economic growth has slowed. This has created a puzzling economic scenario where high inflation, weak growth, and low unemployment coexisting.

?????? Forecasts suggest the unemployment rate may rise mildly to an average of 4.1% in the fourth quarter. However, a labor market recovery is anticipated to resume in 2025-26 as economic growth reaccelerates. Many industries are already experiencing shortages in specific occupations, particularly those requiring specialized skills. Certain sectors, such as manufacturing, will continue to face significant labor shortages. The Bureau of Labor Statistics (BLS) forecast that labor force growth will slow down over the next decade, contributing to these ongoing shortages. As of 2024, the U.S. labor shortage rate is 70%, meaning 7 in 10 employers are unable to find suitable employees for their job vacancies and could see a revenue loss of over $435.24 billion by 2030 due to talent shortages.

?????? Companies have been reluctant to lay off workers, due to recent experiences with labor shortages. Instead, they've reduced hours or slowed hiring rather than cutting jobs. This has been reflected in the gradual reduction in new job opportunities over the past 6 months referred to as the “cooling of the job market”.

The Federal Reserve

While the Federal Reserve is part of the U.S. government, it has a unique structure that combines both public and private elements. The Federal Reserve is an independent agency within the federal government. It is not part of the legislative, executive, or judicial branches. President does not have control over monetary policy, which is the primary tool for managing inflation.?

Americans often look to the president to address economic issues like inflation. And there's indication of increased support from many Americans for government intervention with growing support for hypothetical government price controls to address inflation, suggesting some Americans are looking for broader government action.

The Federal Reserve System has a hybrid public-private structure. While the Board of Governors is a federal agency, the 12 regional Federal Reserve Banks operate more like private corporations. The Federal Reserve is charged with pursuing monetary policy, including implementing tighter or "tougher" policy when needed to achieve its mandated goals. The Fed conducts monetary policy in pursuit of these goals set for it by Congress. The Federal Open Market Committee (FOMC), which is the monetary policymaking arm of the Fed, sets the target for the federal funds rate and uses various tools to implement its chosen policy stance.

The Fed has a significant degree of independence in its operations and decision-making. Its decisions do not need to be ratified by the President or other government officials. This independence is designed to insulate monetary policy from short-term political pressures. The president doesn’t have control over the Federal Reserve other than exerting some influence via Fed Chair and members of the Board of Governors appointments subject to congressional approval. The President can influence fiscal policy through proposing budgets and working with Congress on legislation. For example, the Inflation Reduction Act was signed into law by current administration in August 2022, aiming to address inflation through various economic measures. The President can also influence inflation indirectly through executive actions that affect the economy, such as regulations or trade policies. Trade policies, such as tariffs, typically have negative inflationary effects. Trade barriers like tariffs raise prices and reduce available quantities of goods and services for U.S. businesses and consumers.

Looking Forward

There is no denying the US Economy

The US economy's ongoing normalization continues to progress. The economy has now survived its cyclical fever and will likely continue on a path of mildly moderating growth and inflation unless and until it is hit by some unexpected and substantial shock.

With solid economic growth, low unemployment and most of the journey back to 2% inflation completed, the U.S. economy should continue to provide a rising tide to support most investment boats for the rest of this year and into 2025.

Overall, the slowdown in growth and inflation has been delayed in 2024, somewhat frustrating Fed officials who expected a swifter moderation. However, the economic expansion, which started with a very swift rebound from the pandemic recession in April 2020, has now entered its fifth year. While growth remains a little stronger than expected and inflation a little hotter, the broad trend is that of an extended expansion powered by voracious consumers, a surge in immigrant workers and competition suppressing inflation.?

As we move into 2025, job growth will likely continue to slow because current levels of job formation are not sustainable, given demographics and the U.S. percentage of labor force participation. As a result, unemployment rates will likely fall in the short term but rise to about 4%-4.2% in 2025.?

The US economy is expected to post real GDP growth of 2.4% this year, but growth could slow to 1.1% in 2025. Between 2026 and 2028, economic growth is forecast to pick back up, with annual gains in real GDP ranging between 1.6% and 1.9% per year.

The Federal Reserve will likely be content to hold rates steady before beginning to cut slowly in September. One cut is expected in 2024 and three in 2025, with a possible rate of 3.875% by year-end 2025. By the time the Fed begins cutting rates, unemployment will have slightly edged up and the annualized pace of core PCE inflation will have dipped below 3.0 percent.

Sources:

-????? AP News

-????? Deloitte Touche

-????? Gallop Polls

-????? J.P. Morgan

-????? Korn Ferry Consulting

-????? McKinsey & Company

-????? Pew Research

-????? Reuters/Ipsos

-????? US Bureau of Statistics