In the third quarter of 2024, the U.S. economy showed robust growth, outperforming expectations despite signs of cooling in the labor market. This softening job market, coupled with moderating inflation, influenced the Federal Reserve's decision to initiate a more accommodative monetary policy by cutting the federal funds rate by 50 basis points in September. This marked the first rate cut since mid-2023 and signaled a potential trend toward further reductions, with projections aiming for a terminal rate around 3.00-3.25% by mid-2026. However, a strong payroll report following the quarter’s end introduced uncertainty around the pace of future rate cuts, prompting the market to anticipate a slower reduction path as the Federal Reserve evaluates labor and inflation data.
Globally, modest growth is expected into 2025, with a projected U.S. slowdown offset by stronger EU growth, while China’s expansion trails expectations. Although global inflation has eased due to lower goods and energy prices, persistent services inflation in some regions continues to keep core inflation elevated.
Domestically, a modest economic slowdown is expected into 2025, with GDP growth projected to average 2.7% in 2024 and ease to 1.8% in 2025. Restrictive monetary policy and high costs are likely to dampen private sector activity, causing businesses and households to spend more prudently. However, lower inflation and interest rates, combined with a stabilizing labor market, should support a shift toward more sustainable growth. Recession risks appear manageable, with the economy positioned for a more balanced trajectory as monetary policy loosens gradually.
Here is a summary of the economic metrics we follow:
Retail Sales/Labor Market:
August saw moderate job growth of 142,000, a slight decline in unemployment to 4.2%, and stable hours worked, suggesting that the labor market remained resilient but softened overall. Payroll revisions revealed a three-month average of job gains at a post-pandemic low, indicating businesses are becoming more cautious. As a result, many companies are expected to curb wage growth, adopt selective hiring, and employ strategic layoffs, with unemployment anticipated to edge up to 4.4% by the end of 2024 and 4.5% in 2025.
Consumer spending has slowed as households adapt to higher prices, elevated interest rates, and less robust income growth, though no significant pullback is expected. Spending growth is projected to average 2.5% for 2024, dipping to 2% in 2025. Financial pressures are especially affecting younger and less affluent households, reflecting the broader trend of cost-conscious spending. Heading into 2025, a more balanced labor market, lower inflation, and cautious spending are expected to support sustainable, albeit slower, economic growth. Additionally, the FED’s recent (and anticipated) rate cuts are expected to further support spending, with retail sales growth projected to pick up by mid-2025.
Construction:
The Federal Reserve’s recent 50-basis-point rate cut in September brings some relief to the construction sector, though its effects will be gradual, beginning with the residential market. In August, the housing sector showed signs of stabilization, with housing starts rebounding by 9.6% month-over-month to a seasonally adjusted annual rate of 1.36 million units. This increase was largely driven by a 15.8% rise in single-family starts, while the multifamily segment declined by 4.2%. Builder confidence in new single-family homes also improved slightly, reaching a reading of 41 in September—the first uptick in five months.
The residential sector’s recovery often precedes nonresidential trends, which are expected to remain soft through 2025 due to lingering effects of past rate hikes and slower economic conditions. A rebound in nonresidential construction is not anticipated until 2026, as the sector requires extended planning and build times.
While the rate cuts may reduce borrowing costs, they don’t address key challenges facing construction, such as labor shortages, rising material costs, and zoning constraints.
Manufacturing:
Industrial activity is set to see modest growth this year, hindered by high interest rates, strict lending standards, and softer demand. The ISM Manufacturing Index inched up to 47.2 in August from 46.8 in July, though it remains in contraction, reflecting ongoing demand and output challenges. Improvements in employment and inventory components were offset by declines in production, supplier deliveries, and new orders, underscoring the sector’s cautious hiring pace.
Industrial production rose 0.8% in August after a hurricane-related dip in July, driven by a strong 0.9% increase in manufacturing output, with motor vehicle and parts production surging by 10%. Mining also saw growth, while utilities remained stable. Overall, manufacturing production is up just 0.2% year-over-year, and looking forward, tight financial conditions are likely to keep growth in industrial activity subdued.
Services (new section):
As global inflation trends ease, services inflation remains a significant driver of core inflation in certain regions, largely due to elevated costs in sectors like healthcare and hospitality. The services component of the CPI is growing faster than overall prices. Relative to the prices of goods, the price of services is more likely to be impacted by rising labor costs. Potential challenges to the sector include persistent services inflation, spikes in commodity prices, and disruptions in global trade, which could contribute to prolonged higher interest rates. Additionally, looming U.S. elections introduce policy uncertainties that may impact tax, trade, and regulation affecting the services landscape.
On the upside, non-inflationary growth fueled by productivity advancements—particularly in tech innovations like generative AI—could support the services sector. In August, services payrolls rose moderately by 108,000, with healthcare and hospitality accounting for most gains, while retail and information sectors saw job declines. The services sector, vital to U.S. GDP at 77.6% in 2021, includes industries such as real estate, leasing, professional services, and accommodation, with real estate alone contributing over $3.67 trillion in 2023. However, classification differences—such as whether construction is counted in services or goods—highlight the sector’s complexity, as well as its integral role in economic growth and stability.
Specific Items to Consider at the Macro Level are:
Retail Sales:
· Business activity is expected to slowly rise in 2025 and 2026, but labor an inflation will still be limiting factors. Develop a plan to retain strong employees and mitigate the impact of inflation.
· Many consumers are hunting for value; make sure your marketing aligns with how your target market is feeling.
· Improve your margins and focus on your competitive advantages ahead of the next uptick in inflation which we anticipate will start in mid-2025.
Construction:
· Prepare for a rise in Starts beginning next year, but keep in mind that trends may vary if your business is region-specific.
· Look for ways to improve efficiency and reduce dependency on labor. The tight labor market may impede the next rising trend.
· If you are associated with healthcare construction, the nondiscretionary aspect of this market and aging demographics make this an area of relative opportunity compared to other nonresidential construction segments.
· Cash is king … Build up an adequate cash buffer now to prepare for the continuing slowdown through 2025.
Manufacturing:
· Growth will be more conservative than in recent years. Prepare for a rise but, rather than focusing on expanding capacity, focus on improving margins, reducing supply chain risks, and retaining talent.
· Assess labor and capital needs and adjust accordingly to capitalize on expected growth in 2025 and 2026.
· It is expected New Orders will rise to record highs in late 2025/early 2026. Ensure your business is prepared for these higher levels of activity.
· If you currently use offshore manufacturing, consider near-shoring or domestic manufacturing opportunities as these may offer more supply chain resilience – as well as protection from potential trade friction.
Services:
· Ensure you are optimizing your operations, potentially with the help of AI and other technologies, or through consultation with employees who may have a fresh perspective for identifying potential efficiency gains.
· Enhance efficiency by standardizing and optimizing processes to drive greater efficiency.
· Look to improve the customer experience through all initiatives.
· Upgrade staff skills. Level up the technical and soft skills of the service delivery staff through training.
Content compiled by: John Nunan