This update presents charts and data from key areas of the US economy: the Consumer, the Employment Situation, the Housing Market, and Consumer Sentiment.
Summary:
- Fourth quarter US Real GDP (first estimate) grew at a 2.3% annual rate, down from the third quarter’s 3.1% print. The growth was driven by consumer and government spending offset by a decrease in investment. For the full year, GDP increased 2.8%, down slightly from the 2.9% growth in 2023.
- The US Consumer remains resilient but low savings rates and rising credit card delinquencies bear watching.
- The employment situation had been strong coming out of the Pandemic but has cooled considerably. Unemployment is low but the labor market is stagnant overall.
- The housing market has felt the effects of higher interest rates most acutely with existing home sales plummeting, pending home sales near record lows and elevated mortgage rates. Despite 1% interest rate cuts by the Federal Reserve between September and December of 2024, mortgage rates increased in the 4th quarter because they are influenced by longer term interest rates, which increased.
- Subjective measures of Consumer Sentiment have improved since the lows of 2022 but remain well below average. Sentiment is particularly poor in the housing market with a record low number of people feeling that this is a good time to buy a house. However, the NFIB reports that small business optimism is at its highest since 2019.
Consumer
Inflation remains sticky and has even moved slightly higher over the past few months. This will spell trouble for the Federal Reserve if that trend continues.
Inflation-adjusted weekly earnings have improved from their 2021 and 2022 levels (which were negative) but remain below the 10-year average.
Consumer spending remains positive and was the major driver of GDP growth in 2024. It will be important to watch for signs of decelerating consumer spending for its impact on US growth but for now, Americans are spending (see our blog for why consumer spending matters so much).
Personal Savings continued to fall in the quarter and remain well below the 10-year average and the pre-pandemic level. This has led more consumers to buy on credit. About 1 in 10 credit card holders face delinquency, which is significantly above the pre-pandemic average.
Employment
The employment situation had been strong coming out of the pandemic but now the labor market can be described as stagnant. People aren’t getting laid off and aren’t quitting, but hiring remains very low. Please read our blog for a detailed look at the US Labor Market.
- The traditional unemployment rate (U3 unemployment) hovered just north of 4% during the 4th quarter, up from 3.8% at the end of 2023. This remains low historically but has increased. The underemployment rate (U6 unemployment) had been rising consistently but leveled off in the quarter and remains below the long-term average.
- Continuing claims for unemployment insurance remain elevated but have not been increasing. A high or increasing number of continuing claims indicates it is difficult for unemployed people to find work and will keep the unemployment rate sticky.
- And finally, the number of unemployed people has risen fairly dramatically with about 1.1 million more people unemployed since the beginning of 2023. At the same time, the number of job openings in the US remained in its steady downtrend.
Housing
The housing market remains beleaguered, mostly due to interest rate and supply dynamics.
Existing home sales are well below the pre-pandemic level. Meanwhile, new home sales have fared relatively better as more supply has come online. Overall, the housing market is nearly frozen as the index of pending home sales in the US is near the lowest level in the index’s history.
Home prices are still rising but at a much slower rate than the Covid-era (blue line), partially due to mortgage rates which have not come down as many people hoped once the Fed start reducing its interest rate (orange line). The mortgage rate has been above 6% for more than two years. It is very difficult for people to buy a home.
Sentiment
Finally, Consumer Sentiment - as measured by the University of Michigan - has risen from the 2022 lows when inflation peaked but remains well below average.
Perhaps the area where Americans feel least optimistic is in their ability to buy a house. According to the same University of Michigan survey, the number of respondents who believe this is a good time to buy a house is hovering near a record low but picked up modestly in the 4th quarter.
On a positive note, Small Business Optimism surged for the first time over the past few months after about three years of declining or low optimism readings according to the National Federation of Independent Business.
