10/28/2024 | News release | Distributed by Public on 10/28/2024 13:08
Introduction
Recent data indicate that the U.S. economy continued to demonstrate robust growth in the third quarter. Although official data will not be released until after this week's meeting of the Treasury Borrowing Advisory Committee, private-sector estimates suggest that GDP rose around 2.5 percent at an annual rate in the third quarter, reflecting persistently strong contributions from household consumption. Meanwhile, third-quarter labor market data significantly reduced concerns that job growth was slowing more quickly than economists would consider optimal. The unemployment rate edged back down to 4.1 percent, a level broadly thought to be consistent with roughly stable inflation.
Headline inflation, measured over the past 12 months, continued to edge lower in the third quarter. Core inflation remained somewhat elevated on a 12-month basis, as inflation for core services turned up with an acceleration in the prices for medical care services and motor vehicle insurance. On the other hand, monthly inflation for housing moderated by the end of the third quarter, and housing inflation over the past 12 months was the slowest since May 2022.
Although further moderation is needed before core inflation is consistent with the Federal Reserve's target, the data suggest that inflation is likely to sustainably return to the Fed's target without a recession: the economy appears to be on the path to a soft landing. At the same time, the Biden-Harris Administration continues to focus on its investments to expand the economy beyond this cycle. By expanding our nation's productive capacity-through significant investments in clean energy, manufacturing capacity, and infrastructure-we aim to build further resilience in the U.S. economy and ensure the modern supply-side expansion of the past few years continues in the long run.
Real Gross Domestic Product (GDP)
Official data on real GDP growth in the third quarter will not be available until after this week's TBAC meeting. According to the most recent publicly available survey (the Wall Street Journal survey published October 13, 2024), the median forecast for third-quarter GDP is 2.5 percent at an annual rate-a strong pace of growth that is modestly above the 2.3 percent annualized pace in the first half of 2024. In the survey, estimates of forecasters at the 25th and 75th percentiles ranged from 2.1 percent to 2.8 percent. The Bureau of Economic Analysis will release its advance estimate of third-quarter GDP growth on Wednesday.
Given other data published for the third quarter already, personal consumption expenditures (PCE) are likely to be the primary driver of quarterly economic growth. Monthly real PCE has risen by 3.1 percent at an annual rate from June to August, and nominal retail sales data indicate strong household spending in September, providing further evidence of robust PCE growth in Q3.
Labor Markets
Labor markets improved on balance over the third quarter, contrary to expectations for continued slowing of payroll growth. The average pace of job creation rose in the past three months, while the labor force participation rate (LFPR) for prime-age workers (ages 25-54) increased and the balance between labor demand and supply improved further (see Table 1 - Labor Market Indicators).
The combination of these trends, including a rising supply of labor and significant declines in job openings as well as vacancies per unemployed worker, has led to a healthier balance in labor markets, even amid solid job and wage growth.
Inflation
Over the past two years, inflation has cooled significantly. After peaking in June 2022 at 9.1 percent, annual headline inflation as measured by the consumer price index (CPI) slowed to 2.4 percent by September 2024. This was the lowest twelve-month reading since February 2021. On a monthly basis, the average pace of inflation ticked up during the third quarter to 0.2 percent (or 2.1 percent at an annual rate, see Table 2 - Inflation Indicators).
Monthly core CPI inflation was also slightly higher in the third quarter, averaging 0.3 percent (3.1 percent at an annual rate) versus an average 0.2 percent per month in the second quarter (2.1 percent at an annual rate). The twelve-month core inflation rate in September was 3.3 percent, one-half the peak rate in the autumn of 2022.
Inflation as measured by the PCE price index has notable differences in weights and methodologies versus the CPI. Over the past 20 years, twelve-month CPI inflation has exceeded PCE inflation by about 0.4 percentage points on average. Over the year through August 2024 (latest data available), the headline PCE price index was 2.2 percent, just 0.2 percentage points above the Federal Reserve's 2 percent inflation target.
Housing Markets
Housing market activity was mixed in the third quarter. While construction activity for single-family residences improved noticeably, activity in the multi-family sector softened over the quarter and total completion rates weakened further (see Table 3 - Housing Construction Indicators).
Elevated home prices and high mortgage rates continued to weigh on existing home sales and inventories in the third quarter, but the impact on the new home market was minimal (see Table 4 - Home Sales & Inventories Indicators).
Indicators for home price appreciation and rental inflation were mixed in the third quarter-although in all cases, rates of inflation were slower than those that prevailed at the end of last year. Home affordability remains an important challenge, in terms of both price levels and mortgage rates (see Table 5 - Shelter Price Indicators).
Risks to the Outlook
The balance of data thus far is suggestive of a soft landing. Recent economic growth has exceeded expectations, driven by persistently strong gains in private domestic final purchases. At the same time, labor markets have come into better balance with cooling labor demand and rising participation rates-even as inflation nears the Federal Reserve's targets. However, a soft-landing outcome is far from certain, with multiple risks for the near-term outlook.
Labor market: Although aggregate labor market data suggests solid growth, some details warrant caution. For example, according to the Current Employer Survey, job growth over the past year has been concentrated in just four industries: education and health, government, leisure and hospitality, and construction. Aside from these industries, job growth is slower than it was preceding the pandemic; in white collar industries-professional and business services, financial services, and information services-monthly job gains have averaged roughly one-fourth of their pre-pandemic average. This concentration of job growth could leave the economy less able to absorb a shock-particularly if it is in an industry driving aggregate job growth.
Household finances: In aggregate, households appear to be in a solid financial position, supported by wealth gains and rising real wages. Personal saving rates have trended up since June 2022; households are devoting similar shares of their income to debt service; and delinquency rates on conventional mortgages remain historically low. However, some data suggest that risks have increased for the household sector. Credit cards and automotive loans have seen rising transition rates from delinquent (30+ days past due) to seriously delinquent (90+ days past due), and delinquency rates have risen for FHA-insured mortgages-which are often held by households with lower credit scores. A downturn in labor markets or deterioration in economic conditions would be felt more heavily by lower-income households, who are least able to weather economic shifts.
A prolonged stock market downturn also presents a risk to the economic outlook. Middle-income and upper-income household consumption has been supported by significant wealth gains, primarily due to rising housing values and corporate equities. In the second quarter of 2024 (latest available data), household net worth stood at the highest share of disposable personal income after excluding the impact of pandemic-era financial support. A drop in stock markets or in housing values could cause these income groups to pull back on spending and exacerbate any other economic weaknesses.
Global inflation, geopolitical instability, and supply chains: Inflation has fallen substantially from the highs of mid-2022, but risks remain to the outlook. Continued strong demand growth without comparable supply expansion could push inflation above consensus forecasts, as could supply-chain disruptions from geopolitical events-such as Russia's war in Ukraine and ongoing conflict in the Middle East. In addition, climate change raises the risk to the inflation outlook through rising shipping costs. For example, drought in Central America has reduced shipping traffic through the Panama Canal, increasing both transportation costs and the prices of goods. Alternatively, a faster-than-expected cooling in the labor market and in economic activity could bring inflation down faster-but with greater cost for American households.
CONCLUSION
The American economy remains strong, with a healthy labor market and easing inflation. Just a few years ago, economic forecasters did not expect that such a combination of persistently strong growth and moderating inflation was likely-or, among many cases, even possible. But over the past three years, the Biden-Harris Administration has made significant investments to reduce costs, boost economic potential, and make our economy more resilient to risks. The outperformance of the American economy thus far in 2024 shows these investments are paying off.
###
Table 1 - Labor Market Indicators
Establishment Survey |
Average Monthly Change |
||
---|---|---|---|
2024 |
2024 |
CY |
|
Total Payroll Employment |
147 |
186 |
251 |
Private Sector |
137 |
145 |
192 |
Government |
10 |
40 |
59 |
Household Survey |
Monthly Average |
||
---|---|---|---|
2024 |
2024 |
CY |
|
Unemployment Rate (% of Total Labor Force) |
4.0 |
4.2 |
3.6 |
Labor Force Participation Rate (% Total Population) |
62.6 |
62.7 |
62.6 |
Prime-Age (Ages 25 to 54) |
83.6 |
83.9 |
83.3 |
Job Openings and Labor Turnover Survey |
Monthly Average |
||
---|---|---|---|
2024 |
2024 |
CY |
|
Job Openings (Millions of Vacancies) |
8.2 |
7.8 |
9.4 |
Vacancies per Unemployed Person |
1.3 |
1.1 |
1.5 |
Sources. Bureau of Labor Statistics, The Employment Situation - September 2024; Job Openings and Labor Turnover - August 2024.
Table 2 - Inflation Indicators
Inflation |
Average Monthly Percent Change |
12-Month |
|
---|---|---|---|
2024 |
2024 |
2023 |
|
Consumer Price Index (CPI) |
0.1 |
0.2 |
3.4 |
Foods |
0.1 |
0.2 |
2.7 |
Energy |
-1.0 |
-0.9 |
-2.0 |
Core CPI (ex. Food and Energy) |
0.2 |
0.3 |
3.9 |
Core Goods |
-0.1 |
-0.1 |
0.2 |
Rent of Housing2 |
0.4 |
0.4 |
6.4 |
Core Services ex. Rent of Housing2 |
0.1 |
0.3 |
3.9 |
PCE Price Index3 |
0.1 |
0.1 |
2.7 |
Core PCE Price Index3 |
0.2 |
0.1 |
3.0 |
Sources. Bureau of Labor Statistics, Consumer Price Index - September 2024. Bureau of Economic Analysis, Personal Income and Outlays, August 2024.
1 For CPI, 12-month growth is not seasonally adjusted.
2 Imputed from CPI Data.
3 PCE price indices average monthly percent changes for July and August. The PCE price indices for September will be released on Thursday, October 31.
Table 3 - Housing Construction Indicators
New Residential Construction |
Average Monthly Percent Change |
12-Month |
|
---|---|---|---|
2024 |
2024 |
2023 |
|
Building Permits, Total |
-0.7 |
-0.7 |
9.3 |
Single-Family |
-1.5 |
0.8 |
36.9 |
Housing Starts, Total |
0.8 |
0.6 |
17.0 |
Single-Family |
-1.9 |
1.5 |
22.6 |
Units Under Construction, Total (end of month) |
-1.5 |
-1.9 |
-0.8 |
Single-Family |
-1.5 |
-1.0 |
-10.3 |
Housing Completions, Total |
5.0 |
-0.9 |
12.3 |
Single-Family |
4.5 |
-2.3 |
3.4 |
Sources. Census Bureau, Monthly New Residential Construction, September 2024.
Table 4 - Home Sales & Inventories Indicators
Homes Sales |
Average Monthly Percent Change |
12-Month |
|
---|---|---|---|
2024 |
2024 |
CY |
|
Total Existing Homes |
-2.6 |
-0.5 |
-5.8 |
New Single-Family Homes |
-0.5 |
3.2 |
3.5 |
Inventories for Sale |
Inventories of Homes Available |
||
---|---|---|---|
2024 |
2024 |
CY |
|
Total Existing Homes |
3.8 |
4.2 |
3.1 |
New Single-Family Homes |
8.1 |
7.7 |
7.8 |
Sources. Census Bureau, Monthly New Residential Sales, September 2024. National Assocation of Realtors, Existing-Home Sales.
Table 5 - Shelter Price Indicators
Home Prices |
Annualized |
12-Month |
|
---|---|---|---|
2024 |
2024 |
2023 |
|
S&P Core Logic Case-Shiller National HPI1,2 |
3.0 |
2.2 |
5.7 |
FHFA Purchase-Only HPI1 |
1.4 |
1.6 |
6.9 |
Rent Prices |
Annualized |
12-Month |
|
---|---|---|---|
2024 |
2024 |
2023 |
|
CPI Rent of Primary Residence2 |
4.1 |
4.6 |
6.5 |
Zillow Observed Rent Index |
7.0 |
2.8 |
3.4 |
Research Series: CPI New Tenant Rent3 |
0.7 |
1.0 |
2.3 |
Sources. Standard & Poor's, S&P CoreLogic Case-Shiller Home Price Indices. Federal Housing Financing Agency, Home Price Index (HPI) Monthly Report. Zillow, Housing Data. Bureau of Labor Statistics, Consumer Price Index - September 2024. Bureau of Labor Statistics, Price and Index Number Research, New Tenant Rent Index.
1 Annualized monthly rate through August.
2 12-month percent change, not seasonally adjusted.
3 Not seasonally adjusted. Quarterly growth rates are 4-quarter percent changes.