There is a series of metrics and indicators that point to continuing strength in the economy, with arrows from every imaginable direction pointing upward.
Of course, leading off all the good news was the first interest rate cut by the Fed in four years. In September, the all-but-assured rate cut of 25 basis points was supplanted by a far more aggressive 50 basis points, with more to come. The Fed turned its attention from their inflation target of 2%, and studied a softening labor market instead, hence the larger-than-expected cut. And the week before the rate cut, a survey of mortgage applications climbed 14.2% on a seasonally adjusted basis for the week ending in anticipation of the rate cut, and expectations of further cuts this fall.
On the inflation front, consumer prices rose 2.2% year-over-year in August as measured by Personal Consumption Expenditures—the lowest annual inflation rate since February 2021. Cooling inflation paves the way for the Federal Reserve to cut its benchmark interest rate further, lowering borrowing costs for all kinds of loans. Overall inflation is nearly back to the Fed’s goal of a 2% annual rate, though rent inflation has stayed stubbornly high and is the single biggest component of the upward pressure on inflation.
Then there is the stock market, busting through previous records to mark all-time highs over the past couple of months, and it is instructive to see how far things have come. Remember, the prior peak in January 2022 wasn’t that long ago in terms of days, but a lot happened over that time period: U.S. inflation climbed to 9%, the Federal Reserve raised interest rates by over 500 basis points, Russia invaded Ukraine, and a new Middle East conflict emerged. Prominent naysayers warned of “economic hurricanes,” “five years of unemployment above 5%,” and “the worst earnings recession since 2008.” Not surprisingly, Americans’ confidence in the economy eroded.
Fast forward two years. Thanks to a resilient economy, quickly fading inflation, and a 26% advance in 2023, we’re now celebrating all the indexes touching or surpassing new records. Some investors might view this with trepidation, but remember, markets lead the economy, not vice versa.
Then there is the economy, which grew at a 3 % annualized pace in the second quarter, a faster rate than Wall Street had expected. The Bureau of Economic Analysis’ third estimate of the second quarter U.S. Gross Domestic Product (GDP) was unchanged from the second estimate, which had shown 3% annualized growth. Economists had estimated the reading to show annualized growth of 2.9%, but the third estimate for second quarter GDP confirms that economic growth was higher than the 1.4% annualized growth seen in the first quarter. The revisions only strengthen my conviction that the U.S. economy will continue to expand at a decent pace over the coming year, which suggests labor market conditions are unlikely to deteriorate markedly from here.
All this converges to calm consumers and bolsters their view of the current state of affairs. Putting aside the forthcoming election, consumer sentiment continued to rise in late September, reaching a five-month high on more optimism about the economy in the wake of the Federal Reserve’s interest-rate cut. Further reductions in borrowing costs are helping to underpin consumers’ outlook on the economy and their personal finances. Sentiment appears to be building some momentum as consumer expectations for the economy brighten. Remember, the person pushing that shopping cart through Walmart is the single biggest driver of the U.S. economy, accounting for 70% of GDP, making the consumer America’s largest industry in the country by far.
What does all this mean? A strong GDP, falling interest rates, a strong stock market, and bolstered consumer confidence all point to prosperity for the foreseeable future. And lower rates will drive increases in housing development, addressing the tremendous pent-up demand that exists for new homes, as well as commercial construction across all categories. We can expect strength in construction spending and private and public development for months, if not years, ahead.