December, 2024
The Federal Reserve recently concluded its most aggressive interest rate hikes in 40 years, moving the Fed Funds rate to a 23-year high. Higher interest rates have a profound impact on the economy, impacting borrowing costs for consumers and businesses, employment rates and inflation. While higher rates curtailed inflation, they did not derail the broader economy. It now also appears that the U.S. economy is the fastest growing among wealthy nations.
U.S. real gross domestic product (GDP) rose 2.9% in 2023. That momentum carried into this year with GDP increases on an annualized basis of 1.6% in the first quarter, 3.0% in the second quarter and 2.8% in the third quarter. Fourth quarter growth is also anticipated to expand north of 2.0%.
The U.S. economy has been boosted by higher nonresidential spending and stronger consumer spending. From 2016-2025, the IMF estimates that domestic investment will have grown an average of 3.3% per year, versus 2.3% for all advanced economies. This surge in investment in the U.S. has boosted productivity, the output per hour worked. Increased productivity is the main driver behind higher long-term growth and living standards. Wage growth also tends to rise when productivity grows, as companies that become more efficient can pay their workers more.
The latest economic reports suggest ongoing consumer resilience. Retail sales rose 0.7% in November from the prior month, which was higher than expected. Sales increased 3.8% from a year ago, up from 2.9% in October and marking an 11-month high.
Consumer confidence has also been moving higher. The University of Michigan’s Index of Consumer Sentiment recently had its highest reading since April, rising for the fourth consecutive month. As the engine of economic growth, consumer demand appears to remain solid.
The strong job market also continues to bolster consumers. Unemployment remained low at 4.2% in November, still well below what the Fed considers full employment. Additionally, wages have been growing faster than inflation. Average hourly earnings rose 0.4% in November and increased 4.0% on an annual basis, the largest annual gain in six months.
The consistently higher level of investments over the past decade has created the framework for the U.S. to pull ahead of the world’s other advanced economies. The resulting higher productivity and wage gains have underpinned GDP growth in the U.S. that is among the fastest for the Group of Seven major advanced economies for both this year and next, according to IMF projections.
The current bull market in stocks recently turned two years old. While bull markets are not linear, they have averaged 61 months in duration since 1950. Sustained economic growth bodes well for further positive returns for our young bull. Now that the Fed has begun cutting interest rates, there is also additional monetary stimulus available to keep the economy growing. Historically, once the Fed started cutting interest rates, incremental rate cuts followed in quick succession. While that may or may not be the case during this rate cut cycle, having the Fed pivot back to supporting the economy instead of restraining it should be beneficial for investors.
