As the 2024 calendar year draws to a close, it follows a year filled with significant events. It's important to reflect on the positive aspects that will define the year's end. Here are five things that we are grateful for, listed in no particular order.
1. Efficient Supply Chains, Especially with the Holiday Sales Season Approaching
In recent years, supply chains have significantly improved, returning to levels seen before the pandemic. This is a positive development, as supply constraints had previously been a major factor influencing the Personal Consumption Expenditures (PCE) deflator, the Federal Reserve’s preferred measure of inflation. Lately, businesses have been able to better manage their inventories, which is especially crucial with the holiday season approaching. We can expect consumer spending to be driven largely by middle- and upper-income households.
Reduced Supply Constraints Are Likely to Alleviate Inflationary Pressures
2. Better Housing Affordability (Driven by Increased Incomes)
For the first time since early March, the Housing Affordability Index has risen above 100, indicating improved affordability (a higher value is better). A score of 100 means that a buyer with a median income can just afford a mortgage on a median-priced home. While existing home sales have gradually increased over the past month, they remain below pre-pandemic levels. As wages and income grow faster than inflation, households now have more purchasing power to enter the real estate market, even with high home prices.
Housing Affordability Improved Last Month
3. Rising Number of Prospective Home Buyers
Homebuilders have revised their six-month outlook for residential real estate upward after noticing an increase in traffic from prospective buyers. While low inventory and high mortgage rates had previously made buyers hesitant in an uncertain market, the Federal Reserve’s interest rate cuts and a stable job market have encouraged more buyers to enter the market, providing a boost to the residential construction sector.
Traffic from Prospective Home Buyers Has Recently Increased
4. Interest Rate Cuts Expected to Continue into 2025
In September, the Federal Reserve concluded its most aggressive rate-hiking cycle in decades. Since then, the Fed has lowered rates by a total of 75 basis points (bps), and these cuts are expected to continue into 2025. Initially, the market anticipated a more aggressive rate-cutting cycle through 2024-25, but with economic data coming in stronger than expected, those forecasts have been adjusted. We believe that after weeks of the market overestimating the number of rate cuts for 2025, Fed rate cut expectations are now more in line with the current economic data. Currently, markets still expect the Fed to lower rates to below 4% by the end of 2025.
5. Reduced Inflation Rates
The U.S. is emerging from some of the highest inflation rates seen since the 1990s. The Federal Open Market Committee (FOMC) is working to achieve its target of 2% inflation.
Prices increased by 0.2% from the previous month, maintaining the same monthly rate as in July, August, and September, signaling that inflation is stabilizing. While clothing, communications, and household furnishings saw declines in October, shelter, used vehicles, airfare, and medical care experienced price increases.
Prices for meat, fish, and eggs dropped by over 1.2%, marking the largest monthly decline since May 2023, which helped ease pressure on household budgets. The more persistent elements of inflation continue to soften, providing the Fed with some flexibility to reduce rates in the coming year. However, strong consumer demand is still exerting upward pressure on prices, as consumer spending remains robust. Stronger-than-expected economic growth, along with factors such as protectionist trade policies and ongoing deficit spending, are likely contributing to elevated bond yields.
By Dr. Jeffrey Roach | Chief Economist
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