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Market Update

Economic indicators continue to show a strong U.S. economy

January 29, 2024
  • amol dhargalkar headshot


    Amol Dhargalkar

    Managing Partner, Chairman
    Global Head of Corporates

    Kennett Square, PA


The fourth quarter of 2023 included strong consumer spending and manufacturing growth, but concerns continue to linger about the sustainability of spending tied to a decreasing savings rate. The Federal Reserve is expected to maintain rates in their first 2024 meeting, with potential cuts later in the year.

LEI continues to fall

The United State Leading Economic Index (LEI) fell for the 21st month in a row, by 0.10% for the final month of 2023, to 103.10, following a previous decline of 0.50% in November. The LEI provides an early indication of significant turning points in the business cycle and future economic activity, to a degree of reasonable accuracy, and considers ten market components — including new manufacturing orders and the spread between the yield of the 10-year U.S. Treasury bond and the Fed funds rate. Interestingly, this past month showed an increase in six of the ten components, yet the LEI still fell, largely in part to weakened conditions in manufacturing and the high-interest-rate environment. The last time the LEI was negative for this long (1973–1975 and 2007–2009), a recession followed. A senior manager of the Business Cycle Indicators, Justyna Zabinska-La Monica, commented on the decline, saying “Overall, we expect GDP growth to turn negative in [the second and third quarters] of 2024 but begin to recover late in the year.”

GDP shows an expanding economy in the fourth quarter

The U.S. economy grew at an annual rate of 3.30% in Q4, well above the 2.00% increase forecasted for Q4 by economists polled by the Wall Street Journal. Steady consumer spending drove the increase in GDP, a metric that accounts for about 70.00% of U.S. economic activity. Americans have been spending more on things like leisure and recreation since the end of the pandemic, so manufacturers have been struggling to keep up. Manufacturing and services PMIs jumped to 15-month and seven-month highs respectively, with the manufacturing PMI climbing over 50 for the first time in over a year, signaling growth in the economy. Business investment and production of goods slowed, two other staples of the economy, but still grew during the end of 2024. Inflation rose at a gentle 1.70% and core PCE increased at a rate of 2.00%, putting that rate right around the Federal Reserve’s 2.00% goal, with questions surrounding its sustainability. While the slowing rate of inflation is pleasing to the Fed, the ongoing strength of the economy may be slightly worrisome. However, the data coming out this week is indicative of a thriving economy.

Source: FRED

A strong economy boosted by holiday consumer spending

Consumer spending rose for the month of December by 0.70%, up from the 0.50% rate forecasted by economists polled by the Wall Street Journal. Record low layoffs, low unemployment, and rising incomes bolstered household spending. Americans spent more on new cars, health care, financial services, and gambling in December — stronger than previously reported in November, up to 4.00% from 2.00%. Taking a step back to look at the big picture, this spending has been driven by wealthier Americans, as lower-income households have struggled with the rising cost of housing and inflation of the past year. Another indicator of the struggles faced by lower income households is the drop in the savings rate to its lowest in a year, down to 3.70% in December from 4.10% in November. 2024 starts with some positive momentum, but spending driven by a drop in the savings rate may be unsustainable.

Retreating mortgage rates drive new home sales

New home sales rose sharply in December, given a boost by the decreasing mortgage rates and shortage of previously owned homes on the market. Sales rose 8.00% to an annual rate of 664,000 units. In November the sales pace was revised to 615,000 units from a previously reported 590,000 units. Monthly sales went up across the Northeast, Midwest, and the South but decreased in the West. With the combination of the rate on a 30-year fixed-rate mortgage dropping from its 23-year high in October and the median new home price dropping 13.00%, buyers’ appetite has increased. However, existing home inventory remains well below pre-pandemic levels, resulting in much lower sales of pre-owned homes.

The Fed meets this week

Looking to later this week, we have the Fed’s first meeting of 2024. Many experts expect the Federal Open Market Committee (FOMC) to hold rates steady, at a target of 5.25%–5.50%, with rate cuts anticipated through 2024 as inflation eases and the economy slows down. We will also get more data on U.S. productivity, nonfarm payrolls, unemployment, and consumer sentiment at the end of the week.

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