Evolving Developments: A US Macroeconomic Update

Despite inflation remaining a concern, the US economy has been robust, with higher levels of consumer spending and job creation in the fourth quarter of 2023. In part because of these factors, the Federal Reserve decided to continue the pause on interest rate hikes throughout the quarter, helping alleviate pressures for downstream activities like construction and investing. However, inflation remained above the 2.0% target rate in the final three months of 2023. This kept pressures in place as well, especially as costs for some goods also remained higher in the period despite improvements in both supply chains and consumer spending. As such, real GDP expanded by an annualized 3.3% in Q4 2023.

Labor market       

• In the final quarter of 2023, nearly 680,000 jobs were added in the economy, which signaled market strength against various economic pressures in the quarter. In January 2024 alone, more than 353,000 jobs were created, further demonstrating the economy’s resilience.
• The education and health services supersector was the highest-performing in the fourth quarter, for which employment rose 1.1%, while employment in the trade, transportation and utilities supersector ticked up by 0.1%. These supersectors have all needed more people to join their workforces because of their size and the essential nature of their services, which made them more willing to hire in the fourth quarter to enhance their operations. Higher consumer spending in the period especially indicated that consumers were more able to afford to pay for these services than before, adding to the willingness to hire.
• The rate of unemployment remained at 3.7% in January 2024, where it had been in both November and December 2023, though that’s slightly lower than October 2023 when it was at 3.8%. Sectors like transportation and warehousing and mining and logging led the way in terms of job losses. Inflationary pressures remained an influencing factor that compelled companies to cut back on their workforces to control costs in the period, especially for sectors dealing with rising costs.
• However, despite various inflationary pressures in the quarter, average hourly earnings went up by 4.5% in January 2024 from the same period last year, which is a reflection of the robust spending environment that has largely fended off pressures from inflation while helping stimulate the economy. Companies took advantage of booming consumer spending to boost their payrolls in efforts to retain seasoned employees, in addition to widening their workforces by attracting new prospective employees in the labor market with higher, more competitive wages. Doing so expands employers’ presence in the market and optimizes their operations in needed areas with new talent, both of which enabled them to sustain and even capture more of the elevated spending and economic activity seen in the fourth quarter.

Consumer spending

• Personal consumption expenditures (PCE) rose by 1.1% in the final quarter of 2023, remaining at 5.9% year-over-year from December 2022. Consumer spending largely remained elevated in the quarter, despite ongoing inflationary pressures. The inroads made toward more job openings alongside wage gains and stable interest rates in the quarter helped counterbalance the effects of inflation on the consumer, which also rose slightly in the quarter.
• Durable goods spending scaled up 0.2% in the fourth quarter. This can be linked to the rise in consumer spending for recreational goods and vehicles; however, the motor vehicles and parts and furnishings and durable household equipment subsectors both endured a slump in spending that muted the effects of this uptick on PCE. Inflationary pressures have challenged the appeal of higher-priced items like furniture and vehicles.
• Nondurable goods spending went up 0.6% in the period, with steady rises in other nondurable goods spending helping boost this activity. However, heftier inclines in spending for gasoline and other energy goods worked against the energy sector, despite noticeable price drops for these items. Efforts made to ramp up production of crude oil made fuel more affordable in the fourth quarter, though the costs for nondurable goods are still above their prepandemic levels and therefore their appeal remains contentious for consumers who still have to pay more to get these items.
• Spending on services expanded by 1.4% in the fourth quarter. Gains made in transportation services and food services and accommodation led the way for this sector, as travel has continued to be a strong source of spending in the years since the pandemic. Lingering pent-up demand for travel fueled the appeal of services like airlines and public transit, with food services and accommodation steadily expanding alongside in the period as establishments in these industries leveraged their presence to capture the markets of commuters and travelers.

Inflation

• Over the course of the fourth quarter of 2023, the core personal consumption expenditures price index (core PCE) – which excludes both food and energy items while also being the Federal Reserve’s preferred inflation measure – scaled up by 0.4%. The year-over-year core PCE for December 2023 rose 2.9%, which is above the Federal Reserve’s preferred inflation target rate of 2.0%.
• When taking into account both food and energy items, the consumer price index (CPI) was up 3.3% (adjusted) year-over-year as of December 2023. Between November and December 2023, the CPI rose by 0.3%, with price hikes in energy services leading the way for the month as the need for electricity among consumers became larger and pressures on energy grids affected costs.
• However, it should be noted that energy prices went down year-over-year in December 2023 by 2.0%, which is attributed to US efforts made to bolster energy inventories in light of Russia’s invasion of Ukraine. The US heightened its oil production through various actions like sanctions on Russia while decoupling industries from the region, which paved the way for more domestic oil and gas industries to be supported in the period. This – along with increased output generated by domestic refineries – altogether tempered prices in 2023 and in the quarter, with no signs of the United States slowing down its production efforts.
• Various actions to combat the supply chain crisis that emerged from the pandemic played a role in reducing the stresses on the economy, with the Biden administration encouraging more US-based energy projects by issuing more oil permit approvals in 2023. The administration had also signed into law a wide range of legislation like the CHIPS and Science Act of 2022 and the Inflation Reduction Act of 2022, both of which paved the way for more support for domestic industries that produce semiconductors and industries that embrace both green and clean energy. These acts undertaken by the United States instilled more confidence that issues like economic pressures on certain industries from supply chain disruptions are not set to manifest.

Residential trends

• Despite slight escalations in inflationary pressures amid the robust economy for the fourth quarter, the 30-year fixed mortgage rate reached 6.6% by the end of the fourth quarter, down from 7.3% at the end of the third quarter. In the beginning of the fourth quarter, toward the end of October, this rate had risen to 7.8% – a 23-year high. The lowering trend suggests that various factors like the pause in hikes for interest rates did contribute to mortgage rates sliding down in the fourth quarter from the end of the prior quarter, despite interest rates remaining at higher levels historically because of the unique economic pressures in the period.
• Spending on residential construction ticked up slightly, by 1.6% in the fourth quarter. The essential need for housing amid the low housing stock in the US – coupled with the Fed’s decision to pause interest rates at a relatively high level, constraining existing home sales – helped fuel more spending on construction as a means to boost housing availability. The pressure on housing stock in the period also spurred sales of new homes, with new home sales going up by 8.0% in December 2023 despite prices for such homes being elevated in the same period. The more robust economy and continued high levels of consumer spending in the fourth quarter helped counterbalance these concerns, as well.
• Sales of existing homes remained pressured in the final quarter of 2023 despite a slight uptick in November. The elevated prices of these properties and the pressured housing stock in the period are making existing homes a lot more valuable and noticeably expensive until abatements can be achieved, especially with inflation and interest rates also remaining up. The median cost of existing homes reached $382,600 in December 2023.

Nonresidential trends

• Even as inflation trickled up in the fourth quarter, spending on nonresidential structures remained up, rising on average by 1.1% in the period. This was mainly driven by elevated bouts in construction activity for both public and private types of projects, with both manufacturing and infrastructure alike experiencing a boost in spending in the last quarter of 2023.
• Legislative actions, such as the CHIPS and Science Act of 2022 and the Inflation Reduction Act of 2022, support spending on semiconductor and green energy projects through incentives like tax breaks and boosted funding on key projects. These helped expand spending in the fourth quarter for semiconductor- and energy-related industries. Infrastructure projects such as highways and streets remained up in all months of the quarter, partially because of infrastructure bills and funding passed by federal and state governments prior to and during 2023.
• But the quarter did bring on more pressures in terms of office and commercial markets. Commercial spending slumped in all months of the quarter; spending on office construction remained slightly up in the quarter but stagnated in December 2023, with lower occupancy levels for office spaces remaining a major factor that worked against both the valuation and the appeal of these properties in the period. Added stresses from inflationary pressures made the risks associated with taking on office construction projects a lot more burdensome in the fourth quarter.

Financial markets

• Between a resilient US economy and an unexpectedly strong labor market, the Federal Reserve decided to not raise interest rates during the fourth quarter. However, since inflation remained elevated in the period and is still above the Fed’s 2.0% target rate several months after the last rate hike, it seems increasingly unlikely that rate cuts will happen in the near term.
• Amid the varying developments happening in the US economy, the markets have responded. A majority of S&P 500 companies have reported that their fourth quarter earnings surpassed estimates, while total S&P 500 earnings expanded in the fourth quarter of 2023. These factors signal a continued level of robustness in the economy in the fourth quarter.
• However, with the expectation that interest rates will be cut in 2024, investors began turning away from money market funds in favor of securities like stocks. A steady majority of banks have speculated that interest rate cuts in 2024 will lead to a boosted need for loans in the year, altogether leading to a potential shakeup in the financial market in 2024 if rate cuts do transpire. The prolonged pause in interest rates has also influenced market activity, preventing highs from being achieved because of the expectation that cuts will happen soon.

Risk ratings

• Despite pandemic-related restrictions easing, surging inflation drove up risk levels in 2022, resulting in 37.5% of industries being rated as medium-high or higher risk.
• Ongoing inflation concerns and multiple interest rate hikes resulted in worsening risk levels in 2023, despite the conclusion of the pandemic in the first half of the year. Consequently, 52.0% of industries were rated as medium-high or higher risk.
• With interest rates kept steady since July 2023 and potential rate cuts on the horizon, risk levels are expected to ease slightly in 2024, with 46.6% of industries rated as medium-high or greater risk.
• With a strengthening economy in a postpandemic environment, risk levels are expected to further lessen in 2025.

Sector highlights

Construction: Efforts to launch various new residential and nonresidential projects helped boost activity in the fourth quarter, but factors like high building costs and elevated interest rates have made these projects more expensive. Low housing stock and the slump in office and commercial real estate amid the challenges of enticing more employees back to in-person work have added to the risks. As such, higher costs and mortgage rates worked against the appeal of residential and nonresidential construction projects for consumers and investors alike, who had to contend with these conditions without any immediate signs of relief on the horizon.

For the time being, these projects are set to stay afloat even amid de-escalating levels of various inflation indicators and a pause in interest rate hikes from the Federal Reserve. These trends are expected to persist in the near term, therefore industries like Home Builders and Industrial Building Construction are set to be threatened.

Mining: Despite efforts to beef up energy and production of various commodities in the fourth quarter, the mining sector is set to be faced with more risks, like the phasing out of some materials sourced from this sector and pressures on specific downstream markets. A push for renewables and electricity from the federal government has reduced demand for sources like coal, especially with regulations that constrained their production. Innovations pertaining to energy development have also reduced the need for these items.

International competition, resulting from the gradual buildup of overseas countries that can source and export materials like gas and oil at lower costs, is expected to add more headwinds to domestic-based mining industries that are vulnerable to external competition. The pressures on various downstream markets like construction, including elevated costs and high interest rates, are also set to hamper the need for more commodities from these sectors. Given all of these factors, industries like Coal Mining and Oil Drilling & Gas Extraction are set to be threatened in the near term.

Agriculture, Forestry, Fishing and Hunting: The need for various goods that rely on agricultural inputs has propped up this sector. However, emerging climate events, vibrant competition in international markets and shifting consumption habits are expected to pressure industries that are part of this sector. It should be noted that there are challenges in gauging the effects of weather events on the sector and to what extent natural disasters will be prevalent in a period of time, due to their unpredictable nature. But nevertheless the potential risks to future crops, for example, remain a pressuring factor.

International markets that rely on domestic exports from this sector will help support industries in Agriculture, Forestry, Fishing and Hunting. However, the recovery in industrial production levels in other countries that have more ideal weather patterns will pressure domestic companies that lack a strong presence in these countries to be able to compete. This has raised the risk level for crops like sugarcane. The changing image of items that were once very popular, like tobacco, along with fluctuating consumer habits will also challenge their appeal – especially amid the elevated health risks of smoking, for example. As such, industries like Tobacco Growing and Sugarcane Harvesting are both set to be threatened in the years ahead.