The U.S. Economy: Firing on All Cylinders

With the year winding down, we thought examining how well the U.S. economy performed this past year would be a good idea. Please keep in mind that this was filmed before the FOMC meeting on December 17th and 18th.

Chart 1, 0:27– The pace of the U.S. economic growth has far outpaced that of many of the world’s major economies. This chart shows that since the end of the recession, domestic growth has been almost three times greater than that of other countries or economic zones. This is an example of American exceptionalism, often discussed by analysts. Although this unique term is more than 100 years old and refers to our culture and views of liberty, individualism, meritocracy, and laissez faire economics, it is now being used to talk about how the U.S. economy is structurally more robust and resilient than many other developed countries in the world. Most notable would be the entrepreneurship and innovation that has led to the creation of new jobs. This is clearly seen in the tech sector.

Chart 2, 1:20– This chart shows the GDP performance of the economy this year and the expectations for the fourth quarter. The dark blue columns are history, actual data. The light blue column is what the Atlanta Fed Nowcast expects for the fourth quarter. The actual fourth quarter data will not be released until the end of January. The bright blue line is the yearly change in GDP.

But what’s noticeable in this chart is the weaker pace of growth in the first quarter. That was due to one-time factors like a massive amount of imports, which took almost a whole percentage point off the headline number. Also, there was some high inflation. You may remember that the inflation spike caused the Fed to delay expected interest rate cuts at the beginning of the year. The following two quarters and the expectation for the fourth quarter are rock solid. This has been driven by robust consumer spending.

The next group of charts shows how major components of GDP have driven growth. They compare the growth of the first three quarters of this year with the average of the past two years.

Chart 3, 2:27– Here we will show the building blocks of GDP growth. Back in 2023 and 2022, it averaged just 2.3%. So, it’s been a bit stronger this year at 2.5%. Here in the dark blue is consumption. It increased this year, helped by income growth faster than inflation.

The inflation spike back in 2022 curtailed some consumer spending. Investment spending in bright blue, which excludes shelter and inventory, which we’ll talk about separately, this year has not been as strong as in the previous two years, and that’s due to a slowdown in the pace of research and development.

Chart 3 cont., 3:10– There has been a switch in the direction of inventories, which is in the dark gray. They were a drag in the two previous years, but so far this year, they’ve been additive to GDP. This can be attributed to many manufacturers stocking up on products needed for production, for they fear that tariffs next year will cause the prices to be much higher, and they want the products right now.

Housing, which is in light gray. It also experienced a reversal of direction. Housing was plagued in the two previous years due to the surge in mortgage interest rates, which increased from roughly 3% to about 8%. That sticker shock caused a sharp pullback in buying demand and building. So far this year, it’s squeaking by with a just a 1/10th of 1% increase.

Government, in green, is a little more additive now than in previous years. This is due to a sharp increase in defense spending and also the continuation of strong expenditures from the state and local governments. They’re flushed with cash from the low unemployment rate and strong sales tax revenue from the robust consumer spending.

The bright green is also switching direction. The current negative reading is because we have imported more than we’ve exported. This too is attributed to the fear of tariffs in 2025, so there’s been heavy importing this year. The important takeaway from all of these building blocks is that the economic data remains robust.

The Congressional Budget Office believes that 2% GDP growth is the long-term sustainable pace. So with growth around 3%, it’s a great place to be right now.

Chart 4, 4:50– All that strength from GDP has kept the unemployment rate low, currently at 4.2%. Many economists view it as full employment to be in a range of 4% – 4.5%. You can see from this chart dating back to 1950, being in this range or below for a sustained period of time has happened just two other times, in the early 1950s and the late 1960s. Both times, the U.S. was at war with either Korea or Vietnam. And there was a draft back then, and many young men were not able to be in the market looking for a job.

This time, there are some demographic issues with baby boomers retiring, but it’s also because of the robust economy that we are experiencing.

Chart 5, 5:39– However, that strength in labor growth is moderating. The columns in this chart show the monthly change in non-farm payrolls. The dark blue line is a six-month moving average, which smooths out the data. However, you can see that the six-month average change is lower now than the pre-pandemic average and is approaching a level associated with the number of people entering the labor force, which means no net growth.

We believe this slow pace of hiring was the catalyst for the Fed starting its easing cycle with a bang, that 50 basis point cut in their first move.

Chart 6, 6:18– Inflation has improved since peaking at 9.2% in the summer of 2022. It initially fell quickly, stabilized last winter and spring, fell during the summer, and has bounced up in these past two months.

The last mile always takes the longest. In economics, as in many parts of life, the trend is your friend, and the trend in inflation is downward. The Fed believes that inflation is on a sustainable path to its target rate of 2%, even though there will be bumps along that way.

Chart 7, 6:52– This chart, like the earlier GDP with the building blocks, shows how in 2022 and 2023, inflation was firing on all cylinders, pushing up the two-year average to 6.1%. But this year, shelter, which is the way they refer to housing costs, is firm – as are service costs, in the green, due to the high labor costs.

Shelter is the largest component of CPI, making up more than one-third of the index, and it’s been the primary reason for CPI’s slow trend toward 2%. But there are some bright spots on the inflation front in regards to housing.

Chart 8, 7:36– Homeownership and tenant rental costs have decreased. Both had their smallest monthly increase in November in more than three years. Of course, one month does not make a trend, but this chart shows that the movement in pricing for housing is on a downward trend.

It’s too early to assess the impact of potential policy changes from the new administration. So aside from that, we do not see any significant economic risks for the economy.

In fact, with the Fed planning on cutting interest rates and the new administration planning on reducing regulations and possibly cutting taxes, this economy is poised to continue its above-trend pace.