Weekly Update 11/27/2024: US Consumer Confidence Rises as US Economy Expands at a Solid Pace in Third Quarter

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Domestic Economic News

US consumer confidence increased in November to the highest level in more than a year on optimism about the economy and labor market. The Conference Board’s gauge of confidence rose 2.1 points to 111.7 this month, data released Tuesday showed. The median estimate in a Bloomberg survey of economists called for a reading of 111.8. A measure of expectations for the next six months edged to 92.3, an almost three-year high. A gauge of present conditions increased to 140.9. The US consumer remains strong which makes the US economy particularly resilient during this interest rate cycle.

US Treasuries added to the gains Monday spurred by the late-Friday announcement of Scott Bessent — a Wall Street veteran who investors expect will take the sting out of the administration’s more aggressive trade and economic policy proposals — as President-elect Donald Trump’s Treasury secretary choice. Monday’s rally trimmed yields by more than 10 basis points across five- to 30-year maturities, gaining momentum in early New York trading amid a drop in oil. The dollar slumped by the most in more than two weeks. “Bessent is viewed as a potentially moderating influence on the incoming administration’s policies,” said Shaun Osborne, chief foreign-exchange strategist at Scotiabank. “Favoring gradualism on tariffs, for example.” Bessent, who runs macro hedge fund Key Square Group, has called for a gradual approach to implementing trade restrictions and has appeared open to negotiating the exact size of tariffs championed by the president-elect. In an interview with the Wall Street Journal, Bessent said his priority will be to deliver on Trump’s various tax cut pledges, while also cutting spending and “maintaining the status of the dollar as the world’s reserve currency.” The dollar had notched its longest stretch of weekly advances in more than a year on Friday as the prospect of an all-out global trade war weighed on currencies across the world. Trump has threatened to hit Chinese shipments with a 60% tariff and impose a 10% levy tariff on goods from all other countries. Bessent’s nomination, which needs to be confirmed by the US Senate before he takes the job, is at odds with Trump’s choices of a series of unorthodox candidates and absolute loyalists for other key positions. Other prominent contenders included former Federal Reserve board member Kevin Warsh and Trump transition co-chair Howard Lutnick, who had the support of Elon Musk. “The Bessent selection certainty doesn’t fully negate the potential fallout from a renewed focus on trade wars and tariffs, although by eliminating some of the more extreme scenarios, the market has surely derived a degree of comfort in the outlook for the bond market,” wrote Ian Lyngen, head of US rates strategy at BMO Capital Markets. While Bessent has said Treasury Secretary Janet Yellen over-utilized Treasury bills to fund the government, Citigroup strategist Jason Williams pointed out that it’s likely the share of bills will remain around 22% “This is a positive development reflected in the price action in bonds today,” said Subadra Rajappa, head of US rates strategy at Societe Generale.

In other domestic economic news, according to the Labor Department, weekly jobless claims fell by 2000 to 213,000 in the week ending November 23 compared to the estimate for 215,000. The data reinforces the view that the US labor market continues to be strong. In separate news, The US economy expanded at a solid pace in the third quarter, largely powered by a broad-based advance in consumer spending and steady business investment. Gross domestic product increased at a 2.8% annualized pace in the third quarter, the second estimate of the figures from the Bureau of Economic Analysis showed Wednesday. The economy’s primary growth engine — consumer spending — advanced 3.5%, the most this year. While still strong, household spending was revised modestly lower from the initial reading, reflecting slightly less robust outlays for merchandise. At the same time, business investment in research and development was revised higher. The GDP report showcases the durability of an economic expansion that’s been tested by lingering price pressures, high borrowing costs and political uncertainty. While progress on inflation has leveled out more recently, the Federal Reserve has started reducing interest rates. With Donald Trump sealing his return to the White House, American businesses and consumers now await the roll-out next year of his economic agenda. The government’s other main gauge of economic activity — gross domestic income — rose 2.2%, after a revised 2% annualized pace in the second quarter. Whereas GDP measures spending on goods and services, GDI measures income generated and costs incurred from producing those same goods and services. The average of the two growth measures in the third quarter was 2.5%. The GDI data include figures on corporate profits. After-tax profits were little changed. Profits as a share of gross value added for non-financial corporations, a measure of aggregate profit margins, edged up to 15.6% last quarter from 15.5% in the prior three-month period.

Pending sales of US homes unexpectedly rose to a seven-month high in October as a brief drop in mortgage rates lured buyers. A National Association of Realtors gauge of contract signings increased 2% to 77.4 last month. That was well above all estimates in a Bloomberg survey, the median of which called for a 2% drop. Homebuyers frustrated by elevated financing costs got a short-lived reprieve in late summer when mortgage rates hit a two-year low. That spurred a wave of homebuying that continued into October, even though rates began to rise again. “Homebuying momentum is building after nearly two years of suppressed home sales,” NAR Chief Economist Lawrence Yun said in a statement. “Even with mortgage rates modestly rising despite the Federal Reserve’s decision to cut the short-term interbank lending rate in September, continuous job additions and more housing inventory are bringing more consumers to the market.” Pending sales indexes increased in all four US regions, led by a 4.7% increase in the Northeast to the highest level since early last year. The South rose slightly despite hurricanes that struck the Southeast in late September and October. The supply of previously owned homes has rebounded to the highest level in four years — even if it’s still well below pre-pandemic levels. Nonetheless, affordability remains a challenge. Economists now anticipate mortgage rates to stay higher for longer, with the Fed taking a more gradual approach to interest-rate cuts amid stubborn inflation. And prices of previously owned home prices have continued to climb on a year-over-year basis. Pending-homes sales tend to be a leading indicator for previously owned homes, as houses typically go under contract a month or two before they’re sold.

The Federal Reserve’s preferred measure of inflation came in exactly as expected for the month of October while personal incomes came in two times better than expected, according to the Bureau of Economic Analysis. Personal income in October rose 0.6% versus the estimate for 0.3%. Personal spending in October rose 0.4% in-line with the estimate. The personal consumer expenditure index (PCE) showed prices rose 0.2% month-over-month and increased 2.3% year-over-year. Core prices rose 0.3% month-over-month and increased 2.8% year-over-year. This was a slight acceleration over the prior month’s data. Inflation-adjusted consumer spending edged up 0.1% after an upwardly revised 0.5% gain in September, consistent with uneven demand over the course of the year.

Interest Rate Insight and the Fed

Federal Reserve Bank of Chicago President Austan Goolsbee said he foresees the central bank continuing to lower rates toward a stance that neither restricts nor promotes economic activity. “Barring some convincing evidence of overheating, I don’t see the case for not continuing to have the fed funds rate decline,” Goolsbee said Monday in an appearance on Fox Business, referring to the central bank’s benchmark interest rate. “How fast that happens will be determined by the outlook and conditions,” Goolsbee added. “But the through line to me is pretty clear that we’re on a path, and that path is going to lead to lower rates, closer to what you might call neutral.” He said his forecast of the neutral rate was close to officials’ median estimate, which was 2.9% in the September projections. The Fed on Tuesday will release the minutes of the Nov. 6-7 meeting of the interest-rate setting Federal Open Market Committee. Policymakers at that gathering reduced the central bank’s benchmark interest rate by a quarter percentage point, following a half-point reduction in September. Several officials have urged a cautious approach to future rate cuts, given continued economic resilience and firm inflation data of late. Fed Chair Jerome Powell said earlier this month that the economy was not sending signals that officials need to be in a hurry to reduce rates. Policymakers will have several more data points to digest ahead of their December meeting, including the Fed’s preferred inflation gauge and an employment report. Goolsbee said Monday it was important not to “over conclude anything” from one month’s data. “I think the broad through line has been the newer months of inflation coming in oftentimes below what was expected, but not that far above the 2% target,” he said, referring to the Fed’s target for price growth.

Federal Reserve Bank of Minneapolis President Neel Kashkari said it is still appropriate to consider another interest-rate cut at the central bank’s December meeting. “It’s still a reasonable consideration,” Kashkari said Monday on Bloomberg Television in response to a question about whether policymakers should reduce borrowing costs by a quarter point at their last meeting of the year. “Right now, knowing what I know today, still considering a 25-basis-point cut in December — it’s a reasonable debate for us to have.” Kashkari said the economy’s resilience in the face of higher interest rates suggests that the neutral rate, where policy neither weighs on nor stimulates growth, may be higher now. That raises questions about how much monetary policy is helping to cool demand in the economy, he said. The longer that resiliency continues, the more he thinks that shift might be structural and not merely temporary. “This is what I’m trying to understand right now, is how much downward pressure are we putting on the economy, and what is the path for inflation,” Kashkari said. Policymakers have lowered interest rates by three quarters of a percentage point in recent months, including a larger-than- usual half-point cut in September. They meet again Dec. 17-18. Some officials have signaled support for a more gradual pace of rate reductions going forward. Fed officials will receive more data, both on inflation and the labor market, before their December meeting. The latest update on the Fed’s preferred price gauges will be released Wednesday. Progress on inflation, which has been inching closer to the central bank’s 2% target, has slowed in recent months. “I have some confidence that it’s gently trending down, and right now the labor market remains strong,” Kashkari said. Kashkari said that while one-off tariffs would likely lead to a one-time price hike, a situation where there is retaliation by foreign countries could drive up prices.

Impactful International News

Japanese Prime Minister Shigeru Ishiba called on companies to continue ramping up pay for workers, as his government seeks economic growth while also responding to the rising cost of living. “I asked for cooperation in next year’s wage negotiations for a substantial wage increase, building on this year’s momentum,” Ishiba said after meeting with labor union and business leaders. Average wage deals this year hit a 33-year-high as firms responded to demands to raise pay amid ongoing inflation. Ishiba met with key players in the annual pay talks, including Tomoko Yoshino, chair of Japan’s biggest trade union federation Rengo and Masakazu Tokura, head of the business lobby Keidanren. The premier’s push comes as unions and companies prepare for pay negotiations that will culminate next spring. The discussions are being closely watched by the government and the Bank of Japan as authorities view wage gains as a key determinant for achieving a positive economic growth cycle. In March, the BOJ raised interest rates for the first time in 17 years shortly after the initial results of Rengo pay deals for 2024 pointed to the biggest gain in over three decades. Higher pay is also needed to mollify voter dissatisfaction over a cost-of-living crunch amid ongoing inflation. Despite strong nominal wage gains this year, real wages have remained largely stagnant due to persistently high inflation. Real wages across the country have only risen in two months over the last year, while the nation’s key price gauge has stayed at or above the BOJ’s 2% target for over 30 months. In Tuesday’s discussions, the prime minister stressed he wants structural wage gains to take root as a key part of achieving a virtuous cycle, according to Masakazu Tokura. For the coming year, Rengo is again targeting gains of at least 5% across all sectors, along with a 6% increase at smaller firms. This year it managed to achieve gains of 5.1% overall and a 4.45% raise at firms with fewer than 300 employees, in results that continued to show a gap between big and small firms. “It’s vital that wage gain trends extend to small and mid-sized businesses as they account for 70% of employment,” Ishiba said.

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