Business Conditions Monthly October 2024

In October 2024, two of the AIER Business Conditions Monthly indicators fell while one remained at neutral levels. The Leading Indicator fell to 58 from 71, returning to the more neutral levels it occupied in the early summer. The Roughly Coincident Indicator remained at the 58 level it held in September, and the Lagging Indicator remained in contractionary territory, declining to 25 from 33 the previous month.

Leading Indicator (58)

Of the twelve components that make up the Leading Indicator, five fell, five rose, and two were neutral.

In October 2024 included the 1-to-10 year US Treasury spread rose from −0.23 percent to 1.013 percent, in addition to the Conference Board US Leading Index of Stock Prices (3.0 percent), Adjusted Retail and Food Service Sales (0.5 percent), FINRA Customer Debit Balances in Margin Accounts (0.3 percent), and the Conference Board US Leading Index Manufacturing, New Orders, Consumer Goods and Materials (0.3 percent). Declining were US Initial Jobless Claims (-3.1 percent), US New Privately Owned Housing Units Started by Structure (-3.1 percent), United States Heavy Truck Sales (-2.7 percent), University of Michigan Consumer Expectations Index (-0.4 percent), US Average Weekly Hours All Employees Manufacturing (-0.3 percent) were unchanged.

The Inventory/Sales Ratio: Total Business and US Leading Index Manufacturing, New Orders, Consumer Goods and Materials were both unchanged.

Roughly Coincident (58) and Lagging Indicators (25)

Within the Roughly Coincident Indicator four components rose and two were unchanged from September to October 2024. The Conference Board Consumer Confidence Present Situation Index rose 9.9 percent, in addition to Coincident Manufacturing and Trade Sales (0.2 percent), Coincident Personal Income Less Transfer Payments (0.2 percent), and Nonfarm payrolls (0.2 percent). US Industrial Production fell 0.4 percent, as did US Total Labor Force Participation (-0.2 percent).

Across the six Lagging Indicator subindices three fell, two rose, and one was unchanged. US Commercial Paper Placed Top 30 Day Yields declined by 2.3 percent, US Lagging Commercial and Industrial Loans were down 1.1 percent, and the Census Bureau’s Private Construction Spending (Nonresidential) fell 0.3 percent. Core CPI (year-over-year) was unchanged, while the Conference Board US Lagging Average Duration of Unemployment declined 1.3 percent and

US Manufacturing and Trade Inventories fell 0.1 percent.

In 2024, the Leading Indicator demonstrated periodic expansion early in the year, peaking at 75 in February, but shifted toward a neutral range by mid-year and beyond, signaling diminished forward momentum. The Roughly Coincident Indicator remained consistently strong, holding steady in the expansion range above 60 for most of the year, indicating resilience in current economic activity despite fluctuations in the leading signals. Meanwhile, the Lagging Indicators showed persistent contraction, with values consistently below 40 after February, suggesting that improvements in economic conditions have yet to filter through to slower-moving components of the economy.

The divergence between the leading and lagging indicators highlights uneven progress, a staple of the post-pandemic recovery, but with robust coincident indicators bridging the gap. This dynamic suggests that while current conditions are on as steady a footing as we’ve seen since 2021, as of October 2024 forward-looking signals and lagging adjustments nevertheless reveal vulnerabilities in sustained economic growth. The alignment of neutral leading and coincident indicators late in the year reflects a cautious economic outlook.

DISCUSSION

Global disinflation is expected to persist into 2025, prompting additional rate cuts from central banks. This progress will vary across regions, however. In the United States, disinflation appears to be losing momentum, leading to a reassessment of the scale and pace of rate cuts in 2025. Key factors such as labor market trends, prices, and consumer activity will play a crucial role in determining the extent and timing of further monetary easing next year.

The labor market in late 2024 reflects a complex mix of resilience and gradual softening, marked by strong payroll growth in November but tempered by signs of broader cooling. Payroll employment rose by an estimated 227,000 in November, with upward revisions adding another 56,000 to prior months. Despite this, the broader context suggests a labor market that has been slowing over the past two years. Indicators such as a 0.8 percentage point rise in the unemployment rate since April 2023 (satisfying the Sahm Rule criteria) and a lengthening median duration of unemployment to 10.5 weeks point to a less robust environment. While initial jobless claims in December fell below expectations, continuing claims remain elevated, reflecting longer periods of unemployment for laid-off workers.

Key structural factors have contributed to the current dynamics. A massive surge in undocumented immigrants has raised the breakeven pace of job gains needed to maintain steady labor-market conditions, while forthcoming benchmark revisions from the BLS are likely to reduce historical estimates of employment growth. This revised perspective suggests that job gains, though robust by pre-pandemic standards, may be insufficient to sustain prior levels of labor-market tightness.

Looking ahead to 2025, the labor market is expected to continue cooling as gradual layoffs, exemplified by announcements from Boeing and Stellantis, signal further pressure on employment. The Federal Reserve’s December 18 rate cut, supported by an “orderly” softening in labor conditions, aligns with expectations of additional easing next year. Overall, while the current labor market remains far from contractionary, the trajectory suggests a continued moderation in employment growth, providing room for the Fed to manage inflation risks without fear of overheating. By early 2025, revisions to employment data and additional rate cuts may clarify whether these trends point to a stabilizing or further slowing labor market.

On prices, recent Federal Reserve policy decisions highlight an attempt to maintain a nuanced balancing act in response to cooling inflation, a softening labor market, and persistent uncertainties. A 25-basis-point rate cut brought the Federal Funds rate to a target range of 4.25–4.50 percent, with the updated dot plot signaling a slower, shallower path for rate reductions through 2025. This cautious approach reflects evolving economic conditions, including sticky inflation and moderate labor market cooling, as well as assumptions about the potential extension of the Tax Cuts and Jobs Act (TCJA). Inflation data supports the Fed’s measured stance. Core PCE inflation slowed to a monthly rate of 0.11 percent in November 2024, significantly below prior levels, though annual inflation remains stubborn at 2.82 percent. Key drivers of disinflation included slowing prices in housing, health care, and discretionary goods, though categories such as financial services may exert upward pressure in the coming months. Looking ahead, the Fed’s slower projected pace of rate cuts reflects concerns about inflation’s resilience and a still-solid labor market. With inflation pressures in services proving tenacious and growth forecasts predicated on policy extensions, the Fed’s cautious optimism hinges on continued progress and stable labor market adjustments.

November retail sales outpaced expectations, driven by strong vehicle purchases and the appeal of online discounts, while consumers scaled back spending on dining out — a key indicator of discretionary service consumption. Overall, consumer spending is projected to grow at an impressive 3.0 percent for the fourth quarter. This growth appears to rely more on temporary factors, however, such as the wealth effect from a stock-market rally and “buy-in-advance” behavior, rather than robust economic fundamentals like job creation. Headline retail sales increased by 0.7 percent, exceeding both consensus estimates and the previous month’s upwardly revised 0.5 percent. Excluding autos and gasoline, sales rose by 0.2 percent, falling short of expectations for 0.4 percent growth. Control-group sales, a closely watched measure that excludes autos, gas, food services, and building materials, rebounded to 0.4 percent after a 0.1 percent decline in October, aligning with forecasts. Gains were led by motor vehicles and parts, which jumped 2.6 percent, and non-store retailers, up 1.8 percent. But contributions from other discretionary categories were mixed, with sporting goods and electronics rising modestly while clothing and restaurant spending declined. In the short term, spending may be supported by improved consumer sentiment following the election and ongoing stock market gains. Political polarization shapes sentiment, however: Democrats and independents express concerns over tariffs fueling inflation, driving preemptive spending, while Republicans largely anticipate inflation to ease. These dynamics underscore the fragile and uneven foundation of current consumption growth.

November’s ISM Manufacturing PMI rose to 48.4 from 46.5, exceeding expectations, driven by a surge in new orders, which entered positive territory for the first time since March. Supply conditions also improved, with quicker delivery times and slower inventory reductions helping to ease producer price pressures. Yet manufacturing/industrial employment remained in contraction, likely reflecting the ongoing impact of restrictive monetary policy. The improvements point to softening inflation pressures in the pipeline, although it remains uncertain whether stronger demand will lead to renewed inflation risks. The data reflects modest demand recovery amid continued caution by manufacturers overall.

We turn now to the stock markets, the most visible and immediate economic feedback mechanism for American households beyond their wages and jobs. Equity markets have delivered stellar returns with the S&P 500 up 23 percent year-to-date, albeit driven largely by a handful of technology stocks. Sky-high expectations for earnings growth in 2025, however, may signal a shift in the market narrative. Analysts expect S&P 500 earnings to grow by 23 percent in 2024, the fastest rate since 2018 (excluding the 2021 post-pandemic rebound). But the market’s implied expectations far exceed that pace, particularly in the tech sector, where valuations suggest nearly 40 percent growth is priced in. This disparity between expectations and likely outcomes raises concern about increasing prospects for investor disappointment. Additionally, revisions to forward earnings estimates in the tech sector have been negative for several weeks, reflecting increasing caution among analysts — partially in recognition of the aforementioned discrepancy. The market has also leapt far ahead of historical trends in performance during easing cycles. Since 1971, the average Fed rate-lowering cycle has lasted between eleven and twelve months, with the stock market returning an average of 15 percent. Three months into the current expansionary phase, the S&P 500 has leapt 37 percent on an annualized basis, more than double the usual increase.

Economic prospects for 2025 hinge on continued disinflation, stable employment adjustments, and the extension of fiscal policies like the Tax Cuts and Jobs Act. But macroeconomic risks such as tariffs and overestimations of the consonance of a Republican-held Congress may challenge expectations for accelerating growth and rising output. Stock market valuations are another source of concern, appearing increasingly detached from underlying fundamentals. While the outlook for 2025 is cautiously optimistic, it is tempered by significant risks that could disrupt the unfolding soft landing.