Good News for the Economy and Financial Markets
Over the past few weeks, investors were treated to three pieces of significant, positive economic data. In total, they seem to reduce the likelihood of a recession in the near term and/or push out the start date of any recession.
The first came from the Federal Reserve’s September meeting. It wasn’t so much that the Fed began cutting rates (that had already been expected) or that the first cut was 50 basis points instead of 25 (100 basis points equals one percentage point). Rather, it was due to the updated estimates of the path of future rate cuts. Not much changed in total between now and the end of 2026, but the new estimates showed the Fed expecting to pull forward its rate cuts. In June, the Fed had projected cutting its target rate by 25 basis points (bps) in 2024; after its September meeting, the Fed looks to cut by 100 bps this year. As we showed in last month’s Monthly Market Perspective, Fed cuts by themselves are not enough to stave off recession; however, all else equal, a more aggressive path of rate cuts would be more stimulating for the economy.
The second, and arguably the most important positive of the three, came from the Bureau of Economic Analysis’s 2024 Annual Update of the National Economic Accounts. Every year, the BEA releases revisions to GDP and national income data for the previous five years. And this year, the revisions were big. More consumer spending helped drive greater economic output than previously reported. Fueling this additional growth were even larger upward revisions to personal income. As a result, the savings rate has increased, at least temporarily erasing a downtrend. (See the exhibit.)
Exhibit: The Downtrend in the Savings Rate Has Been Erased
Source: Bureau of Economic Analysis, BCA Research, Clayton Wealth Partners.
A higher savings rate, especially in the context of higher consumption, is important. It argues that U.S. consumers, in aggregate, are healthier than previously thought. And a higher savings rate suggests more of a cushion for future consumer spending if total income becomes pressured.
Third was the blowout September jobs report. The economy added 254,000 jobs in September, far surpassing expectations. Job growth accelerated for the third straight month. Even allowing for a reasonable adjustment to remain consistent with the downtrend in revisions leaves a very strong number. While we’re careful not to extrapolate a trend based on one month’s data, it provides further evidence of a stronger economy.
Bullish
- The Fed has made good progress in reducing inflation since 2022.
- The Fed is now in an easing cycle and looks to cut rates aggressively.
- The most attractive yields for fixed income and cash in years.
- A revised savings rate shows more cushion for consumer spending.
- Consumer and corporate balance sheets generally remain healthy.
Bearish
- Slowing global economic growth.
- Banks are tightening lending standards for consumers.
- Housing affordability remains at a decades-low.
- Leading indicators of unemployment are generally trending down.
- Delinquency rates on consumer loans are rising.
- Russia-Ukraine war, Israel-Hamas conflict, and other geopolitical concerns.
- China is experiencing a growth recession, with deflation fears growing.
- Federal debt and deficits have ballooned.