The U.S. economy entered the Fourth Quarter of the year with fading momentum and increasing caution signs from some indicators, including a weakening labor market, challenging financial realities, and lingering inflation. Analysts are forecasting GDP growth of only 1.9% for the last three months of the year after surprisingly robust second and third quarter growth at 3.3% and 3.8% (estimate) respectively. A mid-year increase in economic activity offset a contraction in the first three months of the year caused by companies front-loading imports to get ahead of the Trump administration tariffs. Some tariffs remain in effect, but others are in question, embroiled in judicial debate, which only adds to a general sense of economic uncertainty. Predictions of a slowdown result from sticky inflation, weaker labor market numbers, subdued housing activity, fiscal restraint, and pessimistic consumer sentiment. The early October government shutdown only added to existing worries.
Historic Highs
Despite some indicators of a weakening U.S. economy, the stock market has continued to hit historic highs. The market has been fueled mainly by tech investment, and Artificial Intelligence optimism and speculation. Stock prices are up over 30% since April’s lows. The S&P 500 index is up 14.8% for the year so far. The DJIA reached historic benchmarks in early October. Also hitting historic highs in October was the price of gold, rising beyond $4000 an ounce for the first time ever. It was good news for gold marketers and investors but can’t be seen as an optimistic sign. Gold tends to be viewed as a safe haven during times of uncertainty, and that’s likely what’s driving gold prices into the fourth quarter.
Consumer Prices Continue to Rise
The Consumer Price Index moved further away from the Federal Reserve’s 2% target in the third quarter, rising to 2.9% year-over-year in August. This was mirrored in Producer Prices at 2.6% and the Fed’s preferred gauge, the Personal Consumption Expenditures index at 2.7% year-over-year. Tariffs have added to inflationary pressures, with some companies absorbing the higher costs, but many now passing them along in light of weakened consumer spending. Food and grocery prices have continued to rise, along with energy, and housing, including home sales and rents. Consumers have seen some relief at the gas pump with prices lower than at this time last year.
Job Numbers Disappointing
Job numbers remained robust through the middle of the year but showed signs of slowing in July with Bureau of Labor Statistics reporting only 73,000 news jobs and severe slowing in August at only 22,000 new jobs. BLS numbers are estimates which undergo revisions over time. The dismal July report angered President Trump and led to the firing of BLS Director Erika McEntarfer. The September jobs report was delayed by the government shutdown. A slowdown in jobs has also driven unemployment numbers up. They rose from 4.1% to 4.3% over the summer. More recent reports have also been delayed by the government shutdown.
Fed Cuts Rates
The Federal Reserve continues to walk a tightrope, trying to balance inflation and employment realities. After five consecutive meetings of keeping interest rates unchanged, the Fed cut the prime rate by a quarter of a percentage point in September. Open Market Committee members were divided on the interest rate decision. Fed Chair Jerome Powell called it a “risk management” decision, citing the slowing job market. He also telegraphed two more rate cuts by the end of the year. But the Fed only has two more meetings this year, one at the end of October and the last meeting of the year, the second week of December. Current market pricing implies the Fed could cut interest rates at both upcoming meetings. But the government shutdown may interfere with the release of economic data the Fed needs to make further decisions.
Consumer Spending
Consumers’ willingness to keep spending helped boost the economy and the GDP through most of the year. But after the summer and the Back-to-School shopping booms, that appears to be fading as well. Consumer sentiment has turned gloomy, and shoppers are showing more restraint in light of ongoing challenges. These include lingering inflation, higher prices due to tariffs, stagnant salaries, and unemployment fears. Other factors affecting spending include the resumption of student loan payment requirements and the expiration of some pandemic fiscal supports.
The big question this quarter is: Will consumers act on current sentiment and pull back spending? December is the highest spending month of the year. Consumer spending represents 70% of the U.S. economy and holiday sales are a fifth to a quarter of that. Recent holiday sales forecasts from the National Retail Federation predicted modest growth of 2.7%–3.7% for the holiday season while Deloitte forecast 2.9%–3.4%. Both predicted online sales to grow 7%–9%. But the NRF reported that despite a year-over-year increase of 5% in September, monthly sales dipped a total of .66%. Higher prices due to tariffs are also said to be causing many shoppers to think more carefully about their holiday budgets. Analysts now expect consumers to show more restraint in holiday spending this year, seeking greater discounts, being more discerning, and waiting for better deals later in the season.
Looking Forward
Uncertainty and volatility are likely to linger for the remainder of this year and into the beginning of next year. It’s important to avoid letting the current economic climate create a sense of anxiety about the road ahead.
The Lesko Financial Services team remains committed to helping you effectively navigate whatever lies ahead for today and for the future. It’s critical for you to stay invested, remain patient, and stick to a plan based on your unique financial position, risk tolerance, and investment timeline. Please don’t hesitate to contact us with any questions, comments, or to schedule a portfolio review. We’ll continue to focus on both opportunities and risks in the markets, and we thank you for your ongoing confidence and trust.