In the initial phase of the economic recovery, loose monetary and fiscal policies fueled significant tailwinds, creating a sense of inevitable growth. However, as policymakers adopted a more hawkish stance to combat inflation, the economic landscape shifted from fervent to more moderate. This transition doesn’t necessarily signal an impending recession; in fact, there are indications of potential economic acceleration. Rather, it acknowledges the increasing difficulty in assuming continuous growth. Let’s examine some key economic indicators that have cooled down, using data as of December 2024.
Table Content:
Cooling Business Investment
Orders for nondefense capital goods excluding aircraft (core capex), a leading indicator of future economic activity, surged from 2020 to 2022. However, growth plateaued in 2022 and has fluctuated since. While core capex orders remain at record levels, their growth has stagnated.
Job Openings Decline
The number of job openings, a clear indicator of economic demand, peaked at 12.2 million in March 2022. This represented two job openings per unemployed person. However, this metric has been declining for nearly three years. As of November 2024, there were 8.1 million openings, or 1.1 openings per unemployed person. While still elevated compared to pre-pandemic levels, the urgency to fill positions has diminished.
Hiring and Quits Rates Slow Down
Both the hiring and quits rates have decreased. While hiring still outpaces layoffs, the hiring rate, calculated as the number of hires as a percentage of the employed workforce, is trending downward. This could indicate potential challenges as companies might reduce hiring before resorting to layoffs. The quits rate, which peaked at 3% in April 2022, has also declined to 1.9% in November 2024, falling below pre-pandemic levels. This suggests increased job satisfaction or fewer alternative employment opportunities.
Declining Home Affordability
The average 30-year fixed mortgage rate has risen from below 3% in 2020-2021 to around 7% in recent months. Consequently, monthly mortgage payments for a $500,000 home have increased significantly, impacting housing affordability and contributing to the cooling of home sales activity.
Shifting Household Finances
Household finances, while historically strong, show signs of changing dynamics. Debt levels have risen, and excess savings accumulated during the pandemic have largely been depleted. Household debt service payments as a percentage of disposable personal income have increased from record lows in 2021.
Conclusion: A Cooling, But Resilient Economy
The overall economic picture reflects a transition from exceptionally high growth to a more normalized state. While certain indicators have cooled down, the U.S. economy remains resilient, supported by positive demand, job creation, and strong financial foundations. This “normalization” presents new opportunities and challenges for investors and policymakers alike. The long-term outlook remains positive, with continued economic growth and earnings growth supporting stock market performance. However, vigilance is crucial as various risks, including political uncertainty and geopolitical tensions, could impact market volatility.
