US economy eyes strong finish ahead of heightened policy uncertainty in 2025

WASHINGTON – The number of Americans filing new applications for jobless benefits fell more than expected last week, almost reversing the prior two weeks’ increases and suggesting that a gradual labour market slowdown remained in place.

Other data on Dec 19 showed the economy grew faster than previously estimated in the third quarter, driven by robust consumer spending. The upbeat reports came a day after the Federal Reserve delivered a third consecutive interest rate cut, but projected only two rate reductions in 2025, citing the economy’s continued resilience and still-elevated inflation.

Fed chairman Jerome Powell told reporters on Dec 18 that the “downside risks of the labour market do appear to have diminished”, adding that “the US economy has just been remarkable, I feel very good about where the economy is”.

Mr Oren Klachkin, a financial markets economist at Nationwide, said: “The economy is set to end 2024 on a solid note, which is fortunate since we’ll have to contend with heightened policy uncertainty and possibly greater challenges in 2025.”

Initial claims for state unemployment benefits dropped 22,000 to a seasonally adjusted 220,000 for the week ended Dec 14, the Labour Department said. Economists polled by Reuters had forecast 230,000 claims for the latest week. They had increased 27,000 in the prior two weeks. Claims have entered a period of volatility, which could see large swings in the data.

A range of indicators, including job openings, suggests conditions are much looser than they were before the Covid-19 pandemic, but the labour market is slowing in an orderly fashion.

A jump in the unemployment rate to 4.3 per cent in July from 3.7 per cent at the start of the year saw the US central bank launching its policy easing cycle with an unusually large half-percentage-point interest rate cut in September.

The Fed on Dec 18 cut its benchmark overnight interest rate by 25 basis points to the 4.25 per cent to 4.5 per cent range. In September, the Fed had pencilled in four quarter-point rate cuts in 2025.

The shallower rate-cut path in the latest projection also reflected uncertainty over policies from President-elect Donald Trump’s incoming administration, including tariffs on imported goods, tax cuts and mass deportations of undocumented immigrants, which economists have warned would be inflationary.

The Fed hiked its policy rate by 5.25 percentage points between March 2022 and July 2023 to tame inflation. Stocks on Wall Street were higher. The dollar gained versus a basket of currencies. US Treasury yields rose.

Robust consumer spending

The claims data covered the week during which the government surveyed businesses for the non-farm payrolls component of December’s employment report. Claims rose marginally between the November and December survey periods.

Non-farm payrolls increased by 227,000 jobs in November, in part boosted by the fading drag from hurricanes and the end of strikes by aerospace factory workers, which had restricted employment growth to 36,000 in October.

Data next week on the number of people on unemployment rolls will shed more light on the labour market’s health.

The number of people receiving benefits after an initial week of aid, a proxy for hiring, slipped 5,000 to a seasonally adjusted 1.874 million during the week ended Dec 7, the claims report showed.

Labour market resilience has been driving the economic expansion through strong consumer spending. A separate report from the Commerce Department showed more momentum in the economy than previously estimated in the third quarter.

Gross domestic product (GDP) rose at an upwardly revised 3.1 per cent annualised rate, the Commerce Department’s Bureau of Economic Analysis said in its third estimate of third-quarter GDP. Economic growth was previously reported at a 2.8 per cent pace.

Economists had forecast GDP would be unrevised. There was an upgrade to consumer spending while the trade deficit was trimmed, offsetting a downward revision to inventory accumulation. The economy grew at a 3 per cent pace in the April-June quarter. Its pace of expansion is well above what Fed officials regard as the non-inflationary growth rate of around 1.8 per cent.

Consumer spending, which accounts for more than two-thirds of economic activity, grew at a 3.7 per cent pace. That was the fastest in 1½ years and was revised up from the previously estimated 3.5 per cent rate.

“It’s a bifurcated consumer as high-income households are reaping the benefits of a tight labour market, increases in housing, and stock market wealth,” said Oxford Economics chief economist Ryan Sweet.

“Lower-income households remain under financial pressure and, unfortunately, this won’t change next year as it will take time for them to adjust to the past inflation shock.”

There were also upgrades to business spending on equipment, intellectual property products and government outlays. But business spending on non-residential structures like factories was revised down to show a faster pace of decline.

The drop in residential investment was not as steep as previously thought. The housing market could be turning around, though higher mortgage rates and prices remain a constraint.

A measure of domestic demand that excludes government spending, trade and inventories increased at a 3.4 per cent pace.

Final sales to private domestic purchasers were previously estimated to have risen at a 3.2 per cent rate. Domestic demand increased at a 2.7 per cent pace in the second quarter.

National after-tax profits without inventory valuation and capital consumption adjustments decreased US$15 billion (S$20.4 billion), or 0.4 per cent, last quarter. When measured from the income side, the economy grew at a 2.1 per cent rate last quarter, trimmed from the initially estimated 2.2 per cent pace. Gross domestic income (GDI) increased at a 2 per cent rate in the second quarter.

In principle, GDP and GDI should be equal, but differ as they are estimated using different and largely independent source data. Annual benchmark revisions tend to narrow the gap between GDP and GDI.

The average of GDP and GDI, also referred to as gross domestic output and considered a better measure of economic activity, increased at a 2.6 per cent rate. That was revised up from the 2.5 per cent rate reported in November. Gross domestic output grew at a 2.5 per cent pace in the April-June quarter.

“There are no signs, for now, of economic weakness,” said chief economist Eugenio Aleman at Raymond James. REUTERS