Economy Commentary
The Economy
Learning To Live With, If Not Necessarily Love, Volatility . . .
February 2025
Amid the uncertainty looming over the policy outlook, the dramatic headlines about on again/off again trade wars, and what remains a high degree of volatility in the financial markets, it can be easy to lose sight of the fact that the U.S. economy keeps pushing forward, let alone that it continues to do so at a faster pace than is the case across much of the world. It is, of course, reasonable to ask whether that will remain the case, particularly with businesses expressing frustration with policy uncertainty and consumers expressing anxiety about inflation possibly reaccelerating. As for us, we’ve increasingly found ourselves trying to segregate the news from the noise from one day to the next without losing sight that our main task is, as always, trying to segregate the signals from the noise in the economic data. So, in that sense, the high volume of economic data over the past few weeks has been a welcome respite.
The first estimate from the Bureau of Economic Analysis (BEA) shows real GDP grew at an annual rate of 2.3 percent in Q4 2024, easily below what we and the consensus forecast had expected. The details of the data, however, are more in line with our expectations. Real private domestic demand, or, combined business and household spending, grew at an annual rate of 3.2 percent, only modestly below the 3.4 percent growth rate logged in Q3. Our forecast miss on top-line real GDP growth was due to a sharply slower pace of inventory accumulation in the nonfarm business sector than we had anticipated, which knocked 0.93 percentage points off Q4 real GDP growth.
Subsequent to the release of the initial estimate of Q4 GDP, data show the U.S. trade deficit widened substantially in December, which could lead to a downward revision to the first estimate of Q4 GDP growth. It should be noted, however, that inventory accumulation and global trade flows over the back half of 2024 were rocked by concerns over a potential port strike and fears of expanded tariffs in 2025. These disruptions played a part in the Q4 GDP data, and uncertainty over tariffs will likely continue to sway the data over the next few months. Still, the data show consumer and business spending entered 2025 on solid footing, and the data also show that by year-end 2024 the pace of real GDP growth had fallen back in alignment with the trend rate that prevailed prior to the pandemic.
Ahead of its release, the vibe around the January employment report was more fear than anticipation, in the sense that many feared the report could shift the narrative, perhaps dramatically, by showing a much weaker labor market than has been reported. Any such fear was not entirely unwarranted. Each year’s January employment report incorporates the results of the Bureau of Labor Statistics’ (BLS) annual benchmark revisions, a process in which the results of the monthly establishment surveys – from which flow estimates of nonfarm employment, hours, and earnings – are benchmarked to the universe of payroll tax returns that virtually all firms are required to file. Recall that in August the BLS released an initial estimate showing the benchmark revision would result in the level of nonfarm employment as of March 2024 being lowered by 818,000 jobs, substantially larger than the usual benchmark revision. This led many to fear the final results, incorporated into the January data, could be even worse.
As it turned out, the final revision took 589,000 jobs off the seasonally adjusted count of nonfarm payrolls, still larger than normal but closer to the hit of between 600,000-650,000 jobs we originally expected. The net result of this and other technical revisions is that job growth was meaningfully slower over 2023 and 2024 than had previously been reported. The revised data show the U.S. economy added 2.594 million jobs in 2023 and 1.996 million jobs in 2024; prior estimates showed 3.013 million and 2.232 million jobs, respectively. Rather than change our assessment of labor market conditions, however, the revisions put job growth on a trajectory much closer to what we’d suspected was the case, as we’d been on record going back to 2023 in arguing that the monthly employment reports were overstating job growth. The January employment report also incorporated revised population controls around the household survey data which reflect the significant upward revision to the Census Bureau’s prior estimates of foreign in-migration over the 2022-2024 period (which we discussed in last month’s edition). As with the establishment survey data, however, rather than changing our assessment of labor market conditions, this change in the data supported our view that the household survey data had been meaningfully undercounting foreign born labor.
As for the January data, total nonfarm payrolls rose by 143,000 jobs, below expectations and thus sparking a rash of “there goes the economy” reactions, though any such sentiment is not supported by the details of the data. For instance, while the decline in not seasonally adjusted private sector payrolls this January was smaller than the typical January decline, a smaller January boost from seasonal adjustment than in years prior contributed to the soft headline job growth print. To that point, had last year’s January seasonal factor been applied to this year’s change in not seasonally adjusted employment, that would have yielded an increase of 301,000 jobs on a seasonally adjusted basis. Additionally, the household survey data show 573,000 people did not work at all during the survey week due to adverse weather, the most in any January since 2011, while another 1.175 million people worked part-time hours rather than their usual full-time hours, fewer than last year but still above the January average over the past decade. That was reflected in the establishment survey data showing the average length of the private sector workweek fell by two-tenths of an hour. When all was said, done, and revised, our assessment of labor market conditions had not changed; while job growth is slowing, thus far that has been a function of the slowing rate at which firms are hiring workers, rather than an increase in the rate at which firms are laying off workers. Unless and until that changes, we will maintain a constructive view of labor market conditions.
The Institute for Supply Management’s (ISM) January survey of the manufacturing sector brought encouraging news. The ISM Manufacturing Index rose to 50.9 percent, ending a run of twenty-six straight months of contraction in the factory sector. The details of the data affirmed the improvement in the headline index, particularly a third straight month of rising new orders, with order growth broadening across firms and industry groups. Still, it remains to be seen whether, or to what extent, the improvement registered in the January survey will be sustained, as tariffs loom large in the background for many survey respondents. It is worth noting that the monthly data on core capital goods orders, a precursor of business investment in equipment and machinery in the GDP data, firmed up smartly over the past two months after having been oddly rangebound since early-2023. Again, though, it remains to be seen whether this nascent rebound will be blunted by trade disputes.
The ISM’s “prices paid” index, a gauge of movements in prices for non-labor inputs, showed further increases in prices in both the manufacturing and services sectors in January, another unwelcome reminder that inflation pressures are proving more persistent than many had anticipated. To that point, the PCE Deflator, the FOMC’s preferred gauge of inflation, showed core inflation stuck at 2.8 percent in each of the final three months of 2024, and there are concerns that the mix of immigration and trade policy changes expected over coming months could further fuel inflation pressures. As such, the FOMC is generally expected to remain on hold until at least their June meeting.
Continued uncertainty and/or volatility on the policy front will continue to impact households and firms. Along with the usual ebbs and flows of the economic data, this will contribute to elevated volatility in equity prices and interest rates, particularly to the extent that a “react first, analyze later” mindset prevails over market participants.
Sources: Bureau of Economic Analysis; Bureau of Labor Statistics; U.S. Census Bureau; Institute for Supply Management
As of February 13, 2025
