Trend watch
Like the fall back with the end of daylight savings time, many of the activity-based data (slides 5 and 6) have downshifted in fairly typical seasonal patterns. This is best illustrated by hotel occupancy, which dropped by nearly 9 percentage points in the past week. Or weekly air passenger counts, which have plunged by 1.7 million in the past two weeks, or 9.5%.
Both should continue to taper lower through the end of the year, which includes the week of Thanksgiving. While air travel traditionally spikes that week, it’s usually only for a few days – typically Wednesday and Sunday – but traffic drops sharply on the holiday. Additionally, business travel generally is lighter for the entire week, presumably as most people would rather be home. Thus, the full week tends to lower. Similarly, hotel occupancy percentage typically plunges during the week of Thanksgiving to the high 40s/low 50s from the 60s.
What’s new this week
- Fed cuts rates again, this time by quarter point – markets expect more in ’25 (slide 7).
- ISM services index jumps to 2-year high, while price paid cooled (slide 8).
- Used car prices haven’t increased in 9 months, EVs down sharply from ’23 (slide 9).
- Productivity holding steady along with unit labor costs (slide 10).
- Consumer confidence rebounds to 7-month high as inflation worries slide (slide 11).
- New durable goods orders down but core orders hit new high in September (slide 14).
Our take
The election is now behind us. While many people rightly complain about the avalanche of political ads, including the crush of spam political texts, calls, and emails, elections serve an important purpose – it is the cornerstone of self governance. So, too, in that process, America has a peaceful transfer of power, which isn’t something everyone on the planet is lucky enough to have.
Regardless of the outcome, life continues – or, as my Great Depression-era father would like to say, “this too shall pass.”
Indeed, most people don’t buy groceries, clothing, or cars based on who inhabits a rather small white house on Pennsylvania Avenue in our nation’s capitol. There will be birthday celebrations, weddings, funerals, and parties this weekend. Some may even tailgate at a football game, while others will do yard work, attend a craft show, or attend their local house of worship.
My point is that, contrary to popular belief, life isn’t predicated on who won that last election and most people will quickly move on with living their lives, which generates a lot more economic activity than most people realize.
Our mantra is that elections matter, but other things matter more for the economy and markets. For the latter, though, sentiment has dramatically shifted this week. While some are definitely cheering the prospects of the incoming administration, it is also a relief rally, especially since many expected – including some experts – a drawn-out process that would takes weeks to resolve, with potential voting delays or disruption, court cases, as well as social unrest. None of that occurred.
What else occurred likely wasn’t a coincidence either. The incumbent party lost in all 10 of the major countries that had elections tracked by the ParlGov project in 2024, including Japan, the United Kingdom, France – and now the U.S. This is the first time this has happened in nearly 120 years.
Which brings us to the Federal Reserve (Fed), which lowered interest rates by a quarter point (0.25%) as widely expected, including us. This was based on the incoming economic data – from retail sales and personal incomes to durable goods orders and the activity-based indicators – which reflect a U.S. economy that’s doing just fine. However, interest rates remain calibrated for much higher inflation.
Suffice it to say, while the exact point of the neutral rate is debatable, the current level of interest rates remains restrictive for economic growth and should be lowered further. Yet, given the ambiguity for the pace of both inflation and growth, the number of cuts is harder to forecast and, like the Fed, will require a data-dependent approach.
Previously we envisioned a gradual glidepath lower and had penciled in quarter point (0.25%) rate cuts through 2025. Post-election the probability of a slower pace of rate cuts has risen; however, it will take time for the new administration to implement policy changes and for their impacts to emerge.
During the post-meeting press conference, Fed Chair Jerome Powell gave the Fed a significant amount of optionality whether to cut or pause at the December meeting and perhaps adjusting the pace of cuts in 2025. We view that as the appropriate tact at this time.
Bottom line
The U.S. economy remains resilient, albeit with uneven growth. It’s certainly not weak, especially when compared to pre-pandemic figures. We expect the Federal Reserve to continue steadily lowering interest rates, which supports economic growth, although the process of normalizing rates will take time to unfold and will likely be bumpy.
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