Consumer Says: The state of the U.S. economy heading into 2025

What's new in the economy?

• Mixed news on jobs with slower hiring but slightly more job openings – October’s hiring rate dropped to 3.3%, its lowest level since 2013. On the bright side, job openings increased somewhat, but are still hovering just above their pre-pandemic average. 
• The Federal Reserve’s preferred measure of inflation, the Personal Consumption Expenditures (PCE) Price Index, increased in October from the previous month. While topline inflation jumped up to 2.3%, core PCE, which excludes volatile food and energy categories, was even higher at 2.8%. Services categories, particularly housing, continue to be a hurdle in bringing inflation down to target. 
• Speaking of the Fed, minutes from November’s FOMC meeting were released last week and showed a lack of consensus among Fed officials on the future path of interest rates. In combination with public remarks from Chair Powell and other officials, the market is more uncertain about a previously highly expected December rate cut. 

Consumer says...

As we close out 2024, the U.S. economy faces several headwinds and tailwinds that could help or harm the economy in the new year. For a more detailed discussion, head to YouTube to stream the podcast or check out the full State of the U.S. Economy report which has even further analysis. If you’re short on time, here’s a brief overview:

Headwind 1: A slowing labor market

Workers have less bargaining power with fewer job openings and slower wage growth. The total number of U.S. job openings, as measured by the BLS, continues to trend downwards meaning fewer jobs are available for job seekers. At the same time, wage growth has cooled off, while Morning Consult data shows the net share of workers saying they believe their employers would give them a raise if asked reached its lowest level since tracking began.

Headwind 2: Diminished savings

Pandemic-era lockdowns and government stimulus lead to a ramp-up in savings for consumers of all income levels. These “excess savings” have drained considerably since their heights in 2021, but over the past year, trends have diverged by income – higher earners have managed to add to their stock of savings while low and middle earners have kept their savings steady or somewhat reduced from a year ago. Consumers with less savings are more exposed to potential downside risks like resurging inflation or a downturn in the labor market as they rely more on their income to cover expenses. 

Headwind 3: Credit card delinquencies

Morning Consult data shows that among those who had unpaid credit card debt, low-income adults were most likely to say it had been 12 months or more since they fully paid off their balances. Middle-income adults have been closely following low-income adults in terms of longer debt repayment durations. High-income adults had been holding steady through the first half of 2024, however in recent months, they too have had a larger share reporting unpaid balances for longer, suggesting debt burdens are spreading to even wealthier consumers as interest rates remain elevated. 

Headwind 4: Resurgence in inflation

Annual CPI inflation ticked up in October to 2.6%, up from 2.4% the previous month. Core PCE, the Fed’s preferred measure of inflation, also increased in October, as services, and primarily housing, continue to prop up inflation above the Fed’s 2% target. While goods inflation has helped bring the topline number down, supply chains are already showing signs of reheating, and could be facing more headwinds in 2025 with potential economic policies like broad based tariffs. 

Now onto the good news!

Tailwind 1: Full employment 

The U.S. unemployment rate trended higher for most of 2024, but in recent months, Morning Consult’s weekly Unemployment Index has stabilized and even trended slightly lower in November.  Although hiring and wage growth has slowed, it appears that most Americans who want a job, have one. 

Tailwind 1.5: Rebounding spending and demand outlook for lower income adults

In economics, it can be nearly impossible to parse out topics completely separately. For example, improvements in employment appear to be improving the demand outlook of consumers through the Consumer Health Index. Furthermore, in October, Morning Consult’s spending data showed that high earners continued their robust spending growth, with year-on-year growth of over 10%. While the lowest income group’s spending remained below its 2023 level (after adjusting for inflation), the 3-month trend for this group featured a strong rebound of 5.6% growth. Spending growth among this cohort last month was driven by a diverse range of categories such as travel, auto payments, health care and alcohol. 

Tailwind 2: Increased optimism about the economy

One measure of the economy that is better this year than last is consumer sentiment. Easing inflation, and a recent boost in future optimism after the U.S. presidential election, have brought consumer sentiment up considerably from its year ago level. Most of the improvement has come from future expectations, although current conditions have also improved somewhat.

Further reading:

• High-income adults have been propping up spending strength through most of 2024, but in a reversal from recent trends, the lowest earning consumers boosted their spending for a second consecutive month in October. Check out the full memo here
• The U.S. unemployment rate trended higher for most of 2024, but in recent months Morning Consult’s weekly Unemployment Index has stabilized and even trended slightly lower in November.

Thanks for tuning in! See you on December 18th with our final edition for 2024.