November 18, 2024 – The economy continued to do well last month with consumer spending remaining resilient and businesses turning more positive. Overall price level, meanwhile, inched up in October, but the Inflation rate was in line with economists’ expectations. With consumer prices rising only modestly in October, the Federal Reserve should remain on track to lower its policy rates again in the upcoming FOMC meeting. The outlook for inflation next year, however, is murkier than a few weeks ago as the election outcome has raised new questions about the path ahead for price growth. As such, the uncertainty is keeping mortgage rates elevated and could slow down the Fed’s rate cut pace in 2025.

Retail sales remain solid and gain momentum before the start of the holiday season: U.S. retail sales in October exceeded consensus expectations again as overall spending on retail and food services inched up 0.4% from the prior month and increased 2.8% from the same month of last year. While it was not as strong compared to the upward revised 0.8% monthly gain recorded in September, the latest reading beat the 0.3% growth rate expected by economists. Electronics and appliance stores (+2.3%) and auto sales (+1.6%) were the top two categories that pushed sales up solidly at the start of Q424. Consumers were also willing to spend money eating out as restaurants and bars rose 0.7% month-over-month, despite higher prices dining out. Several categories dipped in sales, nevertheless, including furniture stores (-1.3%), drug stores (-1.1%), and clothing outlets (-0.2%). The weakness in sales, however, could be partly attributed to last month’s hurricanes. With consumer spending generally remaining resilient in October, holiday sales in the upcoming months should be decent for retailers, even though the annual growth pace could be the slowest in the past three years.

Inflation meets expectation and remains sticky: The Federal Reserve should remain on track to lower its policy rates again in December as consumer prices rose modestly in October as predicted. The latest headline Consumer Price Index (CPI) went up 0.2% from the prior month and was up 2.6% from the same month of last year. Both the monthly increase and the yearly increase were in line with consensus expectations. The latest read on the annual figure was a slight uptick from September’s 2.4% annual gain in prices and continued to indicate slow progress on the inflation front. Excluding energy and food prices, the core CPI rose 0.3% for the month and inched up to 3.3% for the year-over-year growth rate. In general, core goods prices fell, but core services inflation continued to decline at a fairly slow pace. Housing inflation, in fact, spiked up on a monthly basis in October to 0.4% from 0.2% in September. On an annual basis, its inflation has declined to 4.9% from a peak of 8% in early 2023. Despite a slow grind in the inflation downward adjustment, the Fed is still expected to lower rates one more time in the next FOMC meeting in December.

Small business optimism climbed after the Fed’s rate cut: The NFIB Small Business Optimism Index climbed for the second straight month in October and tied with July for the biggest month-over-month increase in 2024. The index rose by 2.2 points last month to 93.7 and reached the highest level in three months. The jump in optimism was likely due to the Fed’s first rate cut since early 2020 and the expectations of the election outcome. Eight of the ten components that make up the index improved from last month, with the expectation on the economy to improve jumping the most by seven points. While small business owners’ optimism has improved, uncertainty also heightened as its index surged seven points to 110 - the highest level on record. With the election behind us, some of the uncertainty will be resolved as detailed policies are revealed, and owners will have more clarity on what might happen to taxes and regulations in the upcoming year.    

Expectations on price growth and jobs improve: Consumers expectations on inflation at the short, the medium, and the longer-term horizons all declined in October, according to the latest New York Fed’s Survey of Consumer Expectations. At the one-year horizon, the median inflation expectations dipped 0.1 percentage point (ppt) from the prior month to 2.9% and reached the lowest level in four years. The 3-year ahead inflation expectations and the 5-year ahead inflation expectations also declined by 0.2 ppt and 0.1 ppt respectively from September. Results from the same survey also suggest that consumers’ expectations on the labor market improved, with the likelihood of losing one’s job in the next 12 months dropping 0.3 ppt to 13% in October. The mean perceived probability of finding a job if one’s current job was lost also increased by 3.3 ppt to 56% and reached the highest level since October 2023. With the economy remaining resilient and the labor market expected to stay healthy, optimism on jobs growth will likely stabilize, while short-term inflation expectations could climb in the near future.

Foreclosures tick up but remain relatively low: U.S. foreclosure activity inched up from last month, as filings went up 4% month-over-month but declined 11% from a year ago, according to ATTOM’s latest U.S. Foreclosure Market Report. A total of 30,784 properties in the U.S. had a foreclosure filing status in October, which was significantly below the peak observed during the 2008 housing market collapse when filings exceeded 300,000 per month. For the month of October, 20,950 properties in the U.S. started the foreclosure process, an increase of 6% from the prior month, and a decline of 10% from the same month in 2023. California had the fourth highest foreclosure rate among all states in the U.S., with one in every 3,152 housing units had a foreclosure filing in October. Areas in the state with the highest foreclosure rates include Vallejo (one in 1,464 units), Bakersfield (one in 1,640 units), Chico (one in 1,724 units), and Stockton (one in 1,802 units). With home price growth moderating but remaining positive, foreclosure activity is expected to remain steady.

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