Our economic outlook for the United States
October 17, 2024
Our outlook for year-end 2024
2.1%
Economic growth,
year over year
Recent revisions to GDP, gross domestic income, consumer savings, and employment suggest a firmer picture of overall growth and consumer health. The U.S. economy grew by more than originally thought in the second quarter, with real GDP increasing by an annualized 3%. First-quarter growth had been an annualized 1.4%. We continue to foresee growth in 2024 in a range above trend, or its noninflationary potential, with full-year growth above 2%.
2.8%
Core inflation, year over year
The Federal Reserve’s preferred inflation measure to guide policymaking, the core Personal Consumption Expenditures (PCE) price index, inched higher in August, to 2.7% year over year from 2.6% in July. We foresee the pace of core PCE rising to 2.8% by year-end because of base effects, or challenging comparisons with year-earlier data.
4.25%–4.5%
Monetary policy rate
The Federal Reserve appears to have declared victory in the inflation fight and now sees balanced risks to its dual mandate of ensuring price stability and maximum sustainable employment. The Fed made a strong start to its easing cycle on September 18, reducing its target for the federal funds rate by 50 basis points to a range of 4.75%–5%. We foresee 25-basis-point rate cuts at the Fed’s November and December meetings and further cuts in 2025 that would bring the Fed’s policy rate toward the neutral rate—the theoretical interest rate that would neither stimulate nor restrict the economy. (Vanguard pegs the neutral rate at a nominal 3.5%.)
4.3%
Unemployment rate
September job creation exceeded all expectations and upended a soft-market narrative, confirming that the labor market is cooling, not cracking. The unemployment rate has risen from 3.4% in early 2023 to 4.1%, reflecting a normalization, not a labor market poised for rapid deterioration. The increase in the unemployment rate has been driven by an increase in the labor force, not by job losses. We foresee the unemployment rate ending the year marginally above current levels.
What I’m watching
Cyclical employment and an economy with room to run
In the last two years, the three sectors that represent noncyclical employment—government, health care, and education—have created about half of the new jobs in the U.S. despite representing just 30% of the labor market. Government employment is less sensitive than other industries to economic downturns as the sector is an attractive destination for workers in such periods. Spending on health care and education is nondiscretionary, so employment in these sectors is typically agnostic to the economic environment. Meanwhile, cyclical employment—the rest of the labor market—typically rises and falls with economic conditions. Though cyclical employment has moderated since 2022, it continues to grow, an encouraging sign that the economic expansion will likely continue and the labor market will remain strong throughout 2024.
Adam Schickling,
Vanguard Senior Economist
Notes: Employment growth is the year-over-year change in the three-month moving average. Noncyclical employment represents education, government, and health services, industries that historically have had little correlation with the broader economy. Cyclical employment represents all other industries, such as but not limited to finance, professional and business services, construction, manufacturing, and wholesale and retail trade.
Sources: Vanguard calculations using data from the St. Louis Federal Reserve FRED database as of June 13, 2024.
What I’m watching
Healthy balance sheets remain a support for consumers
After a buildup in liabilities ahead of the 2008 global financial crisis, households have deleveraged and growth in assets has outpaced growth in liabilities over the last decade. Although this positive gap has moderated from its pandemic-era surge, it remains elevated. We expect healthy balance sheets and a steady labor market to continue to support consumer spending in the coming quarters, though at a more modest pace than in recent quarters.
Rhea Thomas,
Vanguard Economist
Notes: The chart depicts the cumulative percentage growth in household assets and liabilities since 1990.
Sources: Vanguard calculations using data from the Federal Reserve as of June 11, 2024
What I’m watching
The role of shelter in keeping inflation sticky
Shelter, a component of services inflation that comprises 45% of the core Consumer Price Index and 17% of the core Personal Consumption Expenditures index, is the primary cause of sticky inflation and a factor in our view that the Fed will find it difficult to cut interest rates this year. We expect a shortfall of 1 million single-family homes at year-end 2024, owing partly to a “mortgage lock-in” effect whereby homeowners are reluctant to sell when that means giving up low fixed-rate mortgages. We foresee shelter inflation falling to 4.8% year over year by the end of 2024, keeping inflation solidly above the Fed’s comfort zone.
Ryan Zalla,
Vanguard Economist
Sources: Bureau of Labor Statistics Consumer Price Index data accessed via Refinitiv on June 6, 2024, and Vanguard forecasts.
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