Leaves of Change: Navigating Economic Market Trends

Ever wonder why leaves change color in the fall? It’s all about the hidden pigments. As daylight shortens, chlorophyll breaks down, revealing the vibrant oranges, reds, and yellows that were there all along. Much like those hidden pigments, the economy’s underlying dynamics are starting to emerge this fall — some bright with promise, others signaling potential challenges ahead. As we prepare for the season of spending and rate cuts, it’s essential to look beyond the surface to understand what’s really happening in the broader economic picture.Consumer & Business Sentiment As fall progresses, consumer spending is expected to rise, with holiday discounting projected to increase YoY. This comes at a time when the economy is also poised to benefit from current and future rate cuts. However, there are some uncertainties about how much excess cash could flood the market. Consumer sentiment remains stable, supported by ongoing demand, but there are still mixed signals as inflationary pressures ease in some areas while costs rise in others.Business sentiment paints a mixed picture. The updated Fed dot plot suggests 100bp of easing in both 2024 and 2025, with rate cuts totaling 50bp in 2026 to establish a new normal of 2.875%. for the Fed funds rate. While lower borrowing costs are expected to provide some relief, businesses are grappling with a split between service and manufacturing sectors. Furthermore, the November election is approaching, meaning the outlook for both consumers and businesses continues to be muddled, further complicating expectations for future growth.Economic OverviewInflationary pressures are finally easing, driven by lower energy costs and a continued drop in used car prices. The Personal Consumption Expenditures (PCE) index and Consumer Price Index (CPI) both reported another month of slowing inflation, though this was offset by rising insurance, shelter, and food costs. Unfortunately for consumers, home prices continue to rise.Despite these challenges, 2024 economic projections remain optimistic, with YoY growth now expected to be around 3.0%. The Atlanta Fed actually raised its Q3 2024 GDP forecast from 2.5% in August to 3.1% in September — a good indicator that the economy is doing even better than expected.Another unexpected leap toward economic growth came from the most recent report on employment from the Bureau of Labor Statistics. A sizeable 254K jobs were added in September, far exceeding the expected target of roughly 150K. This was paired with a slight drop in the unemployment rate, from 4.2% in August to 4.1% in September.   

Source: https://fred.stlouisfed.org/series/LNS11300060 

Banking LandscapeThe story in the banking sector hasn’t shifted much over the past 30 days. Data shows that a 50bp rate cut by the FOMC hasn’t had much impact yet on the challenges financial institutions have been facing for over a year. Lower borrowing costs have led to more competition for real estate and Commercial & Industrial (C&I) loans, driving an increase in M&A announcements as banks work to grow and retain their loan books.Despite these headwinds, banks are benefitting from lower loan loss reserves and decreased funding costs, which should help improve their operating ratios going forward. However, the question remains whether there will be enough deals — particularly in construction — to drive YoY growth. Vice Chair for Supervision Michael Barr also announced a 9% increase in capital requirements for large banks, down from the original 19% increase in an address to the Brookings Institution.Housing Trends

The housing market continues to be a mixed bag. In August, privately owned building permits reached a seasonally adjusted annual rate of 1.475MM, up from 1.406MM in July. New housing starts followed a similar trend, with completions rising significantly from July’s numbers. However, existing home sales fell by 2.5% MoM, and homes are staying on the market longer, reflecting ongoing affordability challenges.Builder confidence is improving, with fewer price cuts reported. Yet mortgage rates remain elevated, with the average 30Y fixed-rate loan at 6.13% at the end of September, down slightly from August. This combination of higher rates and limited inventory continues to weigh on the housing market, even as demand holds steady in some regions.As we move deeper into fall, the economic landscape continues to show both promise and uncertainty. While the road ahead may have its twists and turns, there are signs of stability on the horizon. With strategic planning and a watchful eye on emerging trends, businesses and consumers alike can navigate the shifting conditions with confidence.