Haver Analytics
Haver Analytics

Viewpoints: December 2024

  • The Federal Reserve Bank of Philadelphia’s state coincident indexes continued to be soft in November. In the one-month changes, Washington (likely aided by the end of the Boeing strike) led with a .62 percent gain, and Delaware and Montana had increases above .5 percent. On the other side, 18 states had declines declined, with Maine, Michigan, and Alabama all down close to .4 percent. Over the 3 months ending in November, 10 states were down, with Massachusetts and South Carolina clocking declines of nearly .7 percent. Delaware, Connecticut, and Missouri were each up more than 1 percent, with Delaware’s 1.27 percent increase the highest. Over the last 12 months, 5 states were down, and 9 others saw increases of less than 1 percent. South Carolina’s index was off by 1.52 percent. Connecticut had a 4.6 percent increase, Arizona rose 4.54 percent and Connecticut was up 4.7 percent, with 4 others up percent or more.

    The independently estimated national estimates of growth over the last 3 months (.55 percent) and 12 months were .70 and 2.64 percent. These both appear to be roughly in line with the state numbers.

  • State real GDP growth rates in 2024:3 ranged from North Dakota’s -2.3% to Arkansas’s 6.9%. A large distribution of growth in agriculture output played an important role in distributing growth across the states, with farm losses hurting states in the Great Plains, while boosting output in some others, most notably Arkansas, Mississippi, Alabama, and Vermont. Growth was more evenly distributed in less agricultural states; among the largest Texas was on the high side, with a 4.2% growth rate, while New York lagged with a 1.8% figure.

    The distribution of personal income was comparable to that of GDP, with North Dakota’s -0.7% rate of decline at the bottom and Arkansas’s 5.4% on top. Again, developments on the farms contributed to the outliers. Dividends, rent, and interest fell in every state (and DC), while the dispersion in transfer income was fairly modest, though the aggregate income figures for New York, California, and Texas were all aided by faster-than average growth in this category.

  • State labor markets were little-changed in November, save for the after-effects of October disruptions. The end of the Boeing strike, and the rebound from Hurricane Milton, triggered statistically significant gains in payrolls in Washington and Florida. Alaska, DC, and Kansas also saw significant gains.

    Six states had statistically significant increases in their unemployment rates in November, and one (Delaware) showed an decline. None of the changes were larger than .2 percentage point. The highest unemployment rates were in Nevada (5.7%), DC (5.6%), California (5.4%), and Illinois (5.3%). No other state had rates as much as a point higher than the national 4.2%. Hawaii, Maine, New Hampshire, North Dakota, South Dakota, Vermont, and Wisconsin had rates of 3.0% or lower, with South Dakota at 1.9%.

    Puerto Rico’s unemployment rate was unchanged at 5.4%, while the island’s job count grew by 3,300.

  • Globalisation is not going backwards. Figure 1 is a case in point. The chart illustrates the remarkable growth in global exports. By the end of 2023, global exports had increased 459-fold compared to 1948, reaching an impressive $24 trn. The global financial crisis (GFC), the US led trade war, the pandemic, the cost-of-living crisis, China’s economic malaise and conflicts have disrupted rather changed the trend. Again while global trade-openness, calculated as the sum of global exports and imports expressed as a percentage of world GDP, has been volatile, there is no sign of trade openness reversing decisively. Global trade openness has averaged, 46% since the GFC compared with 41% in the decade prior to GFC.

  • Due to the repetitive nature of economic and financial cycles, analysts frequently encounter phases that resemble previous cycles. At the December FOMC meeting of 1999, twenty-five years ago, the Fed research staff delivered a provocative presentation, arguing that parts of the equity market (mainly tech and e-commerce) had showed characteristics of a "bubble". How might policymakers respond today if the Fed staff made a similar argument, considering the aftermath of the tech bubble burst 25 years ago and the fact that many equity price metrics now indicate even more extreme valuations?

    Will History Repeat?

    The notion that predicting an equity bubble before it collapses is impossible has been debated for a long time. Yet, in today's context, can this remain valid when there is clear evidence of fundamental valuations defying basic principles of gravity, along with cases where lower valuations were linked to a bubble?

    It's important to mention that Fed staff cautioned policymakers about an equity bubble in the late 1990s. At the December 1999 FOMC meeting, the Fed's director of research noted that "the market has defied our notion of valuation gravity by posting an appreciable further advance." The research director provided an example of a new IPO to illustrate the market's speculative nature and mentioned that analysts were disregarding fundamental analysis because the only thing that seemed to matter was "momentum." He then doubted whether an additional tightening of 75 basis points in the staff forecast would be sufficient to "halt the financial locomotive".

    From a market perspective, 2024 differs from 1999. In certain instances, equity valuations today are as high, if not higher, than they were in 1999. For instance, the S&P price-to-sales ratio is over 3 today, compared to 2 in 1999, which at that time was a record. This higher ratio indicates even greater investor optimism or exuberance, suggesting potential fundamental instability as people are paying excessively for future sales and cash flow. Although the IPO market does not exhibit the speculation seen in 1999, there are other signs of market speculation in cryptocurrency and private credit.

    Additionally, there is a significant contrast between the monetary and fiscal policies of 2024 and those of 1999. In 1999, monetary policy was being tightened, whereas recently, policymakers have reduced official rates at the last two meetings and signaled further easing. At the same time, fiscal policy was restrictive in 1999, with the US achieving a budget surplus, which stands in stark contrast to the current large budget deficit that boosts domestic spending and liquidity.

    Drawing from past experiences and research, it would not be big surprise if the Fed staff made a presentation at the December 2024 FOMC meeting similar to that of December 1999. Essentially, market speculation has reached "bubble-like" levels, skewing resource allocation, pushing the wealth-to-income ratio to unprecedented heights, and posing a major economic threat should there be a significant drop in the equity market. The main question is whether policymakers will heed this warning.

    Policymakers have consistently made official rate decisions with a focus on employment and inflation goals, often neglecting their financial stability mandate. It's no coincidence that the recessions since 2000 (excluding the pandemic-driven recession) were triggered by financial imbalances. Any decision to ease policy, or even a promise to ease later, would increase the risk of a harder landing that might be difficult to cushion, unlike in 1999 when the US operated with a fiscal surplus.

    Regardless of the actions policymakers decide on, they can no longer ignore a speculative asset price cycle like they did in December 1999. Policymakers are fully aware of the economic and financial losses that come with asset price imbalances. When the tech bubble burst three months later, the Fed spent the next three years lowering official rates to lessen the economic impact of the financial crisis. After the housing bubble burst, the process took even longer. Currently, the Fed is confronting a larger and more extensive financial bubble, with no fiscal cushion to help navigate a severe recession.