The US Q4 outlook

New era of stimulative policies in the US

By Raed Alkhedr | @raedalkhedr | 7 October 2024

US Econopmy Q4 outlook
  • Unemployment Trends: Rising unemployment rates are expected to hit 4.5% in Q4, while job growth slows and most new jobs are part-time, indicating cautious economic stability.

  • Election Impact: The November elections, regardless of the outcome, are expected to support economic growth. Trump favors tax cuts and weakening the dollar, while Harris emphasizes middle-class tax relief and infrastructure spending.

  • Market Sentiment: The U.S. stock market has rebounded amid recession fears, with the VIX index reflecting cautious sentiment; a drop below 15.30 may indicate lower volatility, while a rise above 21.60 could signal increased market anxiety.

In recent years, the Federal Reserve adopted a "soft landing" approach, cautiously lowering interest rates. However, as we move into the fourth quarter of 2024, this cautious stance appears to have shifted, with the Fed now embracing more expansionary monetary policies that may persist for some time.

Fed announces the end of tight monetary policy

After more than two years of aggressive tightening and raising borrowing costs to their highest levels in two decades, the Fed declared at its September meeting that this era has concluded. The Fed decided to cut interest rates by 50 basis points to support the economy and especially the labour market.

Despite ongoing economic challenges, job creation continues. In addition, the data for July and August may not fully reflect the current state of the economy, as they precede the Fed’s rate cuts. Therefore, this policy shift is expected to bolster the labour sector and restore confidence among businesses and employees.

All major contributors to the previous inflation surge, such as food and energy prices, supply chain disruptions and rent increases, have either normalised or are in the process of stabilising. As a result, inflation is expected to decelerate, supporting the Fed’s forecast of 2.3%, revised down from 2.6% in the June meeting. Further interest rate cuts, totalling another half a percentage point, are anticipated before the end of the year.

US Q4 outlook Dott plott

Unemployment may rise in Q4

Unemployment rates have risen sharply in recent months, and new job additions have significantly slowed. Most of these new jobs are part-time, suggesting temporary stability in comparison to more secure, full-time employment.

US Q4 outlook

Unemployment is expected to increase in the last quarter of the year, potentially reaching 4.5%, which exceeds the targeted rate of 4%. According to official statistics, the growth in new job creation is at its slowest pace since 2014, while worker resignation rates are the lowest since 2018. This decrease in resignations is seen as a sign of employees' lack of confidence in their ability to find new job opportunities.

US Q4 outlook 2024

[Chart: Rate of New Job Creation]

Retail sales show growth and resilience

Although the manufacturing sector has contracted for five consecutive months, the service sector continues to show growth and resilience, easing fears of a widespread downturn.

Retail sales have risen at a rate that mitigates market concerns, with a 1.4% year-over-year increase in online purchases compensating for a 1.2% drop in sales at gas stations. This indicates that the overall economy remains in relatively stable condition.

Housing market facing pressures

In the second quarter, US home prices saw a noticeable slowdown in growth. Rising lending rates, driven by high interest rate policies, have increased risk aversion, causing lenders to tighten credit standards.

Despite affordability challenges, there are signs that the market is gradually shifting in favour of buyers. For example, Zillow reported that nearly 25% of its listings saw price reductions in June – the highest rate for this time of year since 2018.

US economy awaits the outcome of the election

Whether Donald Trump or Kamala Harris wins the presidential election in November, the result is expected to support economic growth and boost the stock market. Both candidates propose policies aimed at stimulating the economy and increasing the budget deficit, including tax cuts that could benefit businesses and spur consumer spending.

Kamala Harris’s economic plans

Kamala Harris's policies focus on reducing costs and increasing economic opportunities for the middle class through tax exemptions and increased spending on infrastructure and healthcare. Key components of her economic plan include:

  • Budget implications: Harris's policies are projected to increase the budget deficit by about $1.7 trillion over the next decade.
  • Tax policy: She proposes a progressive tax system that includes higher taxes on people earning over $400,000 and raising the corporate tax rate from 21% to 28%. This could put pressure on corporate performance and investment.
  • Inflation strategy: Harris supports federal legislation to prevent food price manipulation aimed at controlling inflation and fostering competition. However, her plans to increase government spending could lead to demand outpacing supply, potentially reviving past inflationary challenges.
  • Housing initiatives: She has proposed down payment assistance of up to $25,000 for first-time home buyers and tax incentives for contractors who build homes. While these policies can support industry growth, they can also drive prices up.
  • Healthcare: Harris advocates for increased healthcare support and aims to reduce the cost of living.

Donald Trump’s economic policies

Donald Trump has been a strong advocate for businesses during his previous tenure, and his return could improve global risk appetite, benefitting companies and stock markets. His key policies include:

  • Tax policy: Trump supports extending the tax cuts and further lowering the corporate tax rate, which could significantly benefit businesses and stocks.
  • USD position: Trump favours weakening the dollar to make US goods more competitive globally and boost exports. However, this could hinder the pace of economic recovery by making imports more expensive, which may reignite inflation concerns.
  • Import tariffs: Trump plans to impose a 10% tariff on all imports, with a special focus on China, where tariffs could reach as high as 60%. A return to power for Trump may revive the trade war with China, causing market volatility.

Trump's historically strained relationship with the Fed could resurface if he’s elected. His policies, which oppose rate hikes, may put him at odds with the Fed's approach to managing inflation and interest rates. During his previous presidency, Trump frequently criticised the Fed’s policies, particularly its handling of interest rates.

US stock market fending off recession fears

Amid fears of a potential recession, US stock market have rebounded swiftly with several indices reaching record highs. The VIX Index, commonly referred to as the "fear gauge," which measures investor expectations of market volatility over the next 30 days, surged to 36.50 due to weak labour market data and rising unemployment rate.

However, following this sharp increase, the VIX has significantly retreated and established a strong support level at 15.30. This level is crucial; a drop below 15.30 could lead to further declines toward 12.00, which would indicate lower market volatility and an improved sentiment.

Conversely, the main resistance level for the VIX stands at 21.60. If the index surpasses this level, it could trigger a sharp upward move towards 28.20, suggesting increased market fears. These technical patterns indicate that the market remains in a cautious state with expectations for volatility closely tied to upcoming economic data and political developments.

US Q4 outlook VIX

[Chart: VIX Index Levels]