December 09, 2024 – Recent economic data highlights a mix of resilience and challenges across key sectors. The service sector inflation pressures persisted despite a decline in ISM services activity, which can complicate the Fed’s inflation strategy as wage growth remains elevated and tariff-related uncertainties loomed. Construction spending rose in October, driven by solid residential improvements, while nonresidential outlays softened under high interest rates. Consumer sentiment saw a short-term boost in December, but future outlooks remained cautious due to inflation concerns. Meanwhile, November employment bounced back but unemployment rate inched up and labor force participation declined. Additionally, NAR’s 2024 Migration Trends report identified affordability and proximity to family/friends as key drivers for relocation, and the ability to remote work has reduced the importance of job location as a motivating factor for many movers.

Service sector slows but prices continue to rise: The ISM services index saw a sharper-than-expected decline in November, with all key components—employment, business activity, new orders, and supplier deliveries—falling but three out of four remained in expansion territory. Despite the slowdown, the prices paid component rose to 58.2, a reflection of the service sector’s wage growth of 0.6% in October, which was the highest since March. The difficulty in taming service inflation complicates the Federal Reserve's pricing outlook and presents a challenge to the Fed on cooling inflation without stifling economic growth. Additionally, concerns over upcoming tariffs following the presidential election are adding uncertainty on overall price implications, with respondents citing concerns over price increases in electronics and hospital supply chain in particular.

Residential construction outlays lifted overall spending: In October, total construction spending rose 0.4%, with an increase of 1.5% in residential outlays which offset a 0.4% decline in nonresidential spending. Residential gains were fueled by home improvement activity, which surged 2.7% and accounted for the majority of the increase, while growth in single-family construction also contributed to the increase. On the other hand, multifamily spending remained virtually flat from a month ago and declined 6.8% over the year. On the nonresidential side, high interest rates and tight credit conditions continued to weigh on both public and private outlays, with commercial and health care dropping sizably from the previous month. Manufacturing spending remained strong annually, but growth had stagnated in recent months. Data center construction was the exception, with spending up 3.2% monthly and an increase of 37% on an annual basis. Public nonresidential spending fell for the first time in four months, driven by infrastructure pullbacks likely influenced by recent hurricanes.

Consumers are optimistic about present but less positive about the future: Consumer sentiment showed an improvement in early December, reaching a nine-month high of 74.0, according to the University of Michigan’s Survey of Consumers. The climb in the index was driven by a surge in optimism in current economic conditions during the holiday shopping season and following the election. This boost was primarily among Republicans, whose sentiment surpassed that of Democrats within two months of the election, reversing the partisan trend seen since 2020. Independents also saw a significant rise in sentiment, jumping to its highest level since April. Despite an improvement in the present outlook, expectations about the upcoming year remained cautious, with future sentiment dropping to a six-month low. Inflation continued to weigh heavily on consumers’ minds, with year-ahead expectations rising to 2.9%, reflecting concerns about potential tariff-related price increases. Overall, while sentiment has shown a short-term lift in the current month, inflation worries, and economic uncertainty continued to worry consumers and hinder the progress on their near-term expectations.

Labor market bounces back but December rate cut is likely: The November employment report showed a rebound of 227k in nonfarm payrolls from the unusually low October’s figures, as the labor market recovered from disruptions of strikes and hurricanes that took place in the prior month. While sectors like health care, leisure, and government drove most of the job gains, retail employment saw a notable decline during the holiday staffing season. With Thanksgiving coming later this year and the shopping season being shorter than usual, some stores may have held back on hiring. Wage growth rose slightly faster than expectations, with average hourly earnings increasing 0.4% for the month and 4.0% over the year. Despite a solid job gain in November, the unemployment rate measured by the separate household survey inched up from 4.1% to 4.2%. The nudge-up in the jobless figure likely provides a good-enough reason for the Federal Reserve to cut its policy rate by 25 basis points at its December meeting.

Affordability is the second top reason why people relocate: According to the 2024 Migration Trends report from the National Association of REALTORS®, proximity to family and friends (30%) and affordability (21%) are the top reasons driving relocation decisions, with the South emerging as the leading destination. Nearly half (46%) of REALTORS®' clients moved to the South, followed by 25% to the West, 18% to the Midwest, and 11% to the Northeast. Movers to the South and West were often relocating from different states, while those heading to the Northeast typically moved within the same state. Factors like favorable taxes (16%), safety (16%), and job proximity (15%) also played significant roles in the moving. The report also emphasized that many movers were drawn to areas offering more home for their money and closer connections to their support systems, a trend expected to continue with retirees and remote workers. Additionally, outdoor space and quieter areas were key priorities for homebuyers, while job location was not a factor in the buying decision for 43% of movers as many of them were able to work remotely.

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