Augustine (Gus) Faucher is senior vice president and chief economist of The PNC Financial Services Group, serving as the principal spokesperson on all economic issues for PNC.
Prior to joining PNC as senior macroeconomist in December 2011, Faucher worked for 10 years at Moody’s Analytics (formerly Economy.com), where he was a director and senior economist. He was responsible for running the firm’s computer model of the U.S. economy, edited a monthly publication on the U.S. economic outlook, covered fiscal and monetary policy, and analyzed various regional economies. Previously, he worked for six years at the U.S. Treasury Department, and taught at the University of Illinois at Urbana-Champaign. He was named senior vice president in March 2015, deputy chief economist in February 2016, and to his current role in April 2017.
Faucher is frequently cited in international, national, and regional media outlets including The Wall Street Journal and The New York Times. He has appeared on ABC World News, CBS Evening News, NBC Nightly News and Nightly Business Report, and is regularly featured on CNBC, CNN and Fox Business. In addition, he appears regularly on CBS Radio, NPR and Marketplace.
Webcast Transcript:
Hi, I'm Gus Faucher, Chief Economist for the PNC Financial Services Group, with an Economic Outlook for the third quarter of 2024. The U. S. economy is in good shape in the middle of 2024. Interest rates have peaked. The Federal Reserve aggressively raised both short term and long term interest rates starting in 2022 as inflation picked up and as the economy recovered from the pandemic, but more recently, inflation has been slowing and the Federal Reserve has been preparing to cut interest rates sometime later this year. Given that, we've seen short term interest rates stabilize and we've seen a slight decline in longer term yields and we expect that rates will move lower toward the end of 2024.
Investors are also feeling very good in the summer of 2024. The stock market is near record highs, indicated by the blue bars, the S& P 500, and stock market volatility, that is, how much stock prices are moving up and down, is at a very low level, similar to what we saw before the pandemic. Investors are positive about the outlook for the U. S. economy and in particular about the outlook for corporate profits as we head into the second half of 2024. And most importantly, the U. S. labor market is historically strong in mid 2024. Job growth has more than recovered from the pandemic and employment is about 8 or 9 million higher than it was before the pandemic basically back to the long term trend. At the same time, the unemployment rate hit 4.1% in June. That's up a little bit from a year ago, but it's still very, very low on a historic basis. And in fact, from the Federal Reserve's perspective, a bit higher unemployment rate, a bit more slack in the labor market, a bit softer wage growth is good news for inflation.
And so the Federal Reserve is very happy with where the labor market is in the summer of 2024. The labor market is historically strong, but the overall economy is also doing well. This shows two measures of economic activity adjusted for inflation. I set the peak right before the pandemic equal to 100.
What you can see is that whether we're looking at gross domestic product, which is output of goods and services, the broadest measure we have of the U. S. economy, or final sales of domestic product, which measures demand with the U. S. economy, those have both more than fully recovered from the pandemic.
And in fact, economic activity is about 9% higher than it was before the pandemic, adjusted for inflation. This is much better than we've seen in other developed economies, thanks to strong support from the Federal Reserve with low interest rates in the wake of the pandemic and strong fiscal support from the federal government.
And we're seeing broad gains throughout most sectors of the U. S. economy. This is various types of economic activity, again adjusted for inflation, and I set the fourth quarter of 2019 equal to 100. Consumer spending, whether we're talking about goods spending, the orange line, or services spending, the blue line, is well above its pre pandemic level and continues to increase.
The strong labor market, strong wage growth that is outpacing inflation, are supporting consumer spending growth in mid 2024. Business fixed investment, the green line, this is investment in things like commercial construction, equipment, software, R& D, those types of things, that is about 15% higher than it was before the pandemic.
Businesses with strong demand are increasing their capital expenditures because, in part, because they can't find workers, and so they're investing in productivities and technologies that make their workers more productive. Residential investment, the black line, that's the housing market, that rose sharply in the wake of the pandemic, then fell with higher mortgage rates, fell a little bit in the second quarter of 2024 but is up from a year ago as lower mortgage rates and continued strong demand within housing are supporting growth there. Government spending, the purple line, this is government spending on things like salaries, infrastructure, defense, and so forth. It does not include government transfer payments. That has been rising for a couple of years and is now about 6% or 7% above where it was before the pandemic. And also, the key to the entire thing is strong gains in after tax personal income. This is government transfer payments. This is money from the labor market. This is investment returns.
You can see those big swings as the federal government stepped in to support consumer incomes with the pandemic. Then it fell as those payments ended and as inflation was high. But more recently, with the very strong labor market, with good wage growth, with slowing inflation, we see that after tax, personal incomes are about 8% higher than they were before the pandemic.
That means that households have more money to spend on and are increasing their spending. And with the labor market expected to remain strong, we will see continued gains in consumer spending going forward. We're also seeing an easing in inflation. Energy inflation, which was very strong in 2021 and 2022 with the economic recovery, and then the Russian invasion of Ukraine has cooled off dramatically.
And in fact, over the past year, energy prices have been about flat. Energy prices are still higher than they were before the pandemic, but they are not increasing. It's a similar story with food and beverage inflation, the black line. You can see that big acceleration that we had in 2021 and 2022, but more recently, food inflation has cooled off and it's basically back to its pre pandemic trend.
Again, prices are higher than they were before the pandemic, but they're not going up by nearly as much as they were a couple of years ago. When we look at core goods, the orange line, goods, excluding food and energy if anything, we've seen those prices fall over the past year. And so that's a big positive on the inflation outlet.
We still have elevated core services, inflation, the blue line. You can see that that picked up in 2023 is slowed a little bit. This is things like housing, education, healthcare, personal financial services, travel and tourism, and so forth. We've seen a bit of an easing there. It's still higher than the federal reserve would like, but with a labor market that is gradually cooling off with slower wage growth, we expect the core services inflation will continue to slow through the rest of 2024 and into 2025. And that will bring inflation back to the Federal Reserve's objective by around this time next year.
So the overall outlook for the U. S. economy remains solid in mid 2024. We do expect to see a bit slower GDP growth, the blue line on the left hand scale, as high interest rates continue to weigh on the economy, and as we see slower growth in consumer spending and business investment in the near term. But the economy will continue to expand, and we will avoid a recession.
We expect, with easing inflation, that the Federal Reserve will start to cut the Fed funds rate, their key short term policy rate, later this year. We expect to see two cuts of a quarter percentage point each in the federal funds rate later this year. And that, along with additional rate cuts in 2025, will support a pickup in economic activity towards the middle of next year.
The unemployment rate, it was 3.5% before the pandemic, jumped up to almost 15% in April of 2020, was down to 3.4% a year or so ago, and is now around 4%. We expect that that will continue to increase modestly in the near term as job growth cools off somewhat, but will remain historically low.
And then we do expect to see a pickup in job growth in the second half of 2025 as economic growth recovers to a certain extent. Thank you very much for your time. I appreciate the opportunity to speak with you. You can find all of our materials at pnc.com/economicreports, and you can follow me on X, formerly Twitter, @GusFauchePNC.
