By Jordan Chester

During a speech to economists and others at an annual retreat in Jackson Hole, Wyoming, Federal Reserve Chairman Jerome Powell signaled that the central bank will lower the federal funds rate a year after ending a rate-increase cycle intended to combat pandemic-era inflation. 

Powell’s language reinforced what most expected; a rate-cutting cycle starting at the central bank’s September meeting. Aside from a historically short and modest rate-cut cycle before the pandemic, there hasn’t been a prolonged cycle of rate hikes since the Great Recession. While interest rates coming down is almost a foregone conclusion, the political and economic responses are uncertain. 

It is unlikely that the economy will change dramatically between now and the November election. More often than not, the party in power has won the White House when voters cast their ballots during an economic expansion. Yet, the opposing party won elections during periods of increased prosperity, such as 1952 and 2000. 

Just look at the unemployment rate and timing of recessions going back to 1948. The two times where an election was held during a recession, in 1960 and 2008, the party controlling the White House lost. Similarly, in the four times in which a recession ended twenty months or less before an election (1976, 1980, 1992, and 2020), the incumbent party was defeated. 

However, the thirteen elections that occurred more than twenty months after the recession have generally resulted in the White House party being rewarded; the score is 9-4. Put another way, the party in power has been punished 100% of the time when our economy was in recession or fresh out of one, while they’ve been rewarded for a lack of recession just 70% of the time. As of this writing in August 2024, it’s been forty-eight months since the U.S. economy was in recession. 

By most measurements, the economy is in good shape. Unemployment is 4.3%, lower than the long-term average. Business applications reached a new record last year, productivity growth has been robust, and inflation is now below its long-term average as real wages have increased. 

This environment is helpful to achieving the Federal Reserve’s dual mandate of sustaining a strong labor market and stable prices. When people earn more, it enables them to save, invest, and spend. This might include starting a college fund for their kids, investing in the stock market or opening a business, and going to the local coffee shop every morning. Indeed, restaurant sales have recovered from the pandemic, people are willing to spend more on entertainment and travel, and PC sales increased for two consecutive quarters.

Despite low unemployment and moderating overall inflation, the cost of housing has become exorbitant, with half of renters considered cost-burdened. Additionally, consumer debt continues to rise, the overall wealth gap persists, and the personal savings rate is low. 

According to a survey published by McKinsey & Company, American consumers plan on spending the same amount of money in six of seven categories of essentials while decreasing their expenditures in four of seven “semi-discretionary” categories, including cars and fitness services. 

Similarly, the U.S. Census Bureau’s monthly retail sales and food services survey found that in the first seven months of 2024, compared to the same period in 2023, spending on essentials increased while discretionary spending was a mixed-bag, with food services (dining away from home), electronic & appliance stores, and online retailers posting gains as furniture stores and hobby/sporting goods/musical instruments/book stores showed a decline in sales.

Despite few expecting to reduce their levels of spending, more than 60% of Americans see inflation as a major concern. It’s important to consider that in a healthy economy, prices rise – but at a slower pace relative to income growth. Towards the end of the pandemic, until the summer of 2022, prices rose at a faster pace than people’s earnings. Consumers are upset that prices continue to rise and want price reductions. Yet, on average, our purchasing power has increased since inflation peaked due to higher real wages. 

After decades of importing inexpensive consumer products that kept inflation in check, we are now importing less. To be clear, it is extraordinarily positive for society that we are bringing industry home and empowering workers, but as we move away from decades of offshoring jobs and importing inexpensive consumer products, there will likely be inflationary pressures. So while wages are likely to rise at a faster pace, prices will continue to rise as well. The ideal scenario entails wage growth exceeding the consumer price index by a larger margin than in the past.

Traditionally, lower borrowing costs have led to increased demand (and prices) for housing and vehicles, debt refinancing, business investment, appetite for risk assets, and start-up companies raising more cash as investors drive stock prices higher.

Specific to the stock market, legendary economist Liz Ann Sonders and Kevin Gordon of Charles Schwab recently published an article that reminded investors that, while the stock market as a whole has performed well one year after the first rate cut in twelve of the past fourteen such cycles, it’s also important to consider what’s driving rate cuts and which sectors perform best as a result. 

I agree with the majority of economists polled that economic growth will moderate, current levels of inflation will persist, and a recession in the short term is unlikely. It seems that we are in the midst of an economic soft-landing, something that is rare but occurred in the 1990s. That soft landing lasted for around five years before the Dot Com Bubble burst in 2000.