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The year 2024 was extraordinary for the economy and the markets. High interest rates, rising unemployment, turmoil in the Middle East, and the ongoing Russia/Ukraine war were some of the many factors that should have signaled economic contraction and a downturn in the stock market. Yet, the opposite occurred. Gross domestic product expanded by 3.1% in the third quarter and 2.9% year over year. Each of the major stock market indexes posted solid year-end gains. Inflation came down. Corporate earnings grew despite the unemployment rate inching higher. While data showed price pressures slowed in 2024, consumers faced the stark reality of the overall high cost of living.
The economy grew in 2024, proving that it could withstand the Federal Reserve's aggressive policy of interest rate hikes from the previous year. Consumer spending remained strong despite rising unemployment, which boosted the overall economy. In addition, increased nonresidential (business) spending, headed by cash-rich technology companies, and solid wage and income growth all contributed to overall economic strength. However, economic conditions were at the top of consumer concerns throughout much of 2024, particularly in the context of the presidential election. Consumer sentiment drooped in December amid weaker assessments of the present situation, while short-term expectations for business and labor saw a sharp decline.
The housing sector, which cooled in 2023 on the heels of higher interest rates, rebounded somewhat in 2024. Although the Fed reduced the federal funds rate, mortgage interest rates remained elevated. According to Bankrate, the 30-year fixed-rate mortgage was 7.03% as of December 30. The employment sector, expected by some to slow with rising interest rates, maintained strength throughout the year. While the number of new jobs trended lower during the second half of the year, job growth averaged 186,000 per month through November.
One of the primary factors in the drop in overall inflation was a decline in energy prices. According to the CPI, energy prices fell 3.2% over the 12 months ended in November. Gasoline prices dropped 8.1% over the same period. On the other hand, food prices rose 2.4%, while prices for shelter increased 4.7%. Total industrial production declined 0.9% for the year. Manufacturing, which accounts for about 78.0% of total production, decreased 1.0%.
As 2024 ended, there were some positives to consider upon entering the new year. At the conclusion of 2024, Wall Street enjoyed the best two-year run since 1997-1998. If corporate earnings continue to grow, that will bode well for stocks in 2025. Some factors will come into play next year, but how they impact the economy and markets is open to speculation.
Eye on the Year Ahead
Looking forward to 2025, several questions arise. The federal funds rate was reduced by 100 basis points in 2024. How will lower interest rates impact the economy, labor, and consumer prices? If the incoming administration moves toward deregulation, how will that affect the concentration of economic strength, and will it promote more widespread income disparities? Will the conflicts in the Middle East continue into 2025, and if so, what impact will they have on crude oil production? Will increased import tariffs drive consumer prices higher and/or strengthen domestic businesses? These are just a few of the many issues to consider entering the new year.
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