Review of the U.S. Economy in 2024: Situations in Multiple Sectors, Policy Ripples and Investment Trends

Economic

Summary:

This article analyzes the U.S. economy in 2024. That year, the economy grew at an annualized rate of 3.1%, with consumption and other multiple fields providing support, while residential investment and imports were unfavorable. The labor market rebounded in November after being impacted, with changes in employment and wages. The earnings per share in Q3 increased, and industry performances varied. Lower interest rates benefited many industries. There was an inflation situation in November. The Federal Reserve cut interest rates at the end of the year with a hawkish stance. There are risks of geopolitical tensions and economic slowdown, and investment trends are diversified.

U.S. Deficits: Can You Take Me Higher?

The coming U.S. budget debate is likely to be contentious as it balances various interests. We expect deficits to continue to rise for several reasons:

Trump victory: The Republican wave is likely to keep deficits rising amid the renewal of the 2017 tax cuts, which would add a further US$4-5 trillion to current Congressional Budget Office baseline projections over the next decade.Interest expense continues to rise: The Treasury paid nearly US$1 trillion of interest in FY2024. Even if interest rates remain near current levels, the debt burden is set to rise significantly over time. Interest expense as a portion of GDP has reached 3.9% and is likely to continue climbing further.Decline in discretionary outlays: The share of discretionary outlays as a portion of total deficits has declined to just 25% of the total budget in recent years. Higher interest expenses reduce discretionary outlays even further. This will make reducing deficits even more difficult in the coming years as changing entitlement spending has been a no-go zone for politicians.

Tariffs by the Dozen

There’s no certainty about what President Trump will do on the tariffs front, despite his proclamations. We can read his “Truths,” and we can make assumptions about how literal he is, but ultimately, it’s more useful to have a framework and rules-of-thumb that can be adapted as policy develops. On that front, we can assume the following temporary impact on US headline inflation from tariffs:

60% tariffs on China boost inflation by 0.7ppts after a year10% tariffs on countries outside Canada/Mexico/China boost inflation by 0.5ppts after a year25% tariffs on Mexico and Canada combined boost inflation by 0.6ppts after a year.

China: He Said, Xi Said

It's clear that the U.S. and China have no love lost between them. That said, China is perhaps the one country most likely to strike a deal with Trump. The country is still unlikely to avoid sharp tariffs, and we expect retaliation from China once the U.S. tariffs are in place. This could include restrictions on exports of rare earth commodities or components used in the energy industry; in other words, narrow categories that could inflict sharp pain in strategic industries. However, the overall impact of trade restrictions that China can impose in the U.S. is likely to be fairly minimal and not of broad economic significance.

Europe: Stuck in the Middle With EU

The European Union (EU) is more likely to get caught in the crossfire between the U.S. and China. The EU-US relationship has been rigid under President Biden, so Trump may still be welcomed cautiously, simply because he moves the dial. The EU has faced evasive and shifting priorities when negotiating with the U.S. causing it to shift its focus towards China. This is going to cause problems for the U.S., who may insist on changes to the EU-China relationship in any negotiations. This will frustrate the EU, who sees China as a source of cheap green technology that can help the region achieve its green goals as well as a large market for its manufacturing sector.

Global Markets: Welcome to the Jungle

Turning to markets, what does this all mean? As we end 2024, U.S. yields have remained anchored to data, yet equity gains seem to have stretched that relationship. The next year marks a transition from pure data dependence to policy dependence. Don't be fooled; policy dependence augments – not replaces – data dependence. The monthly correlation of U.S. Treasury yields to U.S. surprises during Trump's first term was 0.6 (or 0.8 if we exclude the pandemic-impacted 2020) compared to the 20y average of 0.4. Markets will be driven first by the expected impact of policy plans, then by the actual impact of delivery.

Source：TD Securities

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