By Staff Writer - January 24, 2025

Current Economic Outlook

Dr. Peter Rupert presented to the California Bankers Association on January 7, 2025 and gave an update on the current economic outlook. Responding to the most recent statement put out by the Federal Open Market Committee (FOMC) on December 18, 2024, Peter highlighted several critical developments in growth, inflation, labor markets, and policy trends

One section of the FOMC statement reads: 

“Recent indicators suggest that economic activity has continued to expand at a solid pace. Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee’s 2 percent objective but remains somewhat elevated.” 

Addressing each sentence: 

1. “Recent indicators suggest that economic activity has continued to expand at a solid pace.”

Real GDP per capita has continued to grow and the state of California saw a 3.1 percent increase in real GDP in the third quarter of 2024. Consumption is also up 3.7 percent and personal consumption expenditure in California remains on an upward trajectory.

2. "Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up, but remains low.”

The US has about 8.1 million job openings and 6.9 million unemployed persons. The job market is a little tougher in California, with unemployment rates being roughly 1 percentage point higher than the national average. There are about 740 thousand  job openings in California and about 1 million unemployed.

3. “Inflation has made progress toward the Committee’s 2 percent objective but remains somewhat elevated.”

What does the FOMC mean by inflation? There are two measures of inflation: the CPI and PCE. The Bureau of Labor Statistics calculates the Consumer Price Index (CPI), which measures inflation as experienced by consumers in their day-to-day living expenses. The Bureau of Economic Analysis calculates the Personal Consumption Expenditures (PCE), which is used as a mechanism to gauge how much earned income of households is being spent on current consumption for various goods and services.The FOMC’s preferred measure is the core PCE that removes food and energy, both very volatile month to month.  In other words, both measure inflation by tracking the price of goods and services. Over the last month the core CPI fell yet remains above the FOMC’s 2.0% target.  

Another section of the FOMC statement reads:

“In support of its goals, the Committee decided to lower the target range for the federal funds rate by ¼ percentage point to 4.25 from 4.5 percent. In considering the extent and timing of additional adjustments to the target range for the federal fund rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.”  

All of this to say, despite lowering the federal funds rate, the FOMC’s projections indicate that rates may remain higher for longer due to a stronger-than-expected economy and persistent inflationary pressures.

Looking at the housing market, 30-year fixed rate mortgages have increased slightly and national housing prices continue to rise, with San Francisco and Los Angeles exceeding the national average.

Meanwhile, broader economic trends, including financial sector consolidation and heightened scrutiny of credit unions and cryptocurrencies, underscore a shifting regulatory environment. The number of large banks with assets exceeding $100 billion has grown substantially over the last 30 years. In 1995, there were only five banks with over $100 billion in assets, today there are 32, driving more focus on global systemically important banks (G-SIBs) and potentially less scrutiny on smaller ones. 

Trade policies, particularly tariffs, continue to ripple through the political and economic debate. Tariffs are taxes on imports. They are physically paid by the purchaser, but the burden of the tax is on the consumers, typically paying higher prices.

If you’re interested in learning more, we would recommend looking in to the Economic Snapshot, Bureau of Labor Statistics, Bureau of Economic Analysis, and Federal Reserve Economic Data.

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