This Week's State Of The Economy - What Is Ahead? - 24 January 2025

By: Taro Chellaram /Wells Fargo Economics & Financial Report/Jan 28, 2025

This Week's State Of The Economy - What Is Ahead? - 24 January 2025

Considering a reasonably light domestic indicator schedule this week and the Fed's media blackout period ahead of next week's FOMC meeting, attention was understandably focused on the changing of the guard in Washington and the eagerly anticipated policy details from the new administration which will heavily influence the economic performance over the coming years. On that point, President Trump signed a litany of executive orders and memorandums his first day in office spanning a number of areas, including immigration, energy, foreign policy and trade. On the energy front, President Trump declared a national energy emergency and signed executive orders that will, among other things, review burdens to energy development and end the freeze on the approval of new liquid natural gas export permit applications. Furthermore, President Trump made comments regarding his intentions to refill the Strategic Petroleum Reserve. While these actions are seen as bullish and an attempt to spark animal spirits in the sector, questions remain as to whether the desired surge in private sector investment and output will unfold if oil prices fall materially lower over the coming years.

While executive orders on trade tariffs were notably absent, President Trump initially alluded to the possibility of a 25% tariff on imports from Canada and Mexico starting as soon as February 1. Subsequent comments later in the week were less hawkish—considering 10% tariffs on imports from China—though highlight how much trade discussions remain in flux. Understandably, the administration is ironing out the details, including breadth, degree and implementation. As we have expressed in our economic outlook, our base case is for a 5% universal tariff alongside a 30% tariff on imports from China. For further insight, please read our report, Charting the Course: U.S. Trade in 12 Charts. Until clear guidance is given, the uncertainty about tariffs and the impact on the economic outlook remains high, particularly for firms evaluating existing supply chains and for those considering new investments. As we receive greater detail on new economic policies in the coming weeks—particularly those associated with trade—we will adjust our outlook accordingly.

As previously mentioned, the data calendar was relatively quiet this week. Initial jobless claims increased to a six-week high, rising to a seasonally adjusted level of 223K for the week ended January 18. The Southern California wildfires played a major role in the rise, increasing by 61K on a non-seasonally-adjusted basis. As the wildfires are ongoing, we would not be surprised to see initial claims continue to mount over the coming weeks. Continuing claims increased by 46K to 1,899K, marking the highest level since November 2021. Experiencing extended resilience, the labor market is seeing a dichotomy take shape, one that the Federal Reserve is undoubtedly monitoring as it evaluates monetary policy. On one hand, the historically low level of initial claims suggest the labor market is quite healthy. On the other hand, the relatively elevated level and rising trend of continuing claims suggest more concern, as unemployed workers are having a tougher time finding their next job.

On the housing front, existing home sales ended 2024 with strong momentum as resales posted their third consecutive gain in December, up 2.2% to a 4.24-million unit annualized pace. Last month’s improvement was broad based with gains in single family and condos and co-ops resales. This helped bring total existing home sales 9.3% above the pace a year ago. While encouraging, total existing home sales remain 20% lower than the average pace in 2019. Lower mortgage rates have played a role in the slightly better affordability conditions seen in the second half of last year, though they are still prohibitive to most prospective homebuyers, as they currently hover around 7%. Home price appreciation is another headwind as demand continues to run ahead of supply. Inventories of homes on the market have come up from record lows, though the mortgage rate lock-in effect should keep supply relatively scarce and keep a ceiling on the overall pace of existing home sales. 




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