Growth
2Q24 GDP growth came in at 3.0% q/q saar, well above last quarter’s 1.6%. In the details, consumer spending rose by 2.8% due to a bounce back in spending on goods, while strong nonresidential fixed investment and inventory investment supported impressive business spending growth of 8.3% saar. While the U.S. economy has slowed from its 3.8% pace in 2H23, growth remained solid at 2.3% in 1H24.
Jobs
The September jobs report showed higher-than-expected job gains of 254K, quelling fears of a sharp labor market slowdown. In addition, upward revisions added 72K jobs to the prior two months, and the unemployment rate ticked down to 4.1%. Lastly, wages grew 0.4% m/m (4.0% y/y), likely marking the 17th consecutive month in which wage growth has outpaced inflation. Overall, this report shows that the jobs market is still in good shape.
Profits
The 3Q24 earnings season is officially underway! Analysts are currently expecting pro forma earnings per share (EPS) of $60.41, representing growth of 2.5% y/y and a contraction of -0.2% q/q. Growth sectors like information technology and communication services should deliver another quarter of double digit earnings growth. Elsewhere, cyclical value sectors like energy, industrials and materials are projected to see earnings fall. Moving forward, reduced interest rate and regulatory uncertainty should provide a boost to these manufacturing-tied sectors along with financials as management teams invest incremental dollars into their businesses. This leaves less focus on returning capital to shareholders, so sales growth will be an increasingly important driver of future earnings.
Inflation
The September CPI report came in a touch hotter than expected, although inflation remained on its steady path lower. Headline inflation rose 0.2% m/m and 2.4% y/y, marking the slowest annual increase since early 2021, while core inflation rose 0.3% m/m and 3.3% y/y. In the details, food prices (+0.4% m/m) rose at their fastest pace since early 2023. This was partially offset by lower energy prices, reflecting sharp declines in gasoline and fuel oils. Core goods ended a 6-month streak of deflation, driven by strength in apparel prices, but remained benign. Elsewhere, shelter inflation came in below expectations, easing to 0.2% m/m. Excluding shelter, higher auto insurance prices (+1.2%) and airfares (+3.2%) caused core services inflation to accelerate. Overall, while inflation could see some fits and starts, it remains on a well-paved, predictable path downward.
Rates
At its September meeting, the FOMC voted to lower the federal funds rate by 50bps to a range of 4.75% to 5.00%. In rare fashion, the policy decision was not unanimous, as Michelle Bowman voted in favor of a 25bps cut. During the press conference, Chair Powell struck a cautiously upbeat tone on the economy while acknowledging the risks of a slowing labor market, although he pointed to a broad set of indicators that suggest the labor market still looks solid. In summary, policy normalization has begun, and the pace of rate cuts in the coming months will hinge on the incoming data. While the Fed opted to begin its easing cycle with a larger cut, future rate cuts could be more gradual barring a more material economic slowdown.
Risks
- Geopolitical tensions and the upcoming U.S. election may heighten market volatility.
- A slow-moving economy is more vulnerable to any kind of shock.
- Moderating economic growth could weigh on earnings, leaving markets vulnerable at stretched valuations.
Investment Themes
- Fixed income offers attractive levels of income and protection against an economic downturn.
- Broadening profit growth should continue to support a more inclusive stock market rally.
- Powerful structural and cyclical tailwinds should support select international markets.
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Originally Posted October 28, 2024 – Economic Update
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