Growth
According to the second estimate, the U.S. economy expanded at a solid 2.8% saar, notching a second consecutive quarter of above trend growth. Consumer spending continued to power the economy forward, rising 3.5%, while government spending also looked strong. Business spending growth improved in the second reading to 1.1% with residential investment still being a notable drag. With businesses likely rushing to build up inventory ahead of the port workers strikes in late September, imports jumped 10.2% and weighed on growth. Overall, despite concerns about the labor market and the manufacturing sector, the U.S. economy remains solid.
Jobs
After strikes and hurricanes disrupted labor market activity last month, the November Jobs report showed a rebound in hiring. Nonfarm payrolls rose by 227K, beating expectations, while upward revisions added 56K jobs to the prior two months. The private sector accounted for 85% of this month’s job growth with health care and leisure and hospitality adding 72K and 53K jobs, respectively. Elsewhere, wages rose 0.4% m/m and 4.0% y/y, while the unemployment rate ticked higher to 4.2%. Overall, the labor market still looks solid, although the stability in wages and uptick in the unemployment rate tilts the scales further toward a December rate cut.
Profits
3Q24 pro forma earnings per share (EPS) came in at $61.61, representing growth of 4.6% y/y and 1.8% q/q. Mega cap tech delivered another quarter of double digit earnings growth as did health care. Elsewhere, cyclical value sectors saw earnings fall. Moving forward, lower rates and regulatory uncertainty should provide a boost to manufacturing-tied sectors along with financials as management teams ramp up investment. This means less focus on returning capital to shareholders, so sales growth will be an increasingly important driver of future earnings.
Inflation
The October CPI report showed a slight but expected pick-up in inflation. Headline CPI rose 0.2% m/m, which partly due to base effects pushed the annual increase up to 2.6%, while core inflation rose 0.3% m/m and 3.3% y/y. Food prices continued to climb, while energy prices were flat. Apparel prices (-1.5% m/m) delivered their softest print since 2020, likely due to unseasonably warm weather. In more welcome news, auto insurance prices fell modestly, although this was more than offset by a jump in airfares. In October, headline PCE grew 0.2% m/m (2.3% y/y), representing a modest tick higher from last month. While the proposed tariff policies could increase prices, short- to medium-term disinflationary tailwinds remain intact. Improvement in auto insurance and shelter alongside easing wage pressures should keep inflation under control, allowing the Federal Reserve to deliver more cuts despite the policy uncertainty.
Rates
At its November meeting, the FOMC unanimously voted to lower the federal funds rate by 25bps to a range of 4.50% to 4.75%. During the press conference, Chair Powell said that progress on disinflation and employment data led the decision, although changes to the statement language suggest the Fed acknowledges disinflationary progress has somewhat stalled above 2%. He didn’t provide much forward guidance given the high level of uncertainty, causing markets to be less certain about the pace and destination of future cuts.
Risks
- Geopolitical tensions and policy uncertainty 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 December 9, 2024 – Economic Update
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