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
At the headline level, the November CPI report showed that progress on disinflation has stalled, although the underlying details suggest that positive progress is still being made. Headline CPI rose 0.3% m/m with base effects pushing the annual increase to 2.7%, while core inflation held steady at 0.3% m/m and 3.3% y/y. In the details, inflation appeared to be hottest in segments aligned with resilient mid-to-upper income consumption, including autos, travel and leisure and recreational services. Importantly, many of these segments are volatile and don’t appear to be on an upward trend. In more welcome news, shelter and auto insurance inflation eased, rising 0.3% and 0.1%, respectively. Overall, as base effects turn more favorable and core services disinflation continues, inflation should resume its steady descent back to 2%.
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 16, 2024 – Economic Update
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