Growth
2Q24 GDP growth came in at 2.8% q/q saar compared to expectations of 1.9% and above last quarter’s 1.4%. Notably, the core PCE index rise to 2.9% was slightly firmer than expected but was below the 3.7% increase in 1Q, while consumer spending was a solid 2.3%. Overall, the report points to less softness than the 1Q print suggested. While the U.S. economy has cooled from its 4.1% pace in 2H23, growth averaged a solid pace of 2.1% in 1H24.
Jobs
The July jobs report showed a significant slowdown in job gains, growing just 114K. In addition, 29K jobs were removed from the prior two months, bringing the three-month moving average down to 170K. The unemployment rate rose 20bps to 4.3%, which triggered the Sahm Rule (an empirical observation that predicts recession when the three-month moving average of the unemployment rate exceeds its lowest level over the prior 12 months). Lastly, wage growth continued to cool with July average hourly earnings rising by 0.2% m/m and 3.6% y/y, the slowest annual increase since 2021. Overall, this report showed a labor market that is cooling a little too quickly for comfort.
Profits
The 2Q24 earnings season is wrapping up! With 93% of market cap having reported, analyst estimates for pro-forma earnings per share (EPS) are currently tracking at $60.35. If realized, this would represent growth of 10.7% y/y and 6.9% q/q. Across sectors, information technology and communication services are expected to deliver another quarter of double digit earnings growth, while health care is expected to bounce back after a challenging first quarter. Elsewhere, some of the more cyclical sectors, like industrials and materials, are expected to see earnings fall relative to last year. As wage pressures fade and companies focus more on cost management, margins are expected to be the largest contributor to earnings growth.
Inflation
The July CPI report provided more evidence that inflation is on a sustainable path lower. Headline inflation rose 0.2% m/m and 2.9% y/y, its slowest pace since March 2021, while core inflation rose 0.2% m/m and 3.2% y/y. Both measures were roughly in-line with expectations. In the details, core goods prices fell 0.3% due to lower apparel and vehicle prices, marking the category’s fifth straight monthly decline. Shelter inflation remained elevated, although the 0.4% m/m rise in owners’ equivalent rent (OER) was its second slowest increase since late 2021. Excluding shelter, core services rose 0.2% m/m. Auto insurance remained elevated, rising 1.2% m/m, although this was partially offset by lower airfares. While some of the services components looked more mixed, the lack of troubling details in this report keeps the Fed on track to deliver several rate cuts this year, starting in September.
Rates
At its July meeting, the FOMC voted to hold rates steady at 5.25%-5.50%, as expected. The FOMC statement contained subtle but important dovish tweaks: more confidence on the path of inflation, some concern about a softer labor market and an equal focus again on inflation and full employment. During the press conference, Chair Powell hinted several times that an upcoming rate cut in September might be “on the table.” Given a weaker jobs print following the meeting, markets are now expecting the Fed to cut rates more and at a faster pace this year.
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 present opportunities outside of the Magnificent 7 and support a more inclusive rally.
- Powerful structural and cyclical tailwinds should support select international markets.
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Originally Posted August 26, 2024 – Economic Update
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