Growth
According to the second estimate, the U.S. economy expanded at a solid 3.1% saar, notching a second consecutive quarter of above trend growth. Consumer spending continued to power the economy forward, rising 3.7%, while government spending also looked strong. Business fixed investment rose 4.0% while residential investment remained a drag. With businesses likely rushing to build up inventory ahead of the port workers strikes in late September, imports jumped 10.7% 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.
NEW THIS WEEK
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. On the other hand, headline and core PCE came in just below expectations, rising 2.4% and 2.8% y/y, 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 final meeting of 2024, the Federal Reserve voted to cut the federal funds rate by 25bps to a range of 4.25% to 4.5%. That said, statement language and the new Summary of Economic Projections (SEP) leaned hawkish. In acknowledgement of resilient economic growth, diminished downside risks to the labor market and slower progress on disinflation, the updated SEP showed a higher growth and lower unemployment forecast for 2025, and higher inflation forecasts for 2025 and 2026. Moreover, the committee penciled in just 2 rate cuts in 2025 vs. 4 in the September SEP. Importantly, a few members incorporated potential fiscal policies and tariffs into their estimates. That said, the pace of rate cuts, while likely to be more gradual, will continue to hinge on the data until we gain more clarity on President-elect Trump’s policy agenda.
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 23, 2024 – Economic Update
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