Growth
The U.S. economy grew 1.3% q/q saar in 1Q24, falling short of expectations for 2.5% growth. That said, weakness at the headline level masked some of the underlying strength in the report. Consumer spending rose by a downwardly revised 2.0% as spending on services more than offset a decline in goods spending, while the volatile trade and inventories components detracted from growth. However, real final sales to private domestic purchasers, which exclude these volatile segments, rose by a solid 2.8%. Economic growth should continue to moderate during the balance of this year, although this report likely masks recent economic momentum.
Jobs
The May Jobs report came in stronger than expected, although strong jobs growth masked some of the more mixed details. Nonfarm payrolls rose by an impressive 272K, while revisions removed a modest 15K jobs from March and April. Job growth was broad-based across sectors, with health care and government leading the charge higher. In contrast to the establishment survey, the household survey showed a 408K decline in jobs, while the unemployment rate ticked higher to 4.0%. Elsewhere, wage growth came in slightly hot, rising 0.4% m/m and 4.1% y/y. Overall, the labor market continues to look strong, although the broader basket of labor market data points to continued normalization.
Profits
The 1Q24 earnings season has come to a close. Our final estimate for S&P 500 operating earnings per share (EPS) is $54.91, which represents growth of 4.5% y/y and 1.9% q/q. Across sectors, information technology and communication services had strong quarters, while resilient consumer demand supported the consumer discretionary sector. Elsewhere, energy, materials and health care all saw earnings fall. Revenues, supported by resilient economic activity and solid inflation, were the largest contributor to operating earnings growth, although margins will play an increasingly important role as momentum slows.
Inflation
The May CPI report showed a slower than expected rise in inflation. Headline CPI held steady relative to last month and rose 3.3% y/y, while core inflation rose by 0.2% m/m and 3.4% y/y. Energy prices fell 2.0% m/m, led by a sharp decline in gasoline prices, while core goods prices were flat on a monthly basis. Across core services, shelter inflation remained elevated at 0.4% m/m for a fourth consecutive month. However, in a welcome turn of events, auto insurance fell 0.1% m/m after a streak of unexpectedly strong prints. Overall, this report alone won’t do much to sway the Fed’s messaging, but if the idiosyncratic factors keeping inflation elevated show further improvement in the coming months, inflation should continue its slow descent back to 2%.
Rates
At its June meeting, the FOMC voted to hold rates steady at 5.25%-5.50%, as expected, although its updated dot plot provided some hawkish surprises. In the updated Summary of Economic Projections, the Fed left its growth and employment forecasts for 2024 unchanged, while the headline and core inflation estimates were revised up 0.2% to 2.6% and 2.8%, respectively. On the dot plot, the median member lowered the expected number of 2024 rate cuts from three to one, although one cut was added to the 2025 forecast. The longer-run dot also rose to 2.8%, up from 2.6%. Moving forward, the outlook for interest rates remains largely dependent on incoming growth and inflation data. In our view, easing inflationary pressures through the summer and early fall should allow the Fed to cut one to two times this year.
Risks
- Stalling progress on disinflation could delay rate cuts, presenting challenges to both stocks and bonds.
- A slow-moving economy is more vulnerable to any kind of shock.
- Elevated valuations in some parts of the market may lead to volatility and market corrections.
Investment Themes
- Fixed income offers attractive levels of income and protection against an economic downturn.
- Broadening profit leadership and reasonable valuations should present opportunities outside of the Magnificent 7.
- Long-term growth prospects and improving fundamentals should support international equities.
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Originally Posted June 17, 2024 – Economic Update
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