Growth
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 3.7%, while government spending also looked strong. Business spending grew by a modest 0.3% with residential investment being a notable drag. With businesses likely rushing to build up inventory ahead of the port workers strikes in late September, imports jumped 11.9% and weighed on growth. Overall, despite concerns about the labor market and the manufacturing sector, economic momentum in the U.S. remains solid.
Jobs
The October Jobs report showed the U.S. economy added an underwhelming 12,000 jobs last month, although hurricanes and strikes likely muddled the data. In fact, survey response rates were below average, an above average 512K people reported being out of work due to bad weather and BLS estimates suggest 44K workers were on strike during the survey week. Downward revisions were also gloomy, removing 112K jobs from the prior two months. Other details looked more promising. The unemployment rate held steady at 4.1% while wages, likely biased higher by weather, rose by a solid 0.4% m/m. While weaker than expected, this report was largely distorted, and the broader basket of economic data shows that the labor market, while cooling, still looks solid.
Profits
The 3Q24 earnings season is officially underway! Analysts are currently expecting pro forma earnings per share (EPS) of $61.14, representing growth of 3.8% y/y and 1.0% q/q. Growth sectors like information technology and communication services should deliver another quarter of double digit earnings growth. Elsewhere, cyclical value sectors are projected to see earnings fall. Moving forward, reduced interest rate and regulatory uncertainty should provide a boost to manufacturing-tied sectors along with financials as management teams invest incremental dollars into their businesses. This leaves less focus on returning capital to shareholders, so sales growth will be an increasingly important driver of future earnings.
Inflation
The September CPI report came in a touch hotter than expected, although inflation remained on its steady path lower. Headline inflation rose 0.2% m/m and 2.4% y/y, marking the slowest annual increase since early 2021, while core inflation rose 0.3% m/m and 3.3% y/y. In the details, food prices (+0.4% m/m) rose at their fastest pace since early 2023. This was partially offset by lower energy prices, reflecting sharp declines in gasoline and fuel oils. Core goods ended a 6-month streak of deflation, driven by strength in apparel prices, but remained benign. Elsewhere, shelter inflation came in below expectations, easing to 0.2% m/m. Excluding shelter, higher auto insurance prices (+1.2%) and airfares (+3.2%) caused core services inflation to accelerate. Overall, while inflation could see some fits and starts, it remains on a well-paved, predictable path downward.
Rates
At its September meeting, the FOMC voted to lower the federal funds rate by 50bps to a range of 4.75% to 5.00%. In rare fashion, the policy decision was not unanimous, as Michelle Bowman voted in favor of a 25bps cut. During the press conference, Chair Powell struck a cautiously upbeat tone on the economy while acknowledging the risks of a slowing labor market, although he pointed to a broad set of indicators that suggest the labor market still looks solid. In summary, policy normalization has begun, and the pace of rate cuts in the coming months will hinge on the incoming data. While the Fed opted to begin its easing cycle with a larger cut, future rate cuts could be more gradual barring a more material economic slowdown.
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 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 November 4, 2024 – Economic Update
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