Growth
2Q24 GDP growth came in at 3.0% q/q saar, well above last quarter’s 1.4%. In the details, consumer spending rose by an upward revised 2.9% due to a bounce back in spending on goods, while revisions to residential and nonresidential fixed investment lowered business spending growth to a still strong 7.5% saar. After two quarters of declines, inventory investment rebounded, contributing 78bps to overall economic growth. While the U.S. economy has slowed from its 4.1% pace in 2H23, growth remained solid at 2.2% in 1H24.
Jobs
The August jobs report showed fewer-than-expected job gains of 142K, bringing the three-month moving average down to 116K. In addition, July’s figure was revised down to 89K jobs added. On a positive note, the unemployment rate ticked lower to 4.2%, providing some relief after the recent increase. Lastly, wages grew 0.4% m/m (3.8% y/y), which was slightly larger than July’s monthly increase. Overall, this report doesn’t represent a full rebound from last month’s weak figure, but it does help to calm hard landing fears.
Profits
The 2Q24 earnings season has come to a close! 2Q24 pro-forma earnings per share (EPS) were $60.55, representing growth of 11.1% y/y and 7.3% q/q. Across sectors, information technology and communication services delivered another quarter of double digit earnings growth, and health care bounced back after a challenging first quarter. Elsewhere, some of the more cyclical sectors, like industrials and materials, saw earnings fall relative to last year. Moving forward, as wage pressures fade and companies focus more on cost management, margins are expected to be the largest contributor to earnings growth.
Inflation
The August CPI report came in as expected, providing further evidence that inflation is on a steady path lower. Headline inflation rose 0.2% m/m and 2.5% y/y, while core inflation rose 0.3% m/m and 3.2% y/y. In the details, food and energy prices were well behaved with energy prices falling by 0.8% m/m. Elsewhere, core goods prices eased for a sixth straight month, lead lower by used vehicle prices, although tobacco prices rose by a strong 1.2% m/m. Elsewhere, shelter inflation remained elevated at 0.5% m/m, which alongside a 3.9% m/m increase in airfares, kept core services inflation elevated at 0.5%. Auto insurance prices moderated but rose by a still-warm 0.6% m/m and 16.5% y/y. With shelter still driving the bulk of inflation, broad disinflationary tailwinds remain well established, suggesting that inflation is on a steady path back to 2%. Moving forward, this should allow the Federal Reserve to remain focused on the labor market.
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, the first dissent by a governor since 2005. Changes to the statement language noted that risks to the Fed’s dual mandate are “roughly in balance,” as expected, and the Fed’s updated economic projections showed downward revisions to forecasted inflation and upward revisions to forecasted unemployment for 2024 and 2025. 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 sum, 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 September 23, 2024 – Economic Update
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