Economic Update: April 29, 2024

Growth

The U.S. economy grew 1.6% 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 2.5% as spending on services more than offset a decline in goods spending, while the more 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 3.1%. Overall, economic growth should continue to moderate during the balance of this year, although this report likely masks recent economic momentum.

Jobs

The March Jobs report showed a very strong labor market, but not an inflationary one. Nonfarm payrolls rose by an impressive 303K, handily beating expectations, while revisions to the prior two months added another 22K jobs. Most sectors added jobs this month, with the most outsized gains seen in government and health care. In the household survey, the labor force increased by 469K, and the unemployment rate ticked down to 3.8%. Elsewhere, wage growth rose to 0.3% m/m and moderated to 4.1% y/y. Overall, strong labor supply gains, mainly fueled by immigration, should allow the U.S. economy to keep adding jobs at a robust pace without sparking inflationary pressures.

Profits

The 1Q24 earnings season is now in motion. With 52% of market cap having reported, our current estimate for S&P 500 operating earnings per share (EPS) is $55.25. If realized, this would represent growth of 5.2% y/y and 2.5% q/q. Across sectors, information technology and communication services are expected to have another strong quarter, while resilient consumer demand should support the consumer discretionary sector. Elsewhere, energy, materials and health care are expected to see earnings fall. Revenues, supported by resilient economic activity and solid inflation, are expected to be the largest contributor to earnings growth, although margins will play an increasingly important role as momentum slows.

Inflation

The March CPI report came in stronger than expected, with many of the usual suspects driving the bulk of this strength. Headline CPI rose 0.4% m/m and 3.5% y/y, its fastest annual increase since September, while core CPI rose 0.4% m/m and 3.8% y/y. Energy prices rose for a second consecutive month, while food inflation remained relatively benign. Elsewhere, lower vehicle prices offset a spike in apparel prices, allowing core goods disinflation to continue. Across core services, shelter and auto insurance, up 0.4% m/m and 2.6% m/m, respectively, remained problematic. Similarly, headline and core PCE rose by a hotter than expected 2.7% and 2.8% y/y, respectively. Overall, stalling progress on disinflation limits the likelihood of a Fed rate cut in June, although underlying disinflationary trends should allow inflation to march lower over the course of this year.

Rates

At its March meeting, the FOMC voted to hold rates steady at 5.25%-5.50% for a fifth consecutive meeting. The changes to the Summary of Economy Projections were mixed with year-end core PCE being revised up to 2.6% from 2.4% and 2024 growth being revised up to 2.1% from 1.4% in December. The median dot still showed three rate cuts for this year, and one fewer cut for next year for a total of three cuts in 2025 and 2026. The first rate cut in 2024 is still expected to take place some time this summer. During the press conference, Chairman Powell did not seem concerned about the hot inflation prints in January and February, and the FOMC seems intent on starting to cut rates this year to ensure a soft landing scenario.

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.

This weekly update provides a snapshot of changes in the economy and markets and their implications for investors.

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Originally Posted April 29, 2024 – Economic Update

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