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Economic Update: March 25, 2024

Posted March 25, 2024
J.P. Morgan Asset Management

Growth

The U.S. economy expanded at an impressive 3.2% annualized rate in 4Q23, a deceleration from a very strong third quarter but well above expectations. Many of the underlying details looked strong but consumption, again, powered the economy in both goods and services. The biggest upside surprise was trade, which rose at a 6.4% ann. pace while inventories, previously thought to be a positive contributor, detracted from growth after recent revisions. Growth will likely be slower in 2024, but continued resiliency in the consumer, disinflation progress and a modest rebound in housing should help the economy grow at a decently positive rate.

Jobs

The February Jobs report provided further evidence that the labor market is gradually easing. Nonfarm payrolls rose by 275K, beating consensus expectations. That said, other details in the report looked less strong, as downward revisions removed 167K jobs from the prior two months. Elsewhere, employment in the household survey fell, contributing to a rise in the unemployment rate to 3.9%, its highest print in more than two years. Wage growth moderated to 0.1% m/m after jumping in January. Overall, strong job gains and easing wage pressures in this report should bolster confidence in the Fed’s ability to manage a soft landing this year, even with a slower pace of policy easing.

Profits

The 4Q23 earnings season has come to a close. Our final estimate for operating earnings per share (EPS) is $53.91. This represents y/y earnings growth of 7.0% and q/q growth of 3.2%. Corporate profits ended 2023 on a high note, as economic activity remained resilient. Across sectors, information technology and communication services both had strong quarters, while lower oil and natural gas prices weighed on the energy sector. Looking forward, downbeat forward guidance from management teams could weigh on consensus estimates for earnings growth in 2024.

Inflation

The February CPI report showed that inflation is still gradually receding, although there were some areas of strength. Headline CPI rose 0.4% m/m and 3.2% y/y while core inflation rose 0.4% m/m and 3.8% y/y. In the details, higher gasoline prices supported energy prices, while food prices held steady. Excluding food and energy, goods prices rose by a modest 0.1% m/m. Across core services, owners’ equivalent rent rose 0.4%, a moderation compared to last month but still above its pre-pandemic pace, while transportation services remained elevated. While there were some bouts of strength in this report, the inflation downtrend remains intact. Importantly, with improved supply chains, moderating wage growth and shifting consumer preferences, inflation should continue toward the Fed’s 2% target, although the path down may be bumpier than expected.

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

  • Rate cuts may not occur as quickly as expected, presenting challenges to both stocks and bonds.
  • A slow-moving economy is highly vulnerable to any kind of shock.
  • Elevated valuations in some parts of the market may lead to volatility and market corrections.

Investment Themes

  • Despite the recent bond market rally, fixed income still offers attractive yields and protection against an economic downturn.
  • Solid profit growth and reasonable valuations will be crucial in determining equity winners in a higher rate environment.
  • Long-term growth prospects, a falling dollar and wide valuation discounts support international equities.

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

Originally Posted March 11, 2024 – Economic Update

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