Elevated interest rates, stubborn inflation, geopolitical risks, a contentious election cycle, and labor strikes have all been the hallmarks of 2024. However, the economy continues to grow. These potentially destabilizing events this year have done little to dampen activity but seemed to weigh on people’s feelings about the economy. Despite some recent signs of potential slowing, we think the most likely path for the economy is sustained but slower growth.
Employment is one of the signals of economic health that people tend to focus on closely and is one-half of the Fed’s dual mandate. At present, the employment picture remains resilient. In September, the economy added 254,000 jobs and has averaged over 185,000 jobs per month in Q3 of 2024. While all of the numbers are subject to revision, and we have seen payroll numbers be significantly revised throughout this year, the data we do have seems to point to an economy that is still adding jobs at a reasonable pace. The unemployment rate for September was 4.1%, in line with the June level after a slight uptick in July. Job openings also remained strong at 8M, above pre-2019 levels.
Inflation has declined but remains above what the Federal Reserve believes is consistent with long-term economic health and prosperity. The Headline Consumer Price Index (CPI) increased 0.2% in August and July. Core CPI (which strips out food and energy) increased 0.3% in August and 0.2% in July. Over the past 12 months, as measured by CPI, prices have increased by 2.6% and 3.3% for Core CPI. These levels remain above the Fed’s 2% target, but the trend remains stable and trending down. Consumer expectations for inflation are also trending down. The University of Michigan’s latest year-ahead inflation expectation survey had a reading of 2.7%, which indicates that consumers are beginning to believe that inflation will continue to decline from today’s levels.
When inflation cools significantly, fears can emerge about the potential for slower economic growth as the reason. Although, in this cycle, we have not seen much of an economic slowdown. After surprisingly strong +3% GDP growth in Q2 2024, the Atlanta Federal Reserve is projecting +2.5% GDP growth for Q3 2024 (October 1st). The strength of economic activity against a backdrop of higher rates and fear-inducing headlines has been a welcome surprise over the past several months and highlights the importance of focusing on data when assessing the economic picture. Growth has stayed above expectations as the labor market remained strong and consumers remained willing to spend.
Some other economic data points we watch have given us a more mixed outlook for the future, but currently, there is no overwhelming evidence that we are staring down a massive decline in economic activity. Retail sales remain robust, and financial conditions remain loose. Nevertheless, consumer sentiment is muted, and credit card delinquencies are starting to creep up. These are all signals we are keeping an eye on when charting the course for portfolios over the coming months.
Overall, we believe that while there may be a slowdown from the surprisingly robust growth we have seen so far in 2024, the slowdown is unlikely to tip into recession soon. On the back of sustained growth in Q3, we are set up for a decent, although possibly lower, level of economic activity in Q4. It seems possible that the Federal Reserve may have pulled off the soft economic landing where we see lower inflation without a recession. While it is still too early to call that victory, we will continue to take advantage of the elevated growth environment and position for the lower growth possibility in the future. As always, we will stay focused on the data and not the headlines. We still believe our focus on high-quality equities and fixed income positions will provide solid risk-adjusted returns.
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