Looking at the State of U.S. Economic and Investment Data in Early 2024

The U.S. economy

Starting with the recent inflation numbers; the CPI for February increased 0.4 percent for both CPI all items (3.2 percent year over year) and CPI less food and energy (3.8 percent year over year). While this print is a continuation of the longer trend of dampened inflation, it was not the meaningful deceleration that the U.S. Federal Reserve (the Fed) is hoping for.

The good news in the numbers, however, was a continuation of shelter inflation easing, while food also saw a drop: 0 percent in February and 2.2 percent year over year, down from 0.4 percent in January and the preceding six months, which averaged 0.25 percent. Food has been a sticky (and volatile) number over 2023, and the area where consumers feel the largest negative sentiment. Shelter, which we discussed in our most recent Investment Outlook, as one of the numbers to watch, did indeed fall back to 0.4 percent in February (5.7 percent year over year), down from 0.6 percent in January, This is a key data point in any meaningful drop in inflation toward the Fed’s long-term target. So, the trend of slower inflation is present, it is just not yet where the Fed would like it to be: 2 percent.

Next, let’s turn to the consumer data. Consumer spending remains healthy, but recent numbers are somewhat conflicting. After a solid year of spending growth in 2022 of 3.2 percent, this year we have seen some softening and downward revisions for late last year. The National Retail Federation report indicated spending was up 1.1 percent in February versus a -0.2 percent decline in January (6.3 percent year over year). Both leap day and seasonal adjustments have added to the nuance of interpreting these numbers, but it appears there is no significant drop in consumer spending.

If we add in the March 14 data on producer prices, the strength in the economy continues to show upside surprises. The month-over-month increase to 0.6 percent (1.6 percent year over year) was healthy and above expectations.

Finally, while employment ticked up to 3.9 percent, according to the latest data from the Bureau of Labor Statistics, the numbers are still positive and remain low relative to history. This is the longest stretch of unemployment below 4 percent since the 1960s.

In sum, a healthy labor backdrop provides for healthy consumer spending that keeps the economy on positive footing.

The markets

Given the recent data on employment and inflation, which are sanguine, it seems the Fed has the ability to stay put (not raise or lower rates) at least in the near term, and the market has adjusted expectations accordingly. Prior to the March 20 Fed announcement that its target interest rates would not change, the 30-day Fed Funds futures were pricing in a 1 percent probability of a rate cut, down from 10 percent a month ago. Longer-term expectations have also come down. Even since the first week in March, future expectations for rate cuts are showing one less cut until January 2025. For fixed income markets, we would expect some continued volatility with yield being the driver of return for bond holders.

As for the stock market, valuations are still elevated, as they were coming into the year. Earnings results for the full-year 2023 are okay, if you just look at the aggregate numbers (see chart below). S&P 500^® earnings for full-year 2023 were 0.9 percent, with a lot of underlying variance (positives and negatives) among companies and sectors in the market. Much has been discussed with regards to the “Magnificent Seven,” including in our article, and given the earnings of the group, there has been good reason for the optimism, as the following graph shows.

But, as shown in the next graph, just a year ago, things looked very different, when expectations were for recession, lowering of interest rates and slower growth. The Magnificent Seven earnings were not robust, and energy was the biggest contributor to S&P 500^® earnings. Recency bias would suggest that recent data is the norm. In fact, expectations have changed quite a bit.

Impact of the Magnificent Seven on 2022 S&P 500® Earnings Growth

Source: FactSet

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A final note

Always a good thing to remember: History is a helpful guide for placing current events into context.