**Mastering the Art of Economic Balance**
In the world of gymnastics, “sticking the landing” is a crucial aspect of a successful routine. Similarly, for central banks, navigating an economic expansion without stumbling is a rare feat. However, recent developments suggest that the Federal Reserve may be poised to achieve this elusive goal.
Three key factors have contributed to this optimistic outlook: upward revisions to national economic accounts, China’s aggressive policy pivot, and the start of a rate-cutting cycle. The revised data reveals a healthier consumer sector, with stronger consumption, personal income, and corporate profits. This trend is expected to continue, with the Atlanta Fed’s GDPNow estimate for third-quarter 2024 economic growth projected at a robust 3.1%.
The narrative that the U.S. consumer was on shaky ground has been debunked by the data, which shows household net worth soaring by $47 trillion since the pandemic’s onset. Personal incomes have grown by 5.6% over the past year, and the savings rate has been revised up to 4.8%, in line with historic norms. This suggests that consumers are not as stretched as previously believed.
Corporate America is also looking healthy, with profit margins revised higher. This bodes well for the continuation of the U.S. economic expansion and the equity market. Historically, profits have plateaued over a year before recessions, but the recent past appears different, with corporate profits expanding at a healthy clip.
The Chinese government’s policy shift is another significant development. After years of trying to cool its property market, China has announced a series of monetary stimulus measures and a fiscal package. This dramatic U-turn is expected to provide a positive impulse for the global economy and U.S. multinationals operating in China.
The Federal Reserve’s rate-cutting cycle, which began last month, is the third key factor supporting a soft landing. As supply chains have healed and the economy has normalized from the pandemic shock, inflation has moved down in a durable manner. This has opened the door for the Fed to begin normalizing policy toward a more neutral stance.
While the pace and ultimate destination of monetary policy remain uncertain, the maximum employment half of the Fed’s dual mandate appears to be driving the normalization process. The labor market has shown some recent softness, which has refocused the Fed’s attention and jumpstarted the normalization process.
Historically, Fed cuts have come as the economy was already losing momentum. However, this time around, the economy continues to defy expectations of a slowdown, and the labor market is showing signs of resilience. Markets appear to have sniffed out the coming shift in Fed policy, with a leadership rotation beginning to unfold in mid-July.
As the economy accelerates, earnings growth is likely to become less scarce, and broader market participation will increase. We believe that the recent leadership rotation is a preview of what should continue to play out in the coming quarters. With upward revisions showing a healthier consumer and corporate America, an aggressive Chinese policy pivot, and the commencement of a rate-cutting cycle, the Fed is well-positioned to “stick the landing” and extend the economic expansion.
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