Economic Outlook: A Tale of Two Halves
As we approach the end of 2024, the economy is sending mixed signals. On one hand, the third-quarter GDP growth of 2.8% suggests a normally growing economy heading into year-end. Consumer spending, particularly on durable goods, and federal government spending are driving growth. On the other hand, the housing sector remains sluggish, and industrial production has taken a hit due to the Boeing strike and natural disasters.
Consumers Adapt to Higher Prices
Despite initial sticker shock, consumers are adapting to structurally higher prices. Personal consumption expenditures (PCE) have bounced back in the second and third quarters, suggesting that consumers are willing to spend on goods at stable or lower prices. However, services inflation remains elevated, driven by rent equivalent and insurance costs.
Interest Rates and Inflation
The Fed’s decision to cut interest rates by 50 basis points in September acknowledges the slowing job growth and healthy economic conditions. The core PCE price index, the Fed’s preferred inflation gauge, rose 0.3% in September and was up 2.7% year over year. While inflation is still above the Fed’s 2% target, it’s trending downward.
Earnings and Stocks
Third-quarter earnings have been mixed, with some sectors posting negative earnings growth. However, Communication Services, Technology, Healthcare, and Consumer Discretionary have shown strong earnings growth. The S&P 500 has delivered a total return of 21.5% year-to-date, despite a rough finish to October.
Outlook and Risks
Argus expects GDP growth of 2.5% for all of 2024, with a forecast of 2.0% GDP growth in 2025. We believe the U.S. economy can avoid recession in 2024 and 2025. However, risks remain, including earnings growth failing to meet market targets and/or inflation or interest rates ticking higher.
Fixed Income and Rates
Argus expects short-term yields to move lower from current levels, while long yields are expected to widen their relative premium to short yields. We anticipate two additional quarter-point rate cuts in 2024 and two or three additional quarter-point cuts in 2025, depending on the state of the economy.
Stock-Bond Barometer
According to Argus President John Eade, our stock-bond barometer is near equilibrium, making stocks appear favorable at current levels. However, elevated valuations remain a risk if earnings growth fails to meet market targets or inflation/interest rates rise.
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