The Economy is Off to a Sluggish Start in 2024

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Weekly Market Recap for February 16, 2024

The initial data releases for January paint a picture of a sluggish start to 2024.

First, the U.S. Bureau of Labor Statistics reported updated Producer Price Index (PPI) figures. For January, the Producer Price Index (PPI) showed a 0.3% monthly advance versus a 0.2% contraction for December. This report follows the recently released Consumer Price Index (CPI) report, which investors also found disappointing. Together, these figures renewed concerns that the Federal Reserve may have more work to do to contain inflation.

Secondly, the U.S. Census Bureau published its new housing construction figures for 1.33 million in January, down from 1.46 million in December. Building permit applications came in at 1.47 million versus 1.50 million previously.

Finally, the University of Michigan will publish the February preliminary figures for the monthly consumer sentiment survey next week. An initial reading of 80.0 is expected, up marginally from the final 79.0 level reached in January. The survey has shown improvement since hitting a low of 61.3 in November of last year.

There remains a reasonable degree of economic and political uncertainty this year. The stronger-than-expected CPI and PPI numbers and disappointing retail sales in January have most likely restrained further gains in US companies’ share prices. The current corporate earnings season is winding down, and the results have been sufficient to shore up stock price valuations so far. Our take is that the growth rate is slowing as the lagged effects of tightening work through the system. However, without a sharp deceleration in the data, the U.S. appears unlikely to enter a recession in 1H 2024.

S&P 500 Index

S&P 500 Technical Composite (Last 24 Months)

Inflation Rose More Than Expected in January

The Consumer Price Index rose by +0.3% in January (vs the +0.2% estimate) after increasing +0.2% in December. Over the last 12 months, CPI rose by +3.1%, a slowdown from December’s +3.4% y/y reading. While the year-over-year reading fell, investors focused on the hotter-than-expected monthly reading, which suggested that getting back to 2% may be more difficult than previously thought. Core CPI, which excludes energy and food, rose +3.9% y/y, the same as in December. On a monthly basis, Core CPI rose by +0.4% m/m in January, up from the +0.3% rise in December. Notably, the increase was led by categories that the market and economists expected to start trending lower. The Shelter index contributed over two-thirds of the monthly increase, and the indexes for motor vehicle insurance and medical care continued to rise. In addition, gas prices have risen steadily over the past month (Figure 5). Another worrying metric is the Fed’s ‘super core inflation’ measure, which tracks the cost of services minus housing and energy, which has risen by +0.8% since April 2022.

January 2024 CPI Report By Category

Gasoline Prices Sit Near October 2023 Levels

Market Prices Out More Interest Rate Cuts

The January CPI report threw more cold water on the market's rate cut forecast. Since the end of 2023, futures markets have pushed the first rate cut back from March to early summer and cut the projected number of rate cuts in half from 6 to 3. This brings the market's forecast in line with the Fed's Summary of Economic Projections, which forecasts a total of -0.75% worth of cuts in 2024. Our view entering 2024 was that the market's rate cut forecast was too aggressive. After the CPI report, we view the market's rate cut forecast as more realistic. We expect between -0.75% and -1.00% worth of cuts in 2024.

Fed Funds Futures - Current vs 12/31/2023

January Retail Sales Decline

In January, US retail sales saw a notable decline, falling -0.8% from the prior month (vs. the -0.1% estimate). It declined from December’s downwardly revised +0.4% reading and was the most significant drop since March 2023. Control group retail sales, which exclude items such as food service, autos, gas, and building materials, fell by -0.4 %, the most since March 2023. The decline was widespread, with nine out of thirteen categories experiencing decreases, and it suggests a pause in consumer spending following a strong holiday shopping season. It was a weak report, but we aren’t ready to call it a fundamental shift in consumer spending. Consumer spending may not be as robust as in recent years, but the consumer continues to be supported by several themes. Wages continue to grow, the stock market is trading near an all-time high, home prices are rising again, and unemployment remains low.

Retail Sales Unexpectedly Drop in January

Industrial Production Declines

Industrial production fell by 0.1% in January after a flat December reading. The major industry groups posted mixed results. Mining output declined by -2.3% due to a weather-related drop in oil and gas extraction and a decline in coal production. In comparison, utility output surged +6.0% as demand for heating surged due to frigid temperatures. Manufacturing output fell by 0.5%, with durable goods rising +0.1% after a 0.1% drop in December. The manufacturing output of nondurable goods, including petroleum and coal products, chemicals, plastics, and rubber products, declined with widespread disruptions due to cold weather. Weather played a role in the decline of industrial production, but the continued declines in construction supplies and business equipment are slightly concerning. Those declines suggest that increased borrowing costs and tighter financial conditions are becoming headwinds for the manufacturing sector.

Industrial Production Declines in January

Slow Start to 2024

The initial data releases for January paint a picture of a sluggish start to 2024. While job growth showed resilience, there were concerns about consumer spending and industrial output. This suggests a probable slowdown in Q1 2024 GDP growth compared to the robust expansion witnessed in the final two quarters of 2023. According to the Atlanta Fed’s GDPNow model, Q1 GDP growth is forecasted at +2.9%, although this projection is subject to adjustment as more data becomes available. Our take is that the growth rate is slowing as the lagged effects of tightening work through the system. However, without a sharp deceleration in the data, the U.S. appears unlikely to enter a recession in 1H 2024.

Important Disclosures
This material is provided for general and educational purposes only and is not investment advice. Your investments should correspond to your financial needs, goals, and risk tolerance. Please consult an investment professional before making any investment or financial decisions or purchasing any financial, securities, or investment-related service or product, including any investment product or service described in these materials.

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