Q1 2024 Economic Update

Economic Growth (GDP) & Inflation

Throughout the first quarter of 2024, both the economy and labor market showcased remarkable resilience, surpassing market forecasts with ease.  US GDP soared at an annual rate of 3.4%, outpacing the projected 2% target, with Core CPI inching up to 3.8% year-over-year in March.  This robust economic performance, coupled with persistent inflation pressures, prompted a significant reassessment of Fed expectations. 

Initially, the market foresaw around six rate cuts for 2024, but by quarter-end, this estimate dwindled to three or four, with the first rate cut delayed from March to August.  This adjustment brought market expectations more in line with the Fed’s projections, aligning closely with a year-end Fed Fund’s rate of approximately 4.625%.  The Fed’s cautious stance, echoed by Jerome Powell, emphasized the need to await sustained inflation closer to their target before even considering rate cuts. 

As of mid-April, market sentiment further scaled back, anticipating only one to two cuts by year-end.  Market participants anticipating rapid declines in sort-term rates may find themselves disappointed, as the Fed maintains a hawkish stance, prolonging higher rates and money market fund yields. 

Moving forward into 2024, anticipated economic growth is expected to be more restrained, possibly transitioning towards a mildly recessionary state like that currently experienced in much of Europe.  Although interest rates may have ceased their ascent, they remain elevated and are beginning to exert greater pressure.     

Labor Market

In March, non-farm payroll employment saw a notable increase of 303,000 jobs, surpassing the average monthly gain of 231,000 observed over the previous 12 months.  Job growth was particularly strong in the healthcare, government, and construction sectors.  Other sectors, such as retail trade and other services, saw modest gains in employment.  Additionally, wages continue to rise.  The average hourly earnings for private-sector workers rose 0.3% in March, with a year-over-year increase of 4.1%.  Overall, these figures indicate continued strength in employment across a variety of sectors, contributing to the ongoing strength of the US economy. 

Here is a summary of the key metrics we follow:    

Retail Sales

Consumer spending, which accounts for over two-thirds of the US economy, continues to be strong.  Total Retail Sales in the 12 months through March were 2.8% above year-ago levels.  In March, consumer spending jumped 0.8% for a second straight month.  The spending figure underscored that even while the US economy slowed in the first three months of 2024, consumer demand remained healthy, suggesting that economic growth remains on track.  However, household are dipping into savings and may begin to find it increasingly challenging to sustain spending beyond their incomes.  A notable surge in credit card usage has led to a rise in delinquency rates, although the situation has not yet reached a critical stage indicative of recession.  Nonetheless, households will heavily depend on a robust job market and wage growth in the coming months.  

Construction

Annual non-residential construction in February was 20% above year-ago levels. However, the rate of growth is beginning to slow.  Recent Fed messaging signals that rates may remain higher for longer than previously indicated and this will act as a headwind to this sector.  Residential construction is currently trending 2.4% below year-ago levels.  However, low housing inventory and high demand are providing a tailwind, and we anticipate this will continue to support the residential construction sector. US Single-Unit Housing Starts are currently double digits above the year-ago levels on a quarterly basis.  Given Starts lead the macroeconomy and industrial sector by three to four quarters, we anticipate a recovery for US Industrial Production in 2025. 

Manufacturing 

US Total Manufacturing in the 12 months through March was 0.4% below the year-ago levels.  A mild decline in the near term is likely given the previous contraction in the housing market, which leads Manufacturing by roughly three quarters.  Growth will slow during 2024 and then mildly decline in 2025 due to tight lending and lower utilization of existing capacity.  On the positive side, the effects of nearshoring are mitigating some of the expected declines in the near term.        

Specific Items to Consider at the Macro Level are:   

Retail Sales:  

• Don’t let current headline news distract you as they tend to focus on things that have already happened.  Instead, stay focused on your business and be prepared for the economy to grow in 2025 and 2026.

• Expect the labor market to remain competitive for the coming years.  Ensure your wages and benefits are competitive in your industry and geographic region.   

• Focus on the future.  How can you enhance and communicate your competitive advantages? 

• Customers are likely to be less receptive to price increases this year given inflation rates.  Focus instead on implementing efficiencies in your business to maintain and grow your margins. 

Construction:  

• If your business trends closely with the Construction industry, prepare for slower growth this year and a potential decline in 2025.  Look to build a backlog, hold more cash, and focus on margins. 

• Does your company lead or lag construction spending?  Knowing this will allow you to better time capital investment spending.   

• Weigh the benefit of buying at lower prices and interest rates later this year versus targeting your timing to be align with end market demand. 

• Office remodeling or renovation of existing spaces is more likely to be an opportunity than building new structures.  Allocate your sales and marketing efforts accordingly. 

• Migration trends and zoning laws mean regional variations in the market.  In addition to the national outlook, factor in local market research when making business decisions. 

Manufacturing:  

• Attracting and retaining workers was found to be the biggest business challenge for 65% of manufacturers.  Prioritize strategies that will address the skills and applicant gap, especially as the acceleration of digital skills-based jobs continue.

• While it can be challenging to find the confidence to invest, we think it is important to prepare in advance for the next cyclical rising trend.  If you wait for stronger data, you may be ill prepared and behind to curve.

• What investments do you need to make to improve efficiencies, protect or gain market share, and take on a growing economy in 2025 and 2026?

• Interest rates will improve later in the year and into 2025.  Factor in the timing of when your planned improvements come online to take advantage of the recovering business cycle. 

• Orders are more likely to be canceled on the back side of the business cycle.  Use more information than just your backlog as you plan inventory decisions.   

• Focus on the future.  How can you improve margins as labor costs rise?