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Economic Update: December 11, 2023

Posted December 11, 2023 at 10:15 am
J.P. Morgan Asset Management

Growth

The U.S. economy grew at an impressive 5.2% annualized rate in 3Q23, a sharp acceleration compared to last quarter. Many of the underlying details looked strong, as consumption, private inventories, single-family homebuilding and government spending all contributed to growth. On the other hand, weaker equipment spending and a modestly widening trade deficit helped pare back gains. While the continued resilience of the U.S. economy is welcomed, this strength will be difficult to maintain. In the months ahead, a weaker consumer, tighter financial conditions and slower business spending should weigh on growth.

Jobs

The November Jobs report showed healthy job gains, but provided further evidence that the labor market is coming more into balance. Nonfarm payrolls rose by 199K, beating expectations of 180K but below this year’s average. Importantly, auto workers returning from strike provided a 30K boost to this figure, while revisions removed 35K in gains from the prior two months. In the household survey, the unemployment rate slipped to 3.7% and 532K new workers joined the labor force. Wage growth came in slightly hotter than expected, rising 0.4% m/m and 4.0% y/y, but continues on an overall slide. Overall, this report should have little impact on Fed policy at the December meeting.

Profits

The 3Q23 earnings season is now behind us. Our final estimate for operating earnings per share (EPS) is $52.23, which represents y/y earnings growth of 3.7% and a q/q decline of 4.8%. Revenue growth has been the largest contributor to earnings, adding 4.0%, while contracting margins pared back gains. Across sectors, energy has been the largest detractor, while consumer discretionary has been the largest contributor. Management commentary was relatively downbeat, painting a picture of a more challenged business environment ahead.

Inflation

The October CPI report was cooler than expected, providing further confirmation that disinflation is well underway. Headline CPI was unchanged on the month and up 3.2% y/y, while Core CPI rose by 0.2% m/m and 4.0% y/y. In the details, energy was a big detractor with gas prices down 5% while shelter continues to account for the majority of overall inflation. Core goods inflation was very soft with new and used car prices falling. Services ex-shelter and energy remains elevated due to outsized increases in car insurance, while medical services will recede as a driver of disinflation in the coming year. Similarly, PCE inflation showed continued progress, with the headline and core measures easing to 3.0% y/y and 3.5% y/y, respectively. Overall, continued disinflation progress should keep the Fed on pause and keep yields off their highs.

Rates

The FOMC voted to leave the federal funds rate unchanged at a range of 5.25% to 5.50% for the second consecutive meeting, showing a willingness to be patient and proceed with caution. The Fed will continue to maintain its data-dependent stance from here, although Fed Chair Powell did acknowledge that risks are now more “two-sided.” That said, he made it clear that economic and labor market conditions will need to ease further to convince them that inflation is heading back to target. Moreover, the committee is not discussing rate cuts, keeping the “higher for longer” mantra intact.

Risks

  • Rates may stay higher for longer, presenting challenges to both stocks and bonds.
  • A slow-moving economy is highly vulnerable to any kind of shock.
  • Elevated valuations in some parts of the market may lead to volatility and market corrections.

Investment Themes

  • After 2022's sell-off, fixed income now offers higher yield and more protection against a market correction or economic downturn.
  • Solid profit growth and reasonable valuations will be crucial in determining equity winners in a higher rate environment.
  • Long-term growth prospects, a falling dollar and wide valuation discounts support international equities.

This weekly update provides a snapshot of changes in the economy and markets and their implications for investors.

Originally Posted December 11, 2023 – Economic Update

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Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors.

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