Economic Update: March 10, 2025

Growth

The U.S. economy expanded at a healthy 2.3% q/q saar during the fourth quarter, bringing real economic growth to 2.8% in 2024. Consumer spending continued to power the economy forward, growing at an exceptional 4.2%, while government spending moderated. Business fixed investment turned negative due to declines in equipment and structures spending while residential investment rose after lagging for two quarters. Elsewhere, inventories were a large drag on economic activity. While policy uncertainty remains, economic momentum appears solid.

Jobs

The February Jobs report showed a labor market that still looks relatively healthy, although some of the details were soft. Nonfarm payrolls rose by 151k, below consensus expectations. Revisions removed just 2k jobs from the prior two months, bringing the three-month moving average of payroll gains down to a still strong 200k. Across sectors, services (+106k) remained the key contributor, although goods producing sector employment (+34k) rose at its fastest pace since 2023. Government employment rose modestly, although federal government employment fell 10k, likely due to the federal hiring freeze. Even as labor force participation fell, the unemployment rate ticked up to 4.1%, while wage growth eased to 0.3% m/m and 4% y/y. Despite some weakness, this report showed a labor market that has remained resilient in the face of uncertainty.

NEW THIS WEEK

Profits

The 4Q24 earnings season has come to a close. Pro forma EPS came in at $65.77, representing growth of 18.4% y/y and 4.7% q/q. Looking at the three main sources of EPS growth, sales, margins and shares contributed 5.8, 13.6 and -1.0 percentage points, respectively. Earnings continue to broaden out, with the S&P 500 ex-Magnificent 7 earnings rising 15% y/y vs. 31% for the Magnificent 7. Results were solid with 76% of companies beating on earnings and 63% beating on revenue, in-line with 10-year averages. As GDP growth slows and y/y comparisons get tougher, companies’ ability to defend their margins should be an increasingly important driver of earnings growth.

Inflation

The January CPI report showed the headline figure increasing by 0.5% m/m (3.0% y/y), surpassing consensus by 20bps, while core CPI rose 0.4% (3.3%). Core inflation has sustained a 3.3% annual rate for five of the past six months. Unlike previous months, core goods were not a detractor, and energy prices continued to climb, rising 1.1%. This report was a hawkish surprise, and prices could become more volatile in coming months as tariff hikes may begin to flow through the data. Similarly, headline and core PCE rose by 2.5% y/y and 2.6% y/y, respectively. While inflation is expected to eventually return to 2%, there are growing concerns that it may take longer, especially given the current high pace of growth and policy risks.

Rates

As expected, the FOMC decided to leave the federal funds rate unchanged at 4.25%-4.50% during its first meeting of 2025, ending a three-meeting streak of rate cuts. Changes to the statement language tilted modestly hawkish although Chair Powell described the changes as tweaks intended to “clean up” the language rather than more meaningful signals. With solid economic activity, a steady labor market, and inflation moving higher in recent months, there were few reasons to ease policy further. Moreover, with uncertainty around tariffs and fiscal policy continuing to cloud the outlook, the Committee is stressing patience and will likely remain on pause for a while.

Risks

• Geopolitical tensions and policy uncertainty may heighten market volatility.
• A slow-moving economy is more vulnerable to any kind of shock.
• Moderating economic growth could weigh on earnings, leaving markets vulnerable at stretched valuations.

Investment Themes

• Fixed income offers attractive levels of income and protection against an economic downturn.
• Broadening profit growth should continue to support a more inclusive stock market rally.
• Powerful structural and cyclical tailwinds should support select international markets.

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

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Originally Posted March 10, 2025 – Economic Update

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