Monthly Economic Insights
Economic headwinds persist, but markets and sentiment remain resilient
With the first quarter of 2024 behind us, the U.S. economy still presents a mixed picture. Though persistent inflation, elevated interest rates, and now a modest GDP slowdown would generally be enough to warrant extreme caution, there are still signs of underlying optimism and strength in the markets.
Despite the challenging economic landscape marked by a 1.6% GDP growth rate—below the anticipated 2.4%—several sectors showed resilience, underscoring the economy's tenacity.
Yes, inflation has proven stubborn, with core inflation rates—excluding volatile food and energy prices—rising to 3.8% annually, surpassing expectations of 3.7% (but remaining on its monthly downward trajectory: 3.8% vs 3.8%, 3.9%, 3.9%, 4.0%, 4.0%, 4.1%, 4.3%, 4.7%). This suggests that price pressures remained strong into March, complicating the Fed's path to potentially lower interest rates, but they’ve not been taken off the table entirely for the year. And if you needed more tangible proof of the impact of elevated inflation rates, look no further than the U.S. Postal Service’s planned rate hike of first-class postage from 68 cents to 73 cents, an 8% increase expected to take effect in July.
The (somewhat expected) slowdown in GDP growth primarily resulted from reduced spending on durable goods like cars and gasoline and a decline in business investment (i.e. inventories). This trend reflects the broader impact of high interest rates and consumer caution in response to inflation. But it’s still positive economic growth that keeps us out of recession territory, characterized by two consecutive negative quarters.
Despite these challenges, there are clear indicators of economic resilience. Employment has continued to grow, exceeding expectations, buoyed by solid hiring across various sectors. Furthermore, consumer spending has shown vitality, particularly in the services sector, which continues to expand, driven by spending on healthcare, financial services and insurance.
Business optimism has also been notable, particularly in industries like automotive and defense. General Motors, for example, reported robust demand for trucks and SUVs, leading to an upgrade in its profit forecasts. Similarly, Lockheed Martin has seen increased production to meet the needs of ongoing conflicts, illustrating the defense sector's growth.
Bottom Line: While the U.S. economy faces challenges from persistent inflation and a slowdown in GDP growth, the underlying strengths in employment, consumer spending, and business optimism provide a solid foundation for ongoing economic resilience. The path forward will undoubtedly be complicated, but prevailing market expectations for progress and new growth remain positive.
— Marcus Scott, CFA, CFP®, Chief Investment Officer (CIO) for Country Club Trust Company
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