U.S. Economic Growth Slows. Is There Cause For Concern?

2024-04-25

BeiChen Lin, CFA, CPA

BeiChen Lin, CFA, CPA

Director, Head of Canadian Strategy




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Market insights
welcome to Market weekend review for the weekending April 26 2024 I'm Sophie an and I'm joined today by my colleague ban Linn investment strategist for Russell investment hi B Chan how are you pretty good and yourself very good so I am looking forward to getting the rundown um from you on your perspective on some of the highlights and that we're making the news and the headlines this week um I'm hoping in particular to focus on GDP on yields and on earnings sound good sure so starting at the top ban with GDP GDP recently came in this morning a little bit weaker than expected what is what are you seeing beyond the headlines there should we worry or are you still feeling pretty calm about the situation yeah when the data first came out this morning markets seem to interpret it as more of the low lights rather than the highlights you're right GDP did Miss expectation came in at 6% for the first quarter as opposed to 2.2% annualized consensus expectations but when we unpack sort of where that GDP Miss came from a big reason why GDP was a little bit weaker this time was because there was an increase in Imports and imports tend to be something that's very very hard to forecast it's very volatile and the way US GDP works is we actually get three estimates of GDP for each quarter and sometimes what you end up seeing is that in subsequent estimates they might even revise that import data and overall 1.6% still it's it's nothing to complain about I wouldn't be too worried about it the other thing is when it comes to looking at economic data in addition to looking at the overall GDP number sometimes it's better to look at other measures of consumer demand so for example looking at personal consumption expenditures within GDP and when you look at that data point yes consumer spending the rate at which consumer spending increased did moderate somewhat from the previous quarter but it was still a healthy increase in consumer spending overall so I'm not too too worried about the data coming in so far and so that was focused on the US we have numbers coming out for GDP around the world next week as well what do you anticipating there and which ones are you watching yeah so next week we'll get data for Europe as well as for Canada and it's interesting because if you think back to 2023 which feels like a long time ago but in 2023 the story was us had very resilient and robust economics growth whereas Europe and Canada the economic growth was a little bit more subdued one of the other data points we got this week was something called flash pmis these are basically leading economic indicators that give us an early read on how economic growth is going to be and when we look at the flash pmis for Europe we're actually seeing some improving signs in terms of where economic growth might be headed that coupled with some of the positive data we've seen about European Bank lending and credit activity suggest that perhaps the GDP data might start to improve a little bit in the next week once we get the results so I'm excited to see where that ends up yeah so am I thank you moving on to yields we had a bit of an disappointing inflation number come out uh that 10year treasury yields responded to and went up what's your read on that what is the value are we still in the good value are we it's expensive where where are we at with 10e treasury yields yeah sure so the inflation news we got today was for the first quarter this is the core PC inflation for the first quarter and this is important because it's one of the measures that the FED really likes looking at and it did come in slightly harder than consensus expectation so it came in at 3.7% annualized instead of 3.4% annualized and the market was a little bit frustrated about that because ultimately they wanted to see good inflation progress so that we can get into a situation where the Federal Reserve can cut rates but if you think about it this isn't really a new story right we knew that the road to disinflation was going to be a challenging one and we had seen earlier three months of hot slightly hotter than expected CPI print so it's not entirely surprising that core pce came in somewhat hotter than expected certainly it's not necessarily helpful but when I think about the Outlook in the road ahead for 2024 I think it's still reasonable to expect that overall inflation rates should continue to moderate for the rest of the year it's not going to be a linear path downwards but in general I think inflation will get closer and closer to the fed's Target and I still think the Federal Reserve will be able to cut rates this year timing is going to depend on the data but I do think they're in a position to be able to cut rates and finally give homeowners everywhere a side of relief I'm sure a lot of people will be relieved with that um earnings we sort of partway through earning season about half of companies now have reported what is your take on on that is it looking good is it looking a little disappointing where where are you seeing the the sort of true story in the red thread yeah so it's sort of a mixed bag there on the one hand we had some pretty decent results out of the mega cap tech companies like Google for example or like Microsoft on the other hand when you look at earnings for the s&p500 as a whole though earnings growth is still Contracting slightly around maybe 2 to 3% year-over-year the S&P 500 as a whole but bottom line it's not too bad of a picture I think overall companies are still in good shape especially when you look at corporate balance sheets they still tend to be relatively healthy so I'm not too too concerned just yet terrific well thank you so much ban unfortunately that's all we have time for today but thanks so much for joining us and for your insights and thank you for joining us we'll be back again soon

Executive summary:

  • U.S. GDP slowed to a 1.6% clip during the first quarter of 2024
  • The Fed's preferred inflation gauge came in slightly hotter than expected in the first quarter
  • So far, the results from first-quarter earnings season in the U.S. are mixed

On the latest edition of Market Week in Review, Investment Strategist BeiChen Lin and Sophie Antal-Gilbert, Head of AIS Portfolio & Business Consulting, discussed the U.S. first-quarter GDP (gross domestic product) reading. They also reviewed the latest U.S. inflation data and provided an update on U.S. first-quarter earnings season.

Q1 economic growth misses expectations in the U.S.

Antal-Gilbert and Lin opened the discussion with a look at first-quarter GDP in the U.S., which Lin noted came in weaker than expected at an annualized rate of 1.6%. This was lower than both consensus expectations—which called for a 2.2% increase—and the previous quarter’s gain of 3.4%, Lin observed.

He stressed, however, that the reading isn’t too concerning, as a key reason why GDP missed expectations was because of an increase in imports. “Imports tend to be very, very hard to forecast, as they’re often pretty volatile,” Lin explained, noting that the import numbers could be revised in future Q1 GDP estimates. Moreover, at the end of the day, a 1.6% growth rate is still decent, he said.

Lin added that beyond the headline GDP number, there are other measures of consumer demand in the report that can also provide clues on how the economy is trending. One of these measures, consumer spending, rose by 2.5% during the first quarter, he said. “Even though the 2.5% increase is a moderation from the fourth quarter, it still represents a healthy increase in consumer spending overall,” Lin remarked.

Next, Antal-Gilbert asked Lin what his expectations are for European first-quarter growth numbers, which will be published the week of April 29. Lin said that based on recently released flash PMI (purchasing managers’ index) surveys, which often serve as leading economic indicators, he thinks the GDP numbers in the eurozone might show some improvement.

“The PMI readings, coupled with some positive data around European bank lending and credit activity, suggest that growth may start to rebound a little bit, which would be a welcome change from 2023,” Lin stated.

U.S. inflation comes in hotter than expected

The conversation shifted to U.S. inflation, with Lin noting that the core PCE (personal consumption expenditures) price index—the Fed’s preferred inflation gauge—came in slightly hotter than expected for the first quarter. “Analysts were expecting a 3.4% increase, but core prices actually rose by 3.7%,” he remarked, noting that the report helped spark a selloff in the U.S. bond market.

While the PCE inflation number was disappointing, Lin stressed it wasn’t anything new. Case-in-point: the last three CPI (consumer price index) reports have all been somewhat hotter than anticipated, he said. “While the PCE number certainly isn’t helpful, I still think it’s reasonable to expect that U.S. inflation rates will continue to moderate the rest of the year. We’ve always known that the road to disinflation was going to be a challenging one, and that the path to achieving the Fed’s 2% goal wouldn’t be linear, but I do think inflation will move closer and closer to the central bank’s target,” Lin stated.

He finished by noting that he believes the Fed will still be able to cut rates later this year, emphasizing that the timing of the first rate cut will be highly data-dependent.

Q1 earnings season update

Antal-Gilbert and Lin concluded with an update on U.S. first-quarter earnings season, which Antal-Gilbert noted is about halfway complete. Lin characterized the results so far as a mixed bag, saying that on the one hand, there’s been pretty decent results from U.S. mega cap companies like Google and Microsoft. On the other hand, however, earnings growth from S&P 500 companies as a whole is still contracting slightly on a year-over-year basis, he said.

“Overall, first-quarter earnings season isn’t painting too bad of a picture. Companies are generally still in good shape, with corporate balance sheets still looking relatively healthy,” Lin remarked, adding that he’s not too concerned with the results so far.

 

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