Capital markets perspective: Keep on keeping on…

Capital markets perspective: Keep on keeping on… 


Given how markets of late haven’t been swayed by GDP releases, it would probably be incorrect to give credit to Thursday’s better-than-expected read on fourth-quarter GDP for generating last week’s mostly modest gains for equities (which nonetheless included a few more new all-time highs). Instead, last week’s equity market performance looks more like simple drift: the tendency of markets to float in one direction or another in the absence of anything more definitive or obvious to set their direction. 

But that doesn’t mean we should ignore Thursday’s GDP report altogether, if for no other reason than it at least temporarily settled the question of whether the U.S. economy is tipping into a recession. For the record, the U.S. economy expanded 3.3% during the final three months of 2023 – quite a bit more robust than economists expected and represented the sixth consecutive quarter of growth,1 thereby challenging yet again expectations that the economy was about to slip into reverse.

The star of Thursday’s GDP release was the U.S. consumer. Personal consumption expenditures represented 1.9% of that 3.3% growth, or just under 60%. The U.S. is what economists call a “consumption-led economy,” where growth is largely determined by how spendy we are as a society rather than factors like industrial output, foreign trade or investment. 

That 60% number also isn’t too far out-of-line with historical norms. Regardless, it still puts a heavy burden on the consumer to continue onward if the U.S. economy hopes to keep expanding this year – something that’s especially true given that other contributing components like government spending and net trade – which have arguably carried a bigger burden with respect to GDP growth than might ordinarily be expected.

But those two line items inside the GDP report are perhaps returning to trend, something they may have in common with consumer spending. But for now, at least, it looks like the concern over consumer spending may still be somewhat premature. To wit, last week’s income-and-outlays report showed personal spending growing at 0.7% in December – more than twice as fast as personal income – for the second month in a row.2 Hence their strong positive contribution to fourth-quarter GDP, as just described. 

Naturally, ways for consumers to grow their spending faster than their incomes are expanding is to rely on credit cards to finance consumption or draw down personal savings below advisable levels. The national accounts framework that spits out GDP growth figures doesn’t consider that at all. I have my doubts about the sustainability of the trends, especially with credit card interest rates in the 20s and savings rates now below pre-COVID averages. But I may still be overlooking whatever has kept the consumer – and by extension, the entire U.S. economy – keeping on. 

Meanwhile, conditions in the manufacturing sector continue to erode, according to the Federal Reserve’s regional manufacturing reports. Last week brought us updates from the Richmond and Kansas City branches of the Fed, who joined New York and Philadelphia earlier this month by reporting much deeper-than-expected declines among their respective regions’ manufacturing firms.3,4 Important mentions this week included word that manufacturing employment “fell notably” in Richmond while manufacturers in the Kansas Fed’s district saw input prices move up “sharply,” even as prices for goods on their way out of the factory are moderating. 

The only immutable law in economics is that it’s possible to find data to disagree with any view, no matter how strongly held. For example, this week’s counterpoint came from the flash PMI report released by S&P Global on Wednesday.5 The S&P’s manufacturing PMIs abruptly turned up toward neutral after spending the last 15 months below water. We’ll get another update of the S&P PMIs this week, but for now we’ll take the return to neutral for U.S. manufacturing as good news on the margin, even if it’s upsetting to our story. 

So again, we’re left with an economy that is either on the verge of contracting in a meaningful way or one that is still clicking along just fine. For those looking for a tiebreaker, consider that as of last week the Conference Board’s Index of Leading Economic Indicators (LEI) and the Chicago Fed’s National Activity Index (CFNAI) are both still signaling weakness, if not outright recession.5,6 In the case of the LEIs, the folks who compile the index have been on recession watch for the last 21 months. Things are a little more ambiguous for the CFNAI, but both the model’s diffusion index and its moving average – both historically reliable at predicting downturns – are inching closer and closer to the LEI’s way of thinking. 

Finally, a quick comment on earnings. Given that we’re now ankle-deep in earnings season, I’d ordinarily attempt to start a commentary like this one by trying to offer at least some perspective on last week’s results. But like the macro data detailed above, there’s a little something for every point of view wrapped up inside fourth-quarter earnings. Constructive on the consumer? You can point to United Airlines’ relatively upbeat guidance for full-year 2024 as supporting evidence. On the other hand, if you’re worried about corporate margins and slowing demand, look no further than 3M and Intel, both of which guided the other direction (or rail operator Union Pacific, which didn’t provide a clear outlook in either direction). It’s still early innings. But from where I sit, the bottom line is that it’s hard to pull consistent themes out of earnings or guidance, leaving one word to describe earnings season thus far: sloppy.  

What to watch this week 

Earnings season continues to ramp this week, with results expected from more than half the Magnificent Seven heavyweights including Microsoft, Alphabet/Google, Apple and Amazon due between now and Thursday. It’s peak tech and peak energy, with more market cap expected in those sectors this week than any other week on the current calendar. There will also be plenty of opportunities to measure the strength and endurance of the U.S. consumer, whether in the form of results and guidance from General Motors, package shipper UPS or Royal Caribbean or any one of the dozens of consumer-facing companies scheduled to report this week. Finally, Exxon-Mobil and Chevron are due on Friday. 

It usually takes a lot to push that kind of schedule out of the spotlight, but this week’s macro does exactly that. The biggest nudge comes from Wednesday’s decision on rates by the Federal Reserve. The decision itself is hardly controversial: The overwhelming consensus is that the Fed will hold the line on Wednesday. But far less settled is what the Fed will do in March and beyond. After being as high as 90% during the week after Christmas, futures-implied odds of a March cut are now close to 50/50, and traders are still penciling in as many as 5-8 cuts by December. 

If that weren’t enough, we also have non-farm payrolls and everything that comes with it. The U.S. labor market is still too tight for the Fed to fully drop its guard, something that Fed Chair Jerome Powell will likely discuss in his press conference. On the other hand, if some of the cracks start to widen, it’s not hard to imagine the labor market situation worsening rapidly if employers lay off workers and enact hiring freezes amid continued economic uncertainty. For context surrounding that, look to Tuesday’s JOLTS for an indication of future hiring plans and Thursday’s layoff report from Challenger, Gray & Christmas. 

Even this week’s odds-and-ends are potentially important. Let’s start with the consumer: We’ll get two separate reads on confidence, first from the Conference Board (Tuesday) and later from the University of Michigan. After plumbing unexplored depths earlier this cycle, consumers have actually begun to feel a little better about their lot – owing largely to a more sanguine outlook on inflation. But consumer surveys are often influenced by politics. With an election cycle on tap for 2024, it’s hard to rule anything out when evaluating the consumer’s state of mind. 

Last week’s surprise improvement in S&P’s manufacturing flash PMIs – which flew directly in the face of the weakening of the various regional Fed manufacturing surveys – made Thursday’s PMI update (and similar-in-concept ISM release from the Institute for Supply Management) suddenly more relevant. The ISMs and PMIs sometimes disagree with one another, and it’s not unheard of for S&P’s final PMIs to differ somewhat from its mid-month estimate. The few remaining forecasts for near-term recession likely rely at least in part on the premise that the manufacturing sector is still in a slump, so any data that consistently says otherwise may cause a rethink for the remaining holdouts to the soft-landing narrative. 

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Tom Nun, CFA


Tom Nun, CFA, Portfolio Strategist at Empower, works alongside teams overseeing portfolio construction, advice solutions, portfolio management, and investment products and consulting.

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