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Economic Update April 2024

Economic Update April 2024

April 22, 2024

At PalomarWealth, it is important that you are well-informed about what is happening in the markets. Here are a few of the key topics of conversation that deserve the most attention this month. If you have any questions or would like to continue the conversation, please reach out.

The road to a normal inflationary environment looks longer than it did before. The March Consumer Price Index (CPI) report showed that headline and core CPI both rose by 0.4% on a monthly basis, exceeding forecasts and marking the third month of 0.4% increase in core CPI1. The increases in headline and core CPI underscore persisting inflationary pressures and were primarily driven by housing and gasoline costs1. The Federal Reserve’s preferred inflation gauge, the personal consumption expenditures (PCE) price index, saw a year-over-year increase of 2.5% in March, indicating a moderating inflation pace2. However, there may be a good and bad news element to this since February’s consumer spending, particularly in services, was hotter than originally reported2. While moderating inflation is always welcome in this environment, the context was that February was higher than originally reported. This scenario, compounded by the ISM Manufacturing PMI's unexpected rise and increased input costs3, suggests a protracted journey back to normal inflation levels.

Additionally, the labor market dynamics further complicate the economic outlook. March witnessed a significant surge in job growth and a dip in the unemployment rate to 3.8%, reflecting the most substantial job growth in nearly a year4. The savings rate dropped to its lowest level since the end of 20224, suggesting an increased reliance on savings for spending among some consumers. The report also showed wages and salaries rose by 0.8%, the largest increase since early last year4, underscoring the nuanced picture of consumers’ financial health.

Headlines pointing to hot inflation continue to impact US consumer sentiment, which decreased more than expected in early April, with the University of Michigan sentiment index falling to 77.9 from 79.45. Inflation expectations for the next year rose to 3.1%, up from 2.9%, marking the highest expectation for the year, while five- to ten-year inflation expectations reached a five-month high of 3%5. Despite the rise in inflation expectations, consumers do not seem overly concerned about a resurgence of high inflation, according to the director of the survey6.

The Bottom Line: The US economy is navigating a complex environment marked by strong stock market performance, sticky inflation that occasionally shows signs of moderating, and a resilient labor market. The Federal Reserve's stance remains cautious, refraining from rate cuts amidst persistent inflation and robust job growth, pushing market expectations for the first rate cut to sometime after the Federal Reserve’s June policy meeting. On top of shaping the Federal Reserve’s interest rate policy decisions, the culmination of consumer spending, inflation trends, and labor market strength will also likely shape the direction of both inflation and market sentiment.

Sources:

  1. Bureau of Labor Statistics, https://www.bls.gov/news.release/cpi.nr0.htm
  2. Bureau of Economic Analysis, https://www.bea.gov/news/2024/personal-income-and-outlays-february-2024
  3. Institute of Supply Management, https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/pmi/march/
  4. Bureau of Labor Statistics, https://www.bls.gov/news.release/empsit.nr0.htm
  5. University of Michigan, http://www.sca.isr.umich.edu/
  6. Bloomberg News

 

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Index Benchmarks presented within this report may not reflect factors relevant for your portfolio or your unique risks, goals or investment objectives. Past performance of an index is not an indication or guarantee of future results. It is not possible to invest directly in an index.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

Institute for Supply Management (ISM) purchasing managers' index (PMI), is a monthly indicator of U.S. economic activity based on a survey of purchasing managers at more than 300 manufacturing firms. It is considered to be a key indicator of the state of the U.S. economy.

The PCE (Personal Consumption Expenditures) Price Index - A measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.

The Michigan Consumer Sentiment Index (MCSI) is a monthly survey of consumer confidence levels in the United States conducted by the University of Michigan.

The Bureau of Economic Analysis (BEA) is an agency of the Department of Commerce that produces economic accounts statistics that enable government and business decision-makers, researchers, and the American public to follow and understand the performance of the nation's economy. To do this, BEA collects source data, conducts research and analysis, develops and implements estimation methodologies, and disseminates statistics to the public.

The Bureau of Labor Statistics (BLS) is an agency of the United States Department of Labor. It is the principal fact-finding agency in the broad field of labor economics and statistics and serves as part of the U.S. Federal Statistical System. BLS collects, calculates, analyzes, and publishes data essential to the public, employers, researchers, and government organizations.