"Q3 2024 - Out of the Cornfield, and into Destiny"

GROSS DOMESTIC PRODUCT

• Aggregate GDP grew at an annualized pace of 2.8% in Q3 2024, which is in-line with last quarter’s growth rate of 3.0% and marks an acceleration from Q1’s growth rate of 1.6%. Over the past 12 months, GDP has averaged a quarterly growth rate of 2.7%, which is moderately above what many believe to be the long-term trend growth of the economy at 2.0%^1,2
  • Consumption
    • Consumer Spending, by far the largest part of the economy, grew at a very robust pace in Q3 coming in at a level of 3.7%. Q3’s Consumer Spending growth represents the second consecutive quarter of accelerating spending by the consumer and is also the highest rate of growth recorded in this category in the last 6 quarters. Spending in the Goods category was also very robust in the quarter, coming in at a growth rate of 6.0% – which also marked an acceleration from the past 2 quarters’ readings. Within the Goods Categorey, Durable Goods spending advanced at an elevated pace of 8.1% – its highest reading in the past 6 quarters. Areas within the Durable Goods sub-category which stood out were Motor Vehicles (grew at a pace of 9.8% & highest reading in 6 quarters) as well as Household Furnishings & Equipment (grew at a pace of 8.7% – highest reading in the last 14 quarters). The Non-Durable Goods sub-category also experienced robust growth in the quarter, growing by 4.9% in Q3 – the highest rate of growth in this sub-category over the last 12 quarters. Growth in this subcategory was positive across the board, but was primarily lead by the Other Non-Durable Goods line item which grew at a pace of 7.9% (highest reading in 13 quarters). Additionally, consumer spending on Food & Beverages (Groceries) grew at a pace of 3.0% (highest in last 13 quarters – and well above the -0.7% average over this time). Consumer spending on Clothing & Footwear grew at a pace of 3.8% which marked an acceleration over the past 2 quarters’ readings. Consumer spending in the Services category also remained positive in Q3, coming in at a pace of 2.6% with every single sub-category recording a positive growth rate in the quarter. Within the Services category, Food Service & Accommodations broke a 2 consecutive quarter contractionary streak by recording a growth rate of 3.9%. Healthcare spending was steady in the quarter at a pace of 2.7%, and Transportation Services came in at a rate of 4.5%. Q3 marked the 4^th time in the last 5 quarters where positive growth was recorded across both the Goods and Services cateogies^1,2
  • Investment
    • The Private Investment component of GDP grew at a subdued pace of just 0.2% in Q3. Growth was seen in the Fixed Investment category, while Inventory spending produced a contractionary contribution to the component’s growth figure. Fixed Investment grew at a pace of 1.3% and had a strong degree of non-uniformity within its individual sub-components. Within Fixed Investment, Residential Fixed Investment experienced its second consecutive quarter of contraction, coming in at a decline of -5.1%, which was mostly driven by Single-Family and Multi-Family structure spending which decreased by -16.1% and -8.7% in the quarter. This was the second consecutive quarter where both sub-components were contractionary. Non-Residential Fixed Investment experienced a growth rate of 3.3% in the quarter, which was driven by Transportation Equipment spending (grew at a pace of 25.9%), Computer Equipment (grew at a pace of 32.7%), and Software Spending (grew by 1.9% in the quarter). Companies added about 60.2B worth of provisions to their Inventories in Q3, which although was positive – was a lower figure than the 71.7B added in Q2 ^1,2
  • Net Exports
    • The U.S. Trade Deficit expanded further in Q3 2024, producing a negative effect to economic growth. Combined, the U.S. Trade Deficit came in at -$1.077T, which represented a widening of the deficit since last quarter where the measure came in at a level of -$1.035T. However, U.S. Exports did in fact increase over the past quarter – having advanced at a pace of 8.9%. Within Exports, exports of Goods increased by 12.2% and exports of Services increased at a rate of 2.2%. Standout areas within the Exports category were Computer Equipment (increased by 64.3%), Civilian Aircraft (increased by 38.7%), and Food (increased by 28.9%). Although the U.S. exported more in the quarter, Imports increased at a higher rate of 11.2% – thus widening the trade deficit. Imports of Goods increased by 11.6% and imports of Services increased by 9.4% in the quarter. Standout areas of interest in the Imports category also included Computer equipment (increased by 77.8%) and Civilian Aircraft (increased by 60.5%), and included Transportation Services (increased by 17.7%) and Int. Property Services (increased by 61.9%). ^1,2
  • Government
    • The Government Spending component of GDP increased at a pace of 5.0% in Q3, which marks an acceleration from the prior two quarters’ readings of 3.1% and 1.8%. Federal Government spending advanced at a pace of 9.7% – the highest quarterly growth rate for the category in the last 14 quarters. The large advancement in Federal Government spending was driven by a 14.9% increase in National Defense spending – all subcomponent of National Defense spending were moderately-to-robustly positive in the quarter. State & Local Government spending came in at a pace of 2.3%, which directly matched the category’s rate of growth in Q2 as well.^1,2

 

EMPLOYMENT

• The Unemployment Rate for the U.S. Economy ticked upward in September and now stands at a level of 4.1%, up from the recent low mark of 3.7% in December 2023. Upticks in the Unemployment Rate have been mostly driven by a lower rate of growth in the Labor Force relative to growth in Unemployed Persons^1,3

• Regarding the Labor Force, we have seen a steady increase in the metric over the past few years and are now at an all-time high level of 168.5M^1,3
  • Higher levels of wage growth are an important factor driving growth in the Labor Force over the past year^1,3
  • The Labor Force Participation Rate remains below pre-pandemic levels and is now at 62.6%. Pre-Pandemic levels were roughly closer to 63%^1,3

• The number of Employed Individuals has remained stagnant over the past year, coming in at a level of about 161.5M^1,3

• A key metric monitored by the Federal Reserve, Job Openings, have moderated significantly over the past 2 years, which is largely seen as a positive sign from the Fed that the Labor Market is back in better balance. Job Openings are down to 7.44M from the all-time high mark of 12.18M achieved in 2022^1,3
  • There are now 1.06 Job Openings available for every unemployed person^1,3
  • The number of Unemployed Persons currently stands at a level of 7.0M, an uptick from 6.1M seen at the start of the year^1,3
  • Moderation in the number of Job Openings has been a key factor referenced by the Federal Reserve as a potential sign to begin Monetary Policy normalization via ceasing Rate Hikes, and potentially beginning a Rate Cut Cycle^1,3
  • Regarding the Labor Market’s effect on overall Inflationary Pressures, the Fed now officially no longer sees an abnormally unbalanced Labor Market as being a contributor to inflationary pressures ^1,3
    • (Federal Reserve) “With regard to the outlook for the labor market, participants noted that further cooling did not appear to be needed to help bring inflation back to 2 percent”^1,3

• Average Weekly Earnings are up 3.3% over the past year^,3
  • Over the past year, Average Weekly Earnings increases have been entirely attributed to increases in Wage Growth as opposed to Hours Worked^1,3
  • Elevated Wage Growth, in tandem with consumer substitution effects, have been instrumental factors in allowing U.S. consumers to partially offset the effects of higher Inflation¹

 

INFLATION

• Headline PCE Inflation came in at an annualized pace of 2.1% in September which is in-line with the Federal Reserve’s longer-term goal of achieving sustainable 2.0% inflation over time. From May 2024 to September Headline PCE Inflation has averaged just 1.4% on a monthly basis – a large downtick from the first part of the year when it averaged 4.1% ^1,4
  • Core PCE Inflation has trended in largely the same direction as Headline PCE over the past year. September’s Core PCE reading came in at 3.1% and has averaged a pace of 2.1% since May 2024 – also a large downtick from the first part of the year when the figure averaged 4.1% ^1,4
  • Notable disinflationary pressures have been present in the economy relative to Q1 2024 when hotter-than-expected inflation readings surprised the economy and lead to Fed to delay the start of the Rate Cut Cycle^1,4

• Material differences continue to persist between Goods Inflation and Services Inflation, although both categories have generally experienced disinflationary pressures in Q3 2024^1,4
  • Goods prices have contracted for each of the last 5 months, averaging an annualized contraction of -2.0% over this time ^1,4
    • Durable Goods inflation has been variable on a YTD basis, coming in at a pace of 4.0% in the month of September, but averaging a contraction of -1.0% for all of 2024 so far^1,4
    • Non-Durable goods inflation has also been variable on a YTD basis, but has seen more consistent deflationary pressures than its Durable Goods counterpart. Non-Durable Goods deflated at a rate of -4.1% in September, and has averaged a contraction of -1.8% over the last 5 months ^1,4
  • Services Inflation has largely been the area of the economy exhibiting the more robust and persistent inflationary pressures over the past year. Over the past 4 months, Services Inflation has averaged a level of 3.2%, compared to a level of 5.6% during Q1 2024. ^1,4
    • Within the Services category, there are a few sub-categories that standout as being noteworthy. Transportation Services have been erratic over the past year, averaging an inflation rate of 6.4% over the past three months. Healthcare services has experienced 2 consecutive months of accelerating pricing pressures with September’s reading coming in at 4.8% (up from 2.2% and 1.0% in prior 2 months). Electricity costs continue to hover around all-time high levels, experiencing an annualized inflation rate of 8.1% in September and averaging a pace of 4.0% over the last 12 months. Rent prices have experienced steady/elevated inflationary pressures over the past 12 months – averaging an abnormally high pace of 4.8% over this time^1,4

• Market Expectations of future inflation levels have been extremely stable since the mid-point of 2022, a potentially welcome sign for the economy as expectations of future inflation have historically been closely correlated with actual inflation to come^5,6
  • Market Expectations for future Inflation on a 5yr forward looking basis are now at a level of about 2.25%, declining consistently from the previous high of 3.5% in March 2022^5,6
  • Market Expectations for future Inflation on a 10yr forward looking basis are now also at a level of about 2.3%, which have also declined from the previous highs achieved in March 2022^5,6

 

FORWARD LOOKING ASSESSMENT

The 1989 eternal classic “The Field of Dreams” was known for invoking the imaginations of a generation by seamlessly incorporating themes from concepts such as the afterlife, financial hardships, hard work, and (of course) good ole-fashioned American baseball. As memorable as the movie continues to be, a single line of dialog from that movie has resonated across the decades and perfectly encapsulates the overarching theme of the film… “If you build it, they will come”.

Stated differently, “give us something to work with, and we’ll deliver”.

Well, it turns out that sentiment is exactly what the American consumer had in mind in Q3, and not only did they deliver – but they delivered in a big way.

What has been particularly interesting within the flow of economic data over the past few months has been the interplay between the inflation rate of goods and the economic growth of consumer spending on goods. The overall prices of Goods have deflated every single month since May 2024 – while at the same time consumer spending growth on Goods not only remained positive during this time, but accelerated. What appears to be going on here within the data suggests that when given a little bit of breathing room on prices, the consumer comes back in a big way. One could argue that this is the economic manifestation of the concept of “If you build it, they will come”, or rather “give us something to work with, and we’ll deliver”.

Important to note, that not only did the consumer deliver – but the degree to which the consumer contributed to economic growth in the past 2 quarters has been massive with consumer spending on goods growing by 3 & 6% in each of the past 2 quarters respectively. It should now be abundantly clear to any company out there who is even half paying attention (and many don’t) – the consumer is no longer mechanically accepting unfair prices for the things they buy, and never has it been more important for companies to demonstrate that they are willing to ingratiate themselves to the consumer by providing fair pricing. Have you noticed anything “different” as of recent when it comes to commercials or ads you see relative to what was out there before this whole ‘tragic dance’ the economy has performed with inflation in recent years? More and more companies are steering directly into curve when it comes to communicating and addressing prices and inflation of what they offer. To those who have “given the consumer something to work it” they have been rewarded – we see that in the data. So, this begs the question – with that as our general consumer backdrop, where do we go from here?

A couple themes percolate to the top of the probability list. A very solidly functioning economy and more balanced dynamics in the labor market in tandem with moderate wage growth make it difficult to see a scenario where the consumer is no longer continuing to be gainfully employed. Given many individuals’ (as well as the Federal Reserve itself) projections for the economy to operate at Maximum Employment levels into the foreseeable future it is likely that the consumer remains in a position to continue spending growth in approximate proportion with wage growth levels. Moreover, with the very real possibility of large-scale tax reform by way of consumer-friendly tax cuts (no tax on tips, no tax on overtime, no tax on social security) the consumer could find themselves in an even better position to not only increase spending levels but also augment their personal balance sheets at the same time. However, it should always be noted that the legislative process is complicated and never a sure thing, but either way – that positive thread still exists.

Of course, no future projection in 2024 would be complete without addressing the 800lb gorilla lurking menacingly in the corner of the room – artificial intelligence. Whether it be in the form of new discoveries in material science or medicine, creating more efficient factories, autonomously driving you around, sifting through the entirety of human knowledge in a few seconds to get you an answer, or straight up taking over your computer to handle your mundane work tasks (not quite here yet, but coming soon…) the proliferation of artificial intelligence and its effect on the world will be undeniable. In very boring economics parlance, I would put it this way – advances in artificial intelligence provide immense opportunity for the economy to dramatically increase productivity and cost-efficiency thereby representing an eventual robust rightward shift in the aggregate supply curve, which has the potential to significantly increase the standard of living of all players in the economy. A bit “stuffy” of an explanation, but it’ll do.

Overall, there are many reasons to feel good about not only the economy’s current state, but its likely paths forward as well. It’s a strange feeling, but the beneficial undercurrents driving the evolution of the economy (better consumer environment & technological advancements) almost have a very real and palpable feel to them – almost as if they were a warm gust of wind propelling our world into its next ‘very’ exciting chapter where we ‘step out of the cornfield and into our destiny’. If you build it, they will come – and believe me… we’re on our way.

 

[See Below for Disclosures & Annotations]

DISCLOSURES

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The companies presented here are for illustrative purposes only and are not to be viewed as an investment recommendation.

Tax laws and regulations are complex and subject to change, which can materially impact investment results. LPL Financial does not provide tax advice. Clients should consult with their personal tax advisors regarding the tax consequences of investing.

 

ANNOTATIONS

1. FactSet. “Economics – Country/Region – United States”. August 1, 2024
2. Bureau of Economic Analysis. “Gross Domestic Product, 2nd Quarter and Year 2024 (Advance Estimate)”. August 1, 2024.
3. Bureau of Economic Analysis. “Labor Force Statistics from the Current Population Survey”. August 1, 2024.
4. Bureau of Economic Analysis. “Personal Income”. August 1, 2024.
5. FRED. “5-Year Breakeven Inflation Rate”. August 1, 2024.
6. FRED. “10-Year Breakeven Inflation Rate”. August 1, 2024.