Lesser Gains: A US Macroeconomic Update

Much of the economy is on the upswing, with real GDP picking up steam by 2.8% in the period as various factors, such as rising spending, help mute the multiple impacts of inflationary pressures. But the labor market is expanding modestly, as job cuts have become just as commonplace as job gains. Construction is beginning to scale down a bit as the weight of inflation and interest rates are stressing markets. Even then, financial activity has been scaling up, giving way to a stronger market for stocks and certain asset classes during the period. The Federal Reserve has kept interest rates elevated as inflation persists. Still, with inflationary data starting to reach its target rate, there are high hopes that a cut is on the horizon.

Labor market

• Under the weight of inflation, the labor market had a modest quarter with a 0.3% job gain, with companies adding 503,000 nonfarm jobs. While the labor market has been gaining jobs, it's also been losing steam; ill-performing sectors have been a diminishing factor on the market as employers cap the number of new hires, preventing a full-on rebound.
• The transportation and warehousing sector and the education and health services industry were the main winners in the quarter, adding 1.0% and 0.9% more jobs than last quarter, respectively. There's a rising need for medical care because of demographic changes and better screening practices that have been detecting illnesses ahead of time. Coupled with a rebounding market for travel, the jobs in these industries have been multiplying.
• Despite such factors, the unemployment rate has been picking up steam, reaching 4.3% as of July 2024. The pressure for companies to cut down on their costs amid inflation has led many to cut their jobs or minimize their hiring, undercutting job growth in the market.
• Average hourly earnings were still expanding in the period, climbing 3.6% in July 2024 from the same month last year. Negotiations between labor unions and employers, along with efforts by states to scale up how much employers now have to pay their employees, have raised wages. Inflation also intensifies the need for higher compensation to match the economic situation.

Consumer spending

• Even as inflation remains in the background, higher spending is in the foreground, with consumer spending or personal consumption expenditures (PCE) boosting 0.9% in the second quarter of 2024, repelling expectations of a receding economy.
• Durable goods are expanding, with spending up 0.5% in the quarter, as other long-lasting items, recreational goods and vehicles have been leading the way in spending. However, smaller bouts in spending for furnishings and automobiles have still been weighing this industry down as the impacts of inflation are factoring into consumers' decisions about how much they want to spend.
• Non-durable goods are also scaling up, but not at the same levels. Spending on these goods is climbing 1.0%, primarily because of higher spending on gasoline and other energy goods. Expenditure on food and beverages was meager, with higher prices for such items working against their appeal since consumers can't afford these more brutal costs.
• Spending on services has risen 1.4% in the quarter as financial services and insurance, health care and housing and utilities were the main drivers of why services were so popular in the quarter, helping raise spending and showing that consumers are spending more on services that provide more essential value for them.

Inflation

• Prices are still up, with the price index of personal consumption expenditures (excluding food and energy) rising 0.6% in the second quarter. Year-over-year inflation has been rising 2.6% for the year ending June 2024, meaning that current inflation is still above the 2.0% target rate set by the Federal Reserve.
• The consumer price index (CPI), which includes food and energy goods, rose 3.0% in the year ending June 2024, with higher prices on transportation, shelter and food causing much of this stress on prices during the period.
• But a slighter recovery is on the horizon. The CPI began dipping in May and continued with a 2.0% contraction in June, allowing inflation data to be very near the Federal Reserve's price targets.

Residential construction

• Various factors have been causing a stir in the construction sector, with inflationary pressures and high interest rates giving more pause for weary investors who have to bear these costs in hopes of a profitable gain. With such factors in the air, total residential construction spending rose 0.6%, a slower rate than in the first quarter.
• House mortgage rates were at 6.92% in June of this year, with minimal changes from last year. This is a sign that housing, for now, will remain an expensive investment under the guise of inflation and interest rates. These rates, along with low housing stock, will lead buyers to wait for affordable options that won't drain their wallets.
• Existing and new home sales are both slimming down, with no month in the second quarter representing a recovery in sales. Unsold inventory is at its largest volume yet at 4.1 months, the biggest gap since May 2020, showing a slowing market while their costs have accelerated.
• New housing units built are down 4.7% from last quarter. High construction costs (up nearly 3.0% in the second quarter) gave way to a smaller appetite for new units in the period, as their expenses have been driving away more of the market.

Nonresidential construction

• On a less optimistic note, nonresidential construction is now falling at 0.1% on average in the year's second quarter. Various drops in commercial and office spaces have been hurting this sector's appeal in the period, as it struggles to contend with a vacant market for office workspaces.
• High interest rates have been giving this sector pause, adding on costs that developers must consider when building such projects while also dealing with the almost unending stress of inflationary pressures on their finances.
• But movement is happening with data centers, as companies like Microsoft and Oracle are building these facilities in areas like Georgia and Texas. Such projects are becoming increasingly important as the latest technological advancements have given companies many more reasons to develop and expand their digital and data capabilities to capture an evolving market that's become more reliant on such trends.

Financial sector

• While prices remain hot, the Federal Reserve is keeping rates up in the 5.25%-5.50% range, meaning that interest rates are stuck at the same levels from July 2023, over a year ago. Suggestions for a rate cut are undermined by these decisions to take no action on interest rates until inflation data improves.
• Despite these factors, the stock market did well, with the NASDAQ expanding 19.1% YTD, while the S&P 500 climbed 15.3%. Companies have been feeling the weight of higher rates and the robust popularity of trends like AI has been giving Big Tech a major boost in the period. Many investors have been optimistic of an eventual rate cut later in the year.
• Asset classes have done well despite the economic pressures. Equities have rallied gains in the quarter from solid returns in the stock market and positive movement that rates will be cut, helping various classes avoid losses in the period. But volatile developments in the international economy and on the geopolitical stage have given certain investors in developed markets and fixed income second thoughts about making the leap on their investments until such factors subside.

Risk ratings

• As the economy continued to recover from the pandemic and business restrictions eased, inflation skyrocketed. In turn, risk levels climbed in 2022, with 34.3% of industries rated as medium-high or higher risk.
• As the Federal Reserve increased interest rates to combat persistent inflation, risk levels worsened in 2023, with 48.5% of industries rated as medium-high or higher risk.
• With easing inflation and a cooling job market, the Federal Reserve is expected to begin cutting interest rates in late 2024. As the economy begins to stabilize, risk levels are expected to slowly ease to 46.9% of industries rated as medium-high or greater risk.
• Continued economic improvements and rate cuts are anticipated to further ease risk levels to 38.8% in 2025.

Sector highlights

Mining

The mining industry has been unable to gain speed as market forces have been working against it. Coal mining has become a target mainly because of its status as an environmental danger. The country has become less reliant on it now that more environmentally safer energy sources have become popular. Plans to construct these plants in place of coal facilities have been accelerating the downfall of this sector. Volatile economic and geopolitical developments in trading partners have been causing a scale-down of certain US exports like crude oil in the quarter, shrinking more value for this sector. These factors are causing the Oil Drilling and Gas Extraction and Coal Mining industries to operate under more risks.

Retail Trade

Factors like inflation remain an economic factor that molds spending on various items. But retail trade is a strong market that can withstand such heat by launching new initiatives to attract more consumers through better pricing schemes and adopting more AI measures, such as route optimization displayed by both Walmart and Target. Because of inflation-driven alarm, sales in many retail sectors are beginning to slow. However, consumers have become more cost-aware of purchases, despite rising consumer spending, resulting in volatility in the retail sector.

Information

One of the sectors that performed well was the information sphere, as the digital economy has been giving a leg-up to an industry with expertise in software development. Various companies in the streaming business, like Netflix and Disney+, are scaling up their prices as they churn out popular shows and movies that will be available on their platforms, giving this market a boost. The unending releases of very popular titles in the video game market have also been assisting this industry. Developments like AI, plus the popularity of various content, have been helping industries like Video Game Software Publishing and Media Streaming, Social Networks and Other Content Providers.