A 2024 Mid-Year US Economic Snapshot

2024’s first half is in the books, but Q2 data are still rolling in. A spate of widely watched datasets from last week indicate some longer-running trends extended into May. Nothing here is new to stocks, but the numbers confirm the US remains on solid ground economically—an overlooked fundamental underpinning the bull market.

On Personal Consumption Expenditures (and Prices)

June ended with some good news on the consumer spending and inflation front. Real (i.e., inflation-adjusted) personal consumption expenditures rose 0.3% m/m in May, quieting concerns of faltering household spending after a tepid retail sales report earlier in the month.^[i] Meanwhile, the PCE price index—the Fed’s preferred inflation gauge—rose 2.6% y/y, slowing from April’s 2.8% and furthering a longer-running cooldown.

Many cheered the news, calling May’s numbers the “good data” that will convince the Fed things are headed back to normal. This reaction is typical, but don’t try to forecast Jerome Powell and co.’s decisions. Central bankers’ actions are unpredictable. There isn’t any way to know how they will interpret the data, let alone act on those interpretations. Instead, accept the data for what they show: May extended the longer-term trend of resilient consumer spending amid slowing inflation rates. (Exhibits 1 – 2)

Exhibit 1: As Inflation’s Slowdown Continues …

Source: FactSet, as of 7/1/2024.

Exhibit 2: … So Does US Consumer Spending

Source: FactSet, as of 7/1/2024.

On Weaker-Than-Expected Durable Goods Orders           

May US durable goods orders were mixed. The headline number rose 0.1% m/m, thanks to a boost from military aircraft, but “core” capital goods orders (which exclude volatile defense and aircraft orders) fell -0.6% m/m, matching its biggest dip of the year. Some worry this bodes ill for business investment, but beware reading too much into a historically volatile, non-inflation-adjusted data series. Moreover, even though core capital goods have bounced around constantly (Exhibit 3), business investment has grown in every quarter since Q4 2021.

Exhibit 3: Core Capital Goods Orders, May 2021 – May 2024

Source: FactSet, as of 7/1/2024.

Equipment investment, which durable goods orders translate to, has stumbled, falling in four of the past six quarters. However, this category represents only about 38% of business investment—a smidge less than intellectual property products (42%), which have done most of the heavy lifting lately.^[ii] Recovering equipment investment would be a sign of businesses’ going on offense, and we still see signs this is happening—companies are in prime shape to spend, given low default rates and rebounding earnings growth. In our view, it doesn’t really matter exactly when that equipment investment manifests in GDP. Stocks look 3 – 30 months out and appear already to be pricing it in, along with the economic activity and earnings it should generate.

On Stronger-Than-Estimated Industrial Production

Earlier in the month, the Fed reported industrial production rose 0.9% m/m, with the manufacturing subsector up by the same magnitude (expectations were for 0.3% and 0.2% monthly growth, respectively).^[iii] Consumer goods output led the way (all components rose except home electronics), and business equipment production ticked up for the first time in three months.^[iv] Motor vehicle and parts output—which has been a swing factor lately—also rebounded (0.6% m/m after April’s -1.9% fall).^[v]

We won’t pooh-pooh industrial production’s strongest monthly growth of the year. But don’t overstate the broader implications. The economy doesn’t hinge on factory production. If heavy industry were economically consequential, its soft patch would have likely tipped growth in a meaningfully negative way—it hasn’t, which isn’t surprising considering manufacturing comprises around 10% of US GDP.^[vi] That said, though robust manufacturing output isn’t necessary for future growth, its resurgence would likely provide a modest tailwind—and perhaps help folks recognize the US economy is a fine environment for stocks.