A Condensed Market Update on the US economy for the second quarter of 2024

In 2023, despite numerous challenges, the U.S. economy avoided a recession, achieving a growth rate of 3.2% in the fourth quarter. Although inflation rates are slowly approaching the Federal Reserve’s target of 2%, the overall economic climate is expected to remain stable, supported by moderate job gains and continued inflation easing. However, the fading cyclical tailwinds and the upcoming U.S. election pose potential risks to this stability.
The Federal Reserve has maintained steady interest rates as of its March meeting. The future projections indicate a possibility of up to three rate cuts in 2024, a decrease from previous expectations, reflecting a cautious approach to monetary easing. Despite this, the Federal Reserve plans to reduce quantitative tightening soon, which has reassured the markets to some extent.
Investment dynamics have adjusted accordingly, with long-term interest rates rising in the first quarter even as the equity markets continue to perform strongly, driven by major stocks. The broader market is expected to perform well, supported by solid fundamentals, while fixed income will likely continue offering income and diversification benefits. Alternative assets also present opportunities for enhancing portfolio performance through diversification and alpha generation.
Indeed, the U.S. economy showcased remarkable resilience in 2023, marking the sixth consecutive quarter of growth over 2%. Consumer strength remains robust, supported by a tight labor market, though there are emerging signs of stress, such as rising delinquencies in auto and credit card loans. Business spending has been resilient, boosted by increased investment in artificial intelligence and support from federal spending, though challenges like tighter lending standards and weaker corporate profits could constrain growth.
The housing market, though stable, shows no signs of a significant upturn due to high mortgage rates and tight supply conditions. Trade might slightly drag on the economy, impacted by a strong dollar and sluggish global growth, but government spending is expected to bolster economic activity through public infrastructure projects and strong hiring practices.
The labor market has normalized from its explosive post-pandemic recovery, with continued strong job addition rates into early 2024. Immigration has significantly bolstered the U.S. labor force, with over 2 million employment authorization applications approved in fiscal 2023, helping to keep wage pressures subdued and inflation in check. Moving forward, the job market is expected to remain robust, supported by continuous migrant influx, which should help maintain the unemployment rate between 3.5% to 4.0%.
Inflation remains below the peak of mid-2022 but has stabilized around 3.2% since October. The disinflationary trend will possibly continue, supported by lower core goods prices and stable supply chain conditions despite geopolitical tensions. Services inflation outside of housing remains a concern but is expected to moderate through the year. Nevertheless, one needs to be cautious vis-à-vis the volatility of the current balance of international geopolitical forces and their global economic impact, notably the extreme sensibility of inflationary pressures to any major potential black swan.
Anyway, overall, the U.S. economic outlook for 2024 is one of continued expansion but, again, with caution due to potential risks such as policy uncertainties related to the upcoming elections and ongoing geopolitical tensions. The Federal Reserve’s cautious stance on rate adjustments reflects this uncertainty, though the potential for policy easing later in the year could provide additional support for the economy.

Manuel G Samuel, 23 April 2024

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