U.S. Economy

U.S. Economy – Apparently Clear Sailing

The U.S. stock market, as measured by our preferred index of the S&P 500, has been remarkably strong this year. In January, even as markets were concerned about inflation readings (December had an annual inflation reading of +3.4%), markets generally were positive. As a reference, the S&P 500 started the year off at 4,742.83 on January 2. From that point, the markets were on an upward path through the end of March, where the S&P 500 closed at 5,254.35 on March 28. Shortly thereafter, the annual inflation reading for March was announced at +3.5%, sending markets down.

At the time, the general feeling was that with inflation at this higher level, it would prevent the Federal Reserve Bank (Fed) from reducing interest rates. Markets fell further for much of April until a turnaround came around April 19, with the S&P 500 at 4,967.23. From there, markets continued their upward climb until a recent peak on June 18, with the S&P 500 at 5,487.03. That level is about 15.7% higher than the level from January 2nd. An impressive run, and all this while the Fed has not reduced interest rates. The current Federal Funds rate has a range of 5.25 to 5.50%.  Historically high, it has been allegedly a key element in slowing the economy and reducing inflation. We believe the economy is starting to slow in the background and could have more serious effects in time.

Reasons to be Positive

Some areas of the U.S. economy are working quite well and support positive market returns. Unemployment is one of those areas, with the January 2024 unemployment rate at 3.7% rising only a small amount to 4.0% in May 2024. This is historically low unemployment and corresponds to a strong job market with new hiring at historically high levels. January 2024 showed job gains of +256,000 and holding steady to a preliminary reading of +272,000 in May 2024. Again, these are historically strong job gains with reasonable consistency going back into 2022.

Another positive area for the U.S. economy is Gross Domestic Product (GDP). Although the first quarter of 2024 was disappointing at only +1.6%, previous quarters were very strong, with Q4-2023 at +3.4% and Q3-2023 at +4.9%. The general feeling here is that if you have low unemployment and strong job hiring, most people are working, earning an income, and able to spend. Consumer spending is one of the driving forces of a growing economy. Certainly, these positive indicators are reason to believe the stock markets are correct in their upward bias.

Reasons to Worry

But we see reasons to be concerned. We feel that the stock market is underweighting or ignoring the parts of the U.S. economy that are moving negatively, starting with retail sales. If we believe consumers are strong, you would expect retail sales numbers to increase, but that is not what we currently see. In April 2024, retail sales were down -0.2%, and in May up only +0.1%. These amounts put the strength of the U.S. consumer into question. And if retail sales decline, then GDP will also likely decline.

Next on our list is corporate profits, which declined in the first quarter of 2024. Not by a huge amount, just -1.7%, but still a decline.  Declining profits are an indicator of slowing retail sales and the effect of inflation and higher costs to businesses. Our next issue is with delinquency rates on credit cards. This is a good indicator of financial stress within the population. The first quarter of 2024 saw a delinquency rate of +3.16%. This is the highest delinquency rate since Q4 of 2011. 

Could higher delinquency rates indicate that consumers are struggling more with inflation and making ends meet? We think it’s too early on all of these points to know the long-term effect. Still, with the Fed holding interest rates high and the economy showing signs of slowing due to those high rates, we feel the risk of recession is rising later this year or early next year. We aren’t predicting a recession, merely suggesting that the risks are increasing. The bottom line is that we aren’t convinced this upward-rising stock market and strong job market are permanent features. We will be watching these indicators and reporting back to you regularly.

All the best,

Barron Financial Group, LLP is a fee-only Registered Investment Advisor regulated by the Securities and Exchange Commission.

This newsletter is for general information only and should not be considered investment advice.  Investors should consult with a trained investment professional to discuss their particular situation.

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