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The Economy: A Look Under the Hood

Second Quarter 2024

“I love money. I love everything about it. I bought some pretty good stuff. Got me a $300 pair of socks. Got a fur sink. An electric dog polisher. A gasoline powered turtleneck sweater. And, of course, I bought some dumb stuff too.” – Steve Martin, Comedian

Consumer spending, the cornerstone of the U.S. economy, has continued its climb over the past several years. Whether through demand for goods or services, the American consumer has continued to drive over two-thirds of the nation’s gross domestic product (GDP). Government consumption and investment, net exports, and other private investment account for the balance of GDP.

It’s important to note, however, that goods and services are very broad groupings, each comprising many sub-categories (retail, service, manufacturing, etc.). Beyond these sub-categories, even more minute data points are available, all adding nuance to the overall economic picture. While the Federal Reserve and the U.S. Bureau of Economic Analysis release broad macro datapoints that many rely on to take the pulse of the American economy, sometimes a more granular level of analysis is warranted.

This quarter we decided to take an “under-the-hood” look at the current state of the U.S. economy, drawing perspective from a handful of quotes from first-quarter earnings calls and economic surveys made by major U.S. corporate management teams. These teams receive data points daily or weekly, before broad macroeconomic surveys results are compiled, and may have a better up-to-the-minute read on the consumer than the Federal Reserve.

First, Some Good News

“Consumer spending continues to be supported by a strong labor market and wage growth. Our base case scenario for 2024 reflects healthy consumer spending.” – Large U.S. Credit Card Company CFO

“The way we see it, the consumer is fine. All of the relevant metrics are now effectively normalized… but that [also] means that consumers have been spending more than they’re taking in.” – Large U.S. Bank CFO

These quotes and much of the commentary coming from these management teams certainly align with the macro-level data we have been seeing regarding consumer spending and savings rates. For the past nine months the overall savings rate has been below 5%, sitting under the long-term average. While this is good for current consumer spending growth, this may spell trouble for savings in the long run, raising the specter of a future drop in spending if too many households find themselves overextended.

But A Few Caveats on the Type of Spending

“The consumer is healthy, and the consumer is engaged. They’re just engaged at this point in smaller projects.” – Large U.S. Retail CEO

“We’ve seen an increase in value-seeking behaviors from consumers, affecting both the channels they shop and the size of their basket.” – Large U.S. Consumer Food Company CEO

“The mix of guests based on income is now in line with pre-COVID… Transactions from households with incomes above $150,000 were higher than last year. Transactions from incomes below $75,000 were much lower than last year.” – Large U.S. Restaurant CEO

As these comments suggest, consumer spending growth may still seem relatively stable, but there are also some signs of caution. These CEOs are seeing a more measured pace in spending growth, more attention to value, and a return to pre-COVID spending patterns by income group.  This last point makes sense in light of our commentaries from 2023, which noted the drawdown of much of the COVID-era stimulus that may have caused outsized spending for a brief period by lower-income families.

And Some Concerns from Manufacturing

“A business is only as good as its customers’ business and is completely dependent upon its customers’ demand—and demand is weak… [business investment has stopped] beyond the essential spending of deferred maintenance and repairs that buyers cannot defer any longer.” – U.S. Fabricated Metal Manufacturing Management Team

“Our sales have been unusually low since October 2023, and we see the trend continuing but more dramatically in the next four months. We are laying off nonessential workers and cutting hours for employees, effective immediately.” – U.S. Manufacturing Company Management Team

Clearly, although the news from consumer-focused management teams remains fairly bright, some manufacturing areas of the economy are singing a markedly different tune. That being said, other areas of manufacturing are defying this trend. Semiconductor manufacturing, which has seen a huge boost due to increased demand and protectionist trade policies, stands out as one notable example.

Reaction by Equity Markets

How do recent corporate earnings align with the varied perspectives of the management teams quoted above? The broad S&P 500 Index has seen continued earnings growth over the past 3-6 months. However, the rally in stock prices in 2024 thus far has eclipsed this earnings growth and is clearly being fueled by an expectation of even higher earnings going forward.

In short, markets are booming as much on optimism as on companies’ present performance, and expectations going forward are high—perhaps unreasonably so.

At Mitchell Sinkler & Starr we are fully cognizant of the now heightened equity valuation levels. We are also, however, aware of the eternal truth that attempting to time exposure into and out of equity markets based on valuations at any given point is a fool’s errand. In regard to stocks, we remain committed to the long-term, within the context of each clients’ equity allocation range.

– Mitchell Sinkler & Starr’s Portfolio Managers


Economic and Capital Markets Data

In addition to corporate earnings, capital markets are closely monitoring the Federal Reserve for the timing of  potential interest rate cuts.


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