As we write, the 2024 general election in the United States is less than two weeks away, and values-aligned investors are keenly aware of the social and environmental issues that are on the line. With this letter, we aim to put the economy and markets in context of the upcoming election, and to put this election in some historical context as well.

The US economy continues to remain resilient. In the second quarter the economy grew at an annualized rate of 3%, accelerating from an upwardly revised 1.6% expansion in the first quarter. This is in line with the 3% year-over-year GDP growth as strong consumer spending driven by a resilient labor market and wage growth continues to support the US economy. Inflation pressures continued to ease, allowing the Federal Reserve greater confidence to shift their primary focus from lowering inflation to supporting the labor market. In September, they lowered interest rates by 50 bps (0.5%), making the first rate cut in four years.

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The first half of 2024 has brought significant volatility to stock markets, expectations about possible interest rate cuts, and to our political process in the United States. In our summer letter we aim to make sense of this volatility and help shed light on some of the possibilities in the months ahead. 

The US economy remains resilient, but growth is starting to slow, as many households have depleted their excess savings and as the labor market has begun to soften. Elevated interest rates, tightening lending standards and slowing consumer credit growth are expected to continue to be headwinds. US consumer sentiment has decreased to a 7-month low in June as higher prices continue to weigh heavily on Americans’ finances and impact their living standard.¹

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Against the headwinds of eleven Fed interest rate hikes, which started in March of 2022 and plateaued at 5.25%-5.5% in July of 2023, the US economy remains strong. ¹ Consumer spending withstood higher borrowing costs, persistent, but slowing, inflation, and the dwindling of pandemic era savings. 

Both the manufacturing and services purchasing manager index (PMI), which are indicators of economic resilience, were in expansionary territory as of March 2024. There was a slight deterioration in services PMI in the first quarter and consumer sentiment worsened due to higher inflation expectations, but real wage growth remains positive supporting consumer spending, which accounts for nearly 70% of the US GDP.

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The US economy remains resilient, supported by strong retail spending and labor markets and signs of improving consumer confidence¹ and strengthening in housing markets. 

In the third quarter of 2023, GDP grew at its fastest rate in nearly two years – driven by consumer and government spending and private inventory investment.² However, we believe recent indications signal that economic growth is slowing down. The US Manufacturing Purchasing Managers’ Index (PMI) was in negative territory as of Q4 2023.³ ⁴  Consumer debt is also increasing,⁵ indicating that retail spending may be driven by borrowing as pandemic era savings dwindle. The 4th quarter GDP estimate, currently at 2.4%,⁶ suggests the economy has remained strong.

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By Jane Swan, CFA and Roraj Pradhananga, CPA

The first quarter of 2023 was characterized by major events such as the failure of Silicon Valley Bank, escalating concern of a pending recession. Sentiment made an about face in the second quarter, buoyed by limitless enthusiasm for artificial intelligence. At the end of the third quarter, we seemed to have settled into an uncomfortable normalcy: uncertainty.

The labor market remains tight despite slowing job growth in 2023. The unemployment rate remains low at 3.8% despite increasing 0.2% in Q3.¹ Employees are losing confidence in their job prospects, as shown by recent declines in the Conference Board survey and stalling of the quits rate. 

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