The Hidden Strain Behind Economic Data

As I was getting my blood drawn yesterday, the phlebotomist learned that I worked in finance and asked my opinion on the economy. Focused on the sting from the needle, I quickly replied that things look fine and that we’re not expecting a recession in the near term. I could tell by the quizzical look that she didn’t agree. Like many Americans, she’s felt the pain from rising prices and anxiety over the direction of the economy. Despite unemployment remaining near historic lows, positive gross domestic product (GDP) growth, inflation coming down to a manageable 2-3% range, accompanying wage growth, a continued strong labor market and over a 60% rise in the stock market over the last couple of years (at least so far through 2024), we acknowledge there’s a disconnect between the economic data we see and how people actually feel about their finances.

Even though inflation has cooled, the impact of previous price increases continues to strain households, particularly families with lower incomes. These households spend a larger portion of their income on necessities such as food, gas and rent; categories that saw some of the highest price increases, and often lack the cash buffer to weather periods of high inflation. Housing costs, particularly rent, continue to be a major financial burden for many; and food prices, while not rising as rapidly, are still significantly higher than a few years ago.

Additionally, personal savings rates have declined to pre-pandemic levels and the “cushion” that many Americans enjoyed during COVID years is now gone.

While many are pessimistic about the economy, the consumer is still relatively healthy when compared to history. We continue to see robust employment and economic metrics. This week initial jobless claims came in at a low 217,000; and while inflation is still rising 2-3%, we are seeing wage growth to offset inflation. We continue to believe that as long as the consumer segment is healthy, the economy will be as well. So far, the U.S. soft landing (i.e. no recession) appears intact.

**New News **

While U.S. elections have taken center stage these past few weeks, corporate earnings are wrapping up with solid results. So far, earnings are beating expectations across most sectors, signaling more broad-based strength. However, earnings growth expectations are already factored into prices, so what’s moving stock prices higher or lower tends to be based on the magnitude of a company’s earnings guidance and outlook.

Just as solid economic data masks some of the pain felt by consumers, strong growth numbers from the S&P 500 also mask growth challenges under the surface. When looking at forward growth expectations, the Magnificent 7 continue to have an outsized impact. Growth numbers are ever changing, but these seven companies are still growing significantly above the other 493 companies in the index. Their valuations may be higher, but their growth and balance sheets continue to support their stock prices.

Takeaways for the Week

• The disconnect between strong economic data and consumer sentiment highlights the uneven impact of economic changes, with lower-income households particularly affected, even as overall metrics suggest a healthy economy and a potential soft landing.

• The Magnificent 7 continues to lead earnings growth expectations over the next several quarters.

Disclosure
The views expressed represent the opinion of Ferguson Wellman. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Statements of future expectations, estimates, projections and other forward-looking statements are based on available information and Ferguson Wellman’s views as of the time of these statements. Past performance may not be indicative of future results. Ferguson Wellman, Octavia Group and West Bearing do not provide tax, legal, insurance or medical advice. This material has been prepared for general educational purposes only and not as a substitute for qualified counsel who can determine how this information applies to you. We believe the information provided is from reliable sources but should not be assumed accurate or complete.
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