Though inflation persisted, the economy remained afloat in the first quarter of 2024. The Federal Reserve's decision to pause interest rate hikes at both of its meetings in the period produced varied effects – consumer spending, for example, went up despite interest rates staying elevated. However, activity in the construction sector scaled back in the period amid elevated costs and volatile developments in specific markets. The labor market remained strong, supporting consumer spending; yet unemployment also rose while spending on various goods dropped. Amid these conditions, real GDP scaled up by 1.3% in the first quarter.
Labor market
Despite the presence of inflationary pressures, the labor market managed to perform well in the first quarter. Nearly 807,000 nonfarm jobs were added in the quarter, while almost 175,000 jobs were added in April 2024 from the previous month. Ultimately, industries that had experienced steady growth in the period helped expand the labor market.
The labor market recorded gains in the period. Sectors like construction and education and health services led in terms of employment change in the first quarter of the year, rising 1.1% and 1.0% in the period, respectively. The need for more workers is reflective of how well these sectors performed in the first quarter, since they remain vital for many downstream industries while also reliant upon a large workforce.
However, the unemployment rate reached 3.9% in April 2024; this is an increase from the same month last year. The inflationary pressures of the past year led some employers to either slow down hiring or cut down their workforce in response.
At the same time, average hourly earnings went up 3.9% in April 2024 from the same month last year. Various factors like statewide boosts in the minimum wage, corporate incentives to raise wages and labor unions' impact on wage negotiations shaped how much employees got paid in the period.
Consumer spending
Despite elevated inflation and interest rates, personal consumption expenditures (PCE) scaled up 1.8% in the first quarter of 2024 and climbed 5.8% year-over-year in March 2024. These movements showcase the robust bouts of consumer spending that helped sustain the economy despite fears of a potential recession, which have still not come to fruition.
However, while some evidence suggested a recovered economy, not every segment performed well. Spending on durable goods declined 0.4% in the first quarter of 2024, with a 3.0% drop in spending for motor vehicles and parts. The effects of inflationary pressures and high interest rates made buying a vehicle more expensive for consumers, affecting vehicle sales as brands contended with a more economically volatile market.
Spending also dropped for nondurable goods by 0.1% in the period, with a sharp drop in gasoline and other energy goods spending. Even though these items remained essential, quarterly drops in gasoline and fuel prices helped temper spending in the quarter while the effects of inflation on consumers influenced where their spending went too. For instance, spending in the quarter trended upward for other items in the nondurable subsector, like clothing and food and beverages.
Even as spending on durable and nondurable goods dipped in the first quarter, spending on services increased by 2.3%, including financial services and insurance and recreation services. Mounting costs of insurance and the presence of inflationary pressures in the period triggered more spending on services that deal with how consumers spend their money, while the outsized popularity of various types of entertainment outlets raked in more spending – in contrast with services and products that garnered less fanfare.
Inflation
Despite efforts undertaken by the government to combat inflationary trends, inflation remained elevated above the Fed’s target 2.0% level in the first quarter of the year, with the PCE price index at 2.8% year-over-year in March 2024 demonstrating concerns that inflation remained stubborn.
The consumer price index in March 2024 measured inflation – when taking into account food and energy items – at 3.8% year-over-year, with a 0.3% uptick in prices from February to March 2024. Prices in most of the major categories in the consumer price index scaled up in the month, year-over-year.
Energy prices remained 2.1% higher in March 2024 on the year. Items like electricity led in terms of price hikes even as prices for utility gas services and fuel oil fell in the month. The need for electricity has become even more ingrained in consumers’ lives with electric vehicle charging, but this has also raised pressures on how much electricity can be generated – especially since the need for increased capacity to do so has raised costs for consumers.
Residential trends
While the economy was on the path toward full recovery, investments in residential construction inched up 0.3% in the first quarter of 2024. Elevated inflation and interest rates both persisted in the period and, in turn, presented headwinds for residential construction investments.
The cost of an average 30-year fixed-rate mortgage reached 6.79% by the end of the first quarter of 2024, a slight expansion from the fourth quarter of 2023 when the 30-year fixed average rate was 6.61% – its lowest since June 2023. As inflation and interest rates both remain center stage for economic concerns, their effects on mortgage rates begin to evolve as high costs simmered downstream activity for housing investments.
With the appearance of elevated mortgage rates, sales for new and existing homes were shaken for much of the first quarter. While the need for housing typically boosted up sales, year-over-year existing homes sales were lower and from the previous month of February while sales for new homes were up both year-over-year and from the previous month.
However, single-family housing starts crumbled by 12.4%. While new housing units constructed reached 1.6 million in March 2024, that is the lowest number of new housing units built since March 2022. The effects of elevated interest rates and inflation remained a cause of concern in the period for those uncertain about whether these factors will cool down enough in 2024.
Nonresidential trends
Nonresidential construction spending in the first quarter of 2024 dropped 0.2%, on average, as investments made on commercial and office projects in particular scaled down in the period. In contrast, investments on manufacturing projects enjoyed steady gains.
Various factors contributed to nonresidential spending not performing well in the first quarter. Office vacancies had remained a concern, preventing more investment in the commercial sector. Hopes of a rate cut in the near term had been dashed by the Federal Reserve’s decisions to keep interest rates up, while inflation had remained above 2.0%. These headwinds, along with the broader risks posed to various investments in this more volatile economic landscape, worked against nonresidential spending.
The passage of bills like the CHIPS and Science Act of 2022 and the Infrastructure Investment and Jobs Act of 2021 had opened up spending for infrastructure projects and semiconductor development in the US. This environment provided support for multiple projects, however the backlog of projects that had been delayed or canceled also posed a challenge in the first quarter in terms of spending levels.
Financial markets
With inflation still exceeding 2.0% in the first quarter, the Federal Reserve decided to keep interest rates in place, which meant that interest rates had not changed since July 2023 and stayed at their highest level since 2001 – more than 20 years ago.
However, even as economic pressures remain, a majority of S&P 500 companies reported that they exceeded their earnings-per-share and revenue forecasts in the first quarter of 2024. In fact, the S&P 500 had its best start to a year since 2019. Tech giants led in terms of growth – when these companies are included in the S&P 500, the first quarter rally in year-over-year expansions in earnings-per-share (EPS) totals 5.4%.
But when Magnificent Seven companies are excluded from the S&P 500, there is a 2.0% year-over-year drop in EPS growth in the first quarter amid moderate consumer spending habits that painted a different picture of how well the financial markets did in the period.
Stocks in the United States recorded a 10.6% surge in first quarter returns as the strong performance of Magnificent Seven companies, along with solid growth in corporate earnings, contributed to growth in the period.
Risk ratings
In 2022, risk levels were subdued slightly in response to economic recovery following the pandemic. A resulting rebound in consumer spending and business activity left 35.4% of industries rated as medium-high or greater risk.
Inflation having skyrocketed in the prior year along with pressured consumer activity worsened risk levels in 2023, resulting in 46.9% of industries rated as medium-high or greater risk.
2024 continues to present economic challenges, driven by persistent inflation, with 45.2% of industries rated as medium-high or greater risk.
The outlook in 2025 is expected to provide some relief as the economy moves further from the pandemic’s uncertainty and volatility, with 36.8% of industries rated as medium-high or greater risk.
Sector highlights
Mining: Amid the gradual push toward renewable energy, the mining sector endured more threats in the period, such as the decision to phase out coal as a power source for various sectors. At the same time, the high consumption rate of electricity in the period worked against the appeal of alternative sources of fuel to generate power for various products, like vehicles. As governmental policies seek to enforce regulations on emissions, sources that have been contributors to emissions, like coal, will become less popular. More industries will naturally phase out these sources while following evolving governmental regulations. As a result, industries like Coal Mining and Oil Drilling & Gas Extraction will become more threatened in the years ahead.
Agriculture, Forestry, Fishing and Hunting: The continued need for agricultural sector goods will sustain downstream activity. However, factors like climate risk and international competition for goods not easily sourced in the United States will present headwinds for domestic farmers. Even though the United States has plenty of farmland to meet robust production levels, violent storms and persistent droughts affect many areas in the country. Competition with international sources that can offer their goods at a lower cost also challenges domestic farms. Together, these conditions elevate the threat level for industries like Corn Farming and Fruit & Nut Farming for the coming period.
Information: With more forms of content digitizing, the ways to consume media will become more sophisticated in the period ahead. Even though producers have to contend with a market that's relying less on cable, the proliferation of streaming poses an opportunity for more producers via the use of their in-house streaming services that can distribute their content libraries or lucrative deals with companies that can stream their content. Making engaging content, however, will pose a challenge for content creators that either rely on more familiar brands or generate content that may or may not succeed with audiences. Amid these factors, Media Streaming, Social Networks and Other Content Providers and Video Game Software Publishing will benefit in the future.
