GDP, Labor Market Shine, but Manufacturing Slump Signals Economic Divergence

How Does GDP Growth Shape the Economic Outlook?

The U.S. economy grew at an annualized rate of 3.1% in Q3 2024, exceeding the second estimate of 2.8%, driven by robust consumer spending, stronger exports, and federal government expenditures. However, downward revisions to private inventory investment and residential fixed investment tempered the acceleration. Inflation metrics, including the PCE price index (1.5%), showed subdued price pressures, with core PCE inflation (2.2%) aligning closely to the Fed’s 2% target.

This strong growth momentum is supported by increases in disposable personal income (+2.7%) and compensation, although the personal savings rate remains at a modest 4.3%. Corporate profits, however, declined by $15 billion, with nonfinancial and foreign profits contributing to the weakness. Financial sector profitability saw a modest uptick.

Market Impact: The data reinforces the economy’s resilience, easing fears of an imminent slowdown. However, falling corporate profits could limit equity upside.

What Do Falling Unemployment Claims Signal?

Initial jobless claims dropped to 220,000, reflecting labor market strength, though the four-week moving average rose slightly to 225,500. Continuing claims dipped marginally to 1.874 million, signaling sustained employment levels.

Despite strong hiring, wage inflation appears controlled, with firms maintaining stable labor utilization. This labor market stability, coupled with mild wage pressures, suggests limited immediate concerns for the Fed.

Market Impact: The robust labor market supports consumer confidence, which may boost equities and dampen demand for safe-haven assets like gold.

Is Manufacturing Weakness a Warning Sign?

The December Manufacturing Business Outlook Survey revealed a significant contraction in manufacturing activity, with the general activity index falling to -16.4, its weakest since April 2023. Indicators for new orders and shipments turned negative, and firms reported a notable reduction in production expectations for Q4 2024. While input prices rose, output price growth slowed, reflecting profit margin pressures.

Capacity utilization and labor constraints remain persistent issues, with firms highlighting supply chain bottlenecks. However, future activity expectations, while softening, remain optimistic, indicating anticipated recovery over the next six months.

Market Impact: Manufacturing contraction weighs on industrial equities and signals broader economic divergence, potentially capping gains in Treasury yields.

Conclusion

The data reflects a robust economy with limited inflationary pressures, leaving the Fed with room to hold rates steady. Treasury yields and the Dollar remain supported, while gold and equities face mixed factors. Markets will closely monitor Q4 earnings and early 2025 manufacturing data for further direction.