In today’s Steady Investor, we examine the important factors affecting the market and what might lie ahead, including:
• U.S. GDP growth surges
• Higher labor costs hit
• The Federal Reserve holds rates steady
U.S. GDP Growth Surges in the Third Quarter – According to the Commerce Department data released late last week, the U.S. economy expanded at a 4.9% annual rate in Q3, which was more than twice as strong as growth posted in the previous quarter. So much for the near-unanimous consensus that the U.S. economy would enter a recession in the second half of 2023. The fact is, the economy went the other way and accelerated when nearly every expert expected a contraction. We have written before that we think the recent uptick in long-duration interest rates is tied to this better-than-expected growth. Yet even with this strong economic performance, many headlines referencing the GDP numbers struck a cautionary tone, with many pointing out that U.S. growth was driven largely by consumer spending that does not seem likely to last. Some point out that student loan payments are yet to take a bite out of disposable income, and others point to real disposable personal income (which is income adjusted for inflation) has fallen in recent months.1
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Real Personal Disposable Income
What’s missing from this narrative is that American workers continue to benefit from a strong labor market and pay raises, even if those higher wages are not as compelling as they were last year. Employers spent 1.1% more on wages and benefits in Q3 compared to Q2, which was slightly better than the previous quarter-over-quarter growth of 1%. Other reasons given for ‘unsustainable’ economic growth are rising interest rates and wars in the Middle East and Ukraine, but we would argue these headwinds are already priced into equity markets and neither seem likely to derail the global economy – at least for now.
Auto Workers and Detroit’s Big Three “Strike” a Deal – After inking deals with Ford Motor and Chrysler parent Stellantis, the United Auto Workers (UAW) reached a final deal with General Motors to end what had been a six-week strike. Labor prevailed in this case, and the automakers will also benefit from having all factories fully back up and running. The tentative agreements will include a 25% pay boost over four years, which could bring top hourly pay for production workers to $42/hr (including cost-of-living adjustments). All told, unionized workers should expect annual income to land in the mid-$80,000s with the new raises, which doesn’t include overtime pay. For the automakers, higher labor costs will of course pressure margins and require renewed efforts to increase productivity and contain other costs. But it’s also true that labor costs make up a relatively small percentage of the overall cost of producing a vehicle, so we shouldn’t expect to see a major impact on earnings forecasts based on this labor deal alone.4
As Expected, the Federal Reserve Holds Rates Steady – The Federal Reserve convened this week to determine their next monetary policy decision, which as expected was to hold the benchmark fed funds rate steady at a range between 5% and 5.25%. Fed officials have now ‘paused’ rate increases at two consecutive meetings, which marks the longest stretch without a rate increase since they started their tightening campaign in March 2022. The Fed was weighing several factors during this week’s meeting, which included an economy that accelerated in Q3, a sharp uptick in long-duration interest rates, and inflation that continues to cool – albeit at a slower pace than previously. The Fed likely considers the downtrend in inflation and higher long-term interest rates as two factors working in the right direction, since the former means their primary objective is being addressed and the latter implies tighter financial conditions looking ahead.5
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Disclosure