Private Client Group

January 27th, 2025

Inflation News Mostly Good, Manufacturing Rebound, Consumer Holiday Spending

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Focusing on what matters most is crucial in today’s market. This week’s Steady Investor covers three key themes shaping the investment landscape to help you stay ahead:

What December CPI Inflation Data Tells Us – The report was mostly good news—in December 2024, the U.S. Consumer Price Index (CPI) rose by 0.4% month-over-month, which was in line with expectations. Core CPI rose by 0.2% from November, which marked the first deceleration in six months. On an annual basis, headline inflation increased by 2.9% while Core CPI rose 3.2%. As any reader can surmise, these annual rates of inflation are still well above the Fed’s 2% target. But the constructive outlook for inflation and Fed policy comes from two key takeaways. The first is that energy costs and shelter costs were outsized contributors to December’s headline increase, while underlying price pressures—in a broad swath of goods and services—showed continued signs of easing. This inflation print gave some investors a reprieve, as the case of a Fed “pause” in rate cuts was given more flexibility with this data. Federal Reserve officials did not necessarily throw cold water on this thinking, but they indicated that some modest easing in underlying price pressures is not sufficient to prompt an immediate rate cut. We also know the Fed has some sensitivity to the prospect of new tariffs under the incoming administration, which could introduce uncertainty and exert upward pressure on inflation. Overall, while the December CPI report offers some optimism regarding the trajectory of inflation, it underscores the importance of monitoring forthcoming economic data and policy developments to assess their implications for future monetary policy. All in all, we do not see any surprises that would prompt the Fed to alter their thinking or the path of interest rates, which we generally view as a positive for markets—i.e., the market does not like surprises.1

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Manufacturing Activity Sees Early Signs of Rebound – U.S. factory activity saw a nice uptick in December, with industrial production experiencing a notable increase of 0.9%—the most significant monthly gain since February and ahead of expectations. This growth was largely fueled by a 0.6% rise in manufacturing output, which benefited from the resolution of labor disruptions in the aerospace industry. The aerospace sector experienced a sharp 6.3% increase in production, contributing significantly to the overall manufacturing boost. Additional gains were observed in the production of consumer goods and construction materials, and utilities output expanded by 2.1% largely due to a surge in natural gas production amid colder weather conditions. Capacity utilization, which measures how efficiently firms are using their resources, climbed to 77.6%, reflecting an improvement in operational efficiency. These trends indicate that the manufacturing sector may be stabilizing after facing prolonged challenges over the past two years. But the aerospace component is important to keep in mind, as this was largely tied to the Boeing work stoppage. Zooming out, manufacturing output remained stagnant compared to the previous year and showed a 1.2% decline over the fourth quarter of 2024, so it’s likely too early to call this a manufacturing renaissance.3

U.S. Consumers Deliver a Solid Holiday Shopping Season – The U.S. consumer is still healthy. In December 2024, U.S. retail sales experienced a 0.4% increase, following an upwardly revised 0.8% gain in November, indicating robust consumer demand during the holiday season. The National Retail Federation reported that holiday retail sales reached $994 billion, marking a 4% year-over-year increase. Notably, the control-group sales—which exclude food services, auto dealers, building materials stores, and gasoline stations—rose by 0.7%, the most significant gain in three months. This suggests a strong contribution to the gross domestic product (GDP) from consumer spending in Q4, which likely means we will see a strong growth print to end of last year. Looking ahead, stability in the U.S. labor market will likely contribute to rising real wages and discretionary income, so we believe the U.S. consumer will continue to hold up just fine.4

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Disclosure

1 J.P. Morgan. 2024. https://www.jpmorgan.com/insights/outlook/economic-outlook/cpi-report-december-2024#:~:text=Key%20takeaways,December%2C%20in%20line%20with%20expectations

2 ZIM may amend or rescind the “4 Benefits of Active Management” guide for any reason and at ZIM’s discretion.

3 Yahoo Finance. January 17, 2025. https://finance.yahoo.com/news/us-industrial-output-tops-forecasts-144523559.html

4 Business Times. January 17, 2025. https://www.businesstimes.com.sg/international/us-retail-sales-broadly-advance-capping-solid-holiday-season

5 ZIM may amend or rescind the “4 Benefits of Active Management” guide for any reason and at ZIM’s discretion.

DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.
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