CNR Speedometers^®

After several positive changes earlier this year, our Speedometers remain unchanged this month. We continue to have a positive economic outlook for the economy and financial markets, but consistent with our forecast for 2024, economic growth does continue to slow.

The second release of Q1 GDP came in at 1.3%, and that was below the initial estimate of 1.6%. This was driven by a lower estimate for consumer spending, but it still advanced at a rate of 2%, and investment was revised up across all segments. More evidence of a moderate slowing has come from a wide range of measures, which include consumer data, job growth, and manufacturing.

That's not surprising to us, and it isn't alarming. It has taken some time, probably more than we expected, but it does seem that the effects of higher rates and price fatigue are being felt by households and businesses. And from the Fed's perspective, this is evidence that inflation is responding to policy. Following a series of hotter-than-expected reports to start the year, recent price measures have continued to move lower. April Core PCE slowed from .3% to .2% month-over-month, and the three-month change decreased for the first time in four months from 4.4% to just 3.5%, and, crucially, service inflation has begun to moderate.

We've seen signs that housing inflation is coming down, which could become a bigger disinflationary force in the second half of this year, and service prices, excluding housing, rose at a slower pace, which reconfirms the downward trend established last year. While the U.S. economy is no longer shocking to the upside, there's still plenty to be positive about. Recession risk remains low. For us, we see it at just 30%, and traditional areas of macro vulnerabilities are still absent this cycle, and as indicated by many of our green dials, consumers remain in a strong position.

Now, there are some signs of a strain in some households. These include rising delinquency rates primarily on credit cards, but we do think they reflect pockets of distress rather than broader problems. And primarily, this trend is impacting low-income consumers with little savings, and the inflation surge is impacting this group the most. Investors have looked past the recent softening in economic activity. After a brief stumble in April, U.S. equity indexes are back near record highs and bond yields have dropped.

Results from the first-quarter earnings season, which did surprise to the upside, support our outlook for corporate profit growth to remain positive and reinforce our belief that S&P 500 earnings are on track to grow around 10% this year.

And while we acknowledge that valuations do remain high, we don't think this means we're in for negative returns. Our research shows that over long time horizons, high valuations tend to impact the magnitude of stock market returns, but they've historically been very poor indicators of market direction.

Where we do see some risk is on the geopolitical front. If you think about recent elections in Mexico and India, they certainly have made headlines, and they are likely to impact U.S. relations over time, and that's led to some weakness in international markets. This highlights the potential for geopolitical developments to generate volatility, and it does remain one of the biggest risks to our outlook.

So, wrapping everything up, our Speedometers remain supportive of growth, but we continue to forecast a gradual slowing in economic activity, and with Fed rate cuts on the horizon later this year, combined with solid equity market earnings expectations, the backdrop is positive for financial markets to continue the advance.