Quarterly Outlook: Economic Momentum Continues

Main Takeaway

Although markets had a strong first quarter, inflation has been stickier in some key areas of the economy. The services industry continues to be resilient, with employment rising and inflationary pressures increasing, while more interest rate sensitive areas, such as manufacturing, are weaker. The optimistic tone from the Fed has improved the outlook for interest rate cuts, though less liquidity in the banking industry, plus continued fiscal deficits, may keep rates higher for longer.

Top Risks

Rising geopolitical tensions and rate cut predictions have been the main themes this presidential election year. Low office occupancy rates have renewed concerns about the banking sector’s stability, contributing to tighter lending conditions. Municipal finances are coming under pressure in large cities. Government debt levels in most developed nations and China are at all-time highs. Inflationary pressures in the services sector could keep inflation above the Fed’s 2% target for some time.

Sources of Stability

While the Fed’s battle against inflation may not be over, it has made some progress in interest rate sensitive areas of the economy. House prices have stabilized and show signs of rebounding, and businesses are still increasing wages, suggesting a strong economic undercurrent. The S&P 500 has continued its upward climb, credit spreads have tightened, and IPO and M&A activity has picked up. The likelihood of a recession has fallen, barring an unexpected event.

For our latest perspectives on markets and economic conditions, view our Quarterly Outlook for Q2 2024.

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