In this week’s economic update, we are looking at the U.S. economy – specifically the second-quarter earnings season, employment numbers and consumer behaviors. In conjunction, these elements point to an economy that is slowing but healthy. We’ll unpack what this could mean for the U.S. economy through to the end of the year.
We are also sharing the latest inflation update from RBC Economics, with a detailed breakdown of the measures that are contributing to the lowest headline inflation since March 2021.
We’d like to highlight our recent sponsorship and participation in the 38th Annual Wheels of Hope Golf Classic, in support of the Canadian Cancer Society. This is an important cause to our team and we are proud to continue to support this program for our community.
Lastly, a friendly reminder that our Summer Hours are in effect. Please see the details below.
Economic Update
Global markets moved higher over the past couple of weeks, with the Canadian equity market rebounding to new highs and U.S. equities nearing their mid-July peak. Meanwhile, government bond yields remain near their lows for the year. After being shaken by growth concerns earlier in August, equity markets have swiftly regained confidence in the resilience of the U.S. economy and the ongoing downward trend in inflation. Below, we discuss the second-quarter earnings season, which is just wrapping up, and offer insights into the current state of the U.S. consumer.
Potential for reacceleration in earnings growth in the U.S.
The majority of U.S. companies have now reported earnings, and overall results have been solid. Notably, corporate earnings growth has broadened. In fact, S&P 500 earnings-per-share (EPS) growth, excluding the “Magnificent Seven” group of large-cap technology stocks, has turned positive for the first time in over a year, suggesting a reacceleration in earnings growth across a wider range of companies and sectors. Despite some high-profile disappointments amongst a few large technology stocks, and some weakness in pockets of the consumer sector, nine out of eleven sectors delivered positive earnings growth this quarter.
U.S. employment numbers reflect reduced hiring vs layoffs
A weaker-than-expected U.S. jobs report in July, along with downward revisions to the number of jobs created over the past year, has brought the state of the U.S. labour market into focus in recent weeks. However, commentary from management teams this past quarter has been relatively quiet on labour-specific issues, with few mentions of layoffs. Instead, many companies highlighted an increasing focus on cost discipline. This emphasis is reflected in underlying labour market trends, with slowing employment trends primarily driven by reduced hiring rather than outright firings or layoffs. While the unemployment rate has risen from its historically low levels in 2022 and job growth has decelerated, unemployment insurance claims have remained stable, and wage growth remains reasonable compared to pre-pandemic levels. We view these trends as being consistent with cooling inflation pressures, which should allow the U.S. central bank to begin to reduce interest rates as early as next month.
U.S. Consumers behaviour continues to point to price sensitivity
As the labour market finds better balance versus a few years ago, it continues to provide a supportive backdrop for the U.S. consumer. That is particularly important because consumer spending accounts for more than two-thirds of the U.S. economy. Recent retail sales figures for July came in stronger than expected. Moreover, commentary from banks and credit card companies throughout the earnings season painted a picture of a consumer who is increasingly price-sensitive but still healthy in the grand scheme of things. This narrative was echoed by some major national retailers, who noted that customers are being selective and prioritizing essentials over discretionary items. While acknowledging that consumers may not be spending as hastily as they were just a year or two ago, these retailers suggested that consumers are not demonstrating any meaningful signs of weakness either.
Summary
In summary, the latest earnings season and ongoing economic data point to a healthy, albeit slowing, economy, labour market, and consumer base. Some slowing is not such a bad thing as it may lead to lower interest rates, potentially extending this economic cycle further. Nevertheless, we remain vigilant for signs of any meaningful deterioration in the economic backdrop, particularly in the labour market. We are very mindful that elevated interest rates could still have an impact on the economy despite the increasing likelihood of rate cuts being implemented through the second half of the year.
Inflation in Canada continues to slow
Headline inflation continued to ease in Canada in July to 2.5% year-over-year – one of the lowest readings since March 2021.
This moderation should help to quell concerns about sticky inflation pressures after two marginally upside months in May and June – and could support the case for the Bank of Canada’s continued cuts to interest rates.
You can read more and see more detail by clicking here.
38th Annual Wheels of Hope Golf Classic
We are proud to highlight our sponsorship of the 38th Annual Wheels of Hope Golf Classic in support of the Canadian Cancer Society and the Wheels of Hope program. Hosted at Cutten Fields on August 26th, this event is always a special engagement for our team.
We’ve been proud long-time supporters of Wheels of Hope - cancer touches all of our lives and we can’t think of a better cause than helping those in need when they need us the most. Thank you to everyone who generously supported the event and helped make it such a great success.
Summer Hours Continue
A friendly reminder that Elinesky Schuett Private Wealth is recognizing summer work hours. Until September 6th, our office will be closing at 4pm on Fridays. Thank you for your understanding.
As always, we are available to connect with you personally. Please don’t hesitate to contact us at 519-822-2024 or elineskyschuett@rbc.com.
