Capital Perspectives: ORMCA meeting highlights shifting economic and labor trends

On July 13 ^th I had the pleasure of providing the Market & Economic Update at the Oklahoma Ready Mixed Concrete Association’s (ORMCA) summer meeting. Having covered “Markets” in a previous submission, below are a few presentation takeaways regarding “Economics.”

I noted that the economy was resilient, but clearly softening. To substantiate that claim I presented a graph showing how the Atlanta Fed GDPNOW estimate for 2Q24 had deteriorated throughout the quarter, then showing just a 1.6 percent growth estimate, as the model got updated with underwhelming data throughout the period. Further, per EIA, gasoline demand had been comping negative on a year-over-year basis for much of ‘24. Since then, the BEA reported that second quarter GDP growth came in at 3.1%, and gasoline demand has started comping positive to year ago levels.

First off, it is funny/humbling how short a shelf-life market and economic commentary can have. Secondly, the fact that these signs of renewed economic momentum have seemingly done nothing to push back market expectations for near-term Fed rate cuts explains a lot about why there has been such a furious rotation out of large tech companies into more economically cyclical corners of the stock market in recent weeks.

Rate cut expectations have not been frustrated because, while the jobs market is still strong, it has been softening, making the risks for the Fed’s inflation and employment mandates more “two-sided.” Regarding labor market softening, here are a few data points: (1) The unemployment rate is 4.1%, up from 3.6% a year ago. (2) Continuing unemployment claims were reliably around 1.8 million for much of the past year, but have been about 50 thousand higher than that over the past month as unemployed individuals are having more trouble finding reemployment. (3) Ratios indicative of job market tightness such as job openings to unemployment and quits to total separations have almost or entirely normalized to pre-pandemic levels. As a result of the labor market loosening, per the U.S. BLS, annual average hourly earnings growth has declined from 5.9% in March 2022 to 3.9% in June 2024. This cooling has contributed to a tempering of overall price level advances.

This was my third time with the ORMCA, so I was able to pull slides from prior presentations to show how CPI inflation and its components had progressed in recent years. In June 2022, inflation growth was nearing double digits, driven primarily by significant gains in the Goods and Food & Energy components. By the time I met with them again in February 2023 the overall CPI inflation rate had crested, as the rate of change in the aforementioned components had declined dramatically from high peaks in the intervening months. However, the Services and Shelter components, which are the “stickier” aspects of the CPI basket, were still showing persistently higher inflation readings. More recently, the overall inflation rate has come down to 3 percent. Goods and Food & Energy have recently shown very low or even negative (i.e. deflation) year-over-year price growth. On the other hand, while off peak, Services and Shelter inflation are still growing in the mid-single-digits, thwarting the Fed’s goal of returning inflation to 2 percent.

It seems very likely as of this writing that the Fed will cut rates by a quarter of a percent in September. However, given the Fed’s 2 percent goal and the stickiness of Services and Shelter inflation, it is likely that the market narrative will shift from “When will the Fed start cutting rates?” to “How long will the fed funds rate remain over 4 percent?”. The latter is a more important question.

Chas Craig is principal at C.E.C. Wealth Management ( www.cecwm.com ).

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