Market Note – January 9, 2024

By Hightower Great Lakes on January 9, 2024

Goods Versus Services

The United States spends nearly 70% of its total consumption on services and 30% on goods. During the pandemic, consumers shifted their spending towards goods because services shut down. During the ensuing recovery and supply chain challenges, consumers shifted their spending back towards services.

Pent-up demand and services have driven the U.S. economy for much of the past three years. We are beginning to see earmarks that U.S. consumers are now shifting more of their discretionary spending towards goods.

Chart 1: Absolute Services Spending Nearly Double Amount of Goods Spending[1]

Costco (COST) recently reported a 10% y/y increase in December revenues, an acceleration from the 5.1% y/y increase it reported in November. Same-store-sales rose 8.5% y/y in December, an acceleration from 3.5% y/y in November. In line with deflationary costs, goods providers are seeking higher volumes to drive revenue growth in 2024, whereas price action drove revenue growth in 2023.

It is likely the economy is experiencing an inflection in goods versus services spending. A rebound in housing will further support this shift to goods. Fourth quarter earnings will offer insights into whether companies are also expecting shifts in discretionary spending and how management teams are positioning in this new environment that depends on higher volumes to expand profits.

Jobs Less Plentiful

We have consistently emphasized the availability of jobs and how jobs have remained a catalyst for the U.S. economy – there is no recession when the unemployment rate is below 4% and there are more than two jobs available for every unemployed person.

The December unemployment rate was 3.7% – its 25^th consecutive month below 4%. The December ADP Employment Survey reported better-than-expected figures: 164,000 new employees, 8.79 million job openings and 216,000 new nonfarm payrolls. While these numbers beat expectations, job openings and new nonfarm payrolls have been trending downward for the past two years.

Chart 2: Jobs Tightening Represents Mean Reversion and Still Elevated Historically[2]

New nonfarm payrolls are still above the ten-year average (216,000 versus 152,000) and job openings are still significantly above the pre-pandemic peak (1.196 million more job openings versus 2018 peak).

The slowdown from the pandemic era represents a normalizing economy – companies are finding equilibrium in their paces of hiring and have made great progress in their strategies to manage all the geopolitical, inflation, supply and demand volatility.

There are less workers switching jobs for higher wage opportunities – good news for wage-pressure inflation. Hourly earnings expanded +4.1% y/y in December, higher than the latest CPI measurement. Individuals are seeing real earnings growth, which supports consumption and credit merit.

Chart 3: Pace of Wages Exceeds Pace of Inflation[3]

Consumers and Businesses Are Pushing Back on Price

In 2024, companies will be more focused on growing volumes because buyers are pushing back on price. Producer prices (PPI) peaked in March 2022 at +11.6%. In November, PPI expanded just 0.8% y/y.

Carrefour, one of France’s largest supermarkets, will halt its sales of PepsiCo products because of its price increases.[4] We expect that much of the price action is already in place and companies are being pushed to manage costs and increase volumes because price inelasticity has reached its end.

Energy Prices Are Another Component Giving Fed (and Consumers) Breathing Room

The average gas price in the U.S. is near $3/gallon. Prices have not reached this milestone in more than two years. Lower gas prices support consumer wallets.

There are many deflationary parts to the economy, and this gives the Fed additional room to cut interest rates. Markets expect rate cuts, and the Fed can support the labor market and overall economy with some easing to its monetary policy.

Consensus expectations for 11.7% y/y earnings growth in 2024 may also rely on some easing monetary policy. ISM leading indicators remain steady, with goods activity marginally contracting and services activity marginally expanding.

Chart 4: Economy Looking for a Catalyst[5]

The Week Ahead

Earnings – Friday: BLK, JPM, UNH, DAL, WFC, BAC, C.

Economics – Tuesday: NFIB Small Business Index (December); Thursday: CPI (December); Friday: PPI (December).

Return for Selected Indices^[6]

		% Change
Index Name	End of Week	Week	Month	YTD
S&P 500 INDEX	4,697	-1.50%	3.36%	24.36%
NASDAQ COMPOSITE	14,524	-3.23%	2.77%	40.03%
DOW JONES INDUS. AVG	37,466	-0.56%	4.00%	15.54%
RUSSELL 1000 INDEX	2,579	-1.62%	3.47%	24.45%
RUSSELL 2000 INDEX	1,951	-3.73%	5.52%	12.52%
FTSE 100 INDEX	7,690	-0.56%	2.43%	7.08%
HANG SENG INDEX	16,535	-3.00%	0.56%	-13.15%
NIKKEI 225	33,377	-0.26%	-0.10%	30.56%

				% Change
Index Name	YTW	Spread	Duration	Week	Month	YTD
U.S. TREASURY	4.23%		6.25	-1.02%	0.83%	2.99%
U.S. AGGREGATE	4.72%	+48 bps	6.31	-1.20%	1.05%	4.26%
U.S. CORPORATE INV. GRADE	5.28%	+104 bps	7.22	-1.54%	1.05%	6.85%
U.S. CORPORATE HIGH YIELD	8.00%	+377 bps	3.80	-1.12%	1.79%	12.17%
U.S. MUNICIPAL BOND INDEX	3.28%		5.70	-0.29%	1.36%	6.09%

Click here to read last week’s Market Note (12/18).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

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This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: FactSet (chart). As of January 7, 2024.

[2] Source: FactSet (chart). As of January 7, 2024.

[3] Source: FactSet (chart). As of January 7, 2024.

[4] Source: CNN. As of January 7, 2024.

[5] Source: FactSet (chart). As of January 7, 2024.

[6] Source: Bloomberg. As of January 7, 2024.