One thing moving markets…

… is cooling inflation and a softening labor market paving the way for Fed rate cuts. Despite high absolute prices and decades-high borrowing costs, the economy remains on relatively stable footing. Inflation is nearing the Fed’s 2% target, the job market is gradually cooling, and the stock market continues to hover at record highs. Now that the first half of 2024 is in the rearview mirror, can it stay on track through this year’s end and beyond?

Here's a look at where we’ve been and where we’re headed:

Noteworthy numbers

🧊 Coming in cool: Core PCE – the Federal Reserve’s preferred inflation metric – fell to 2.6% in May, the lowest it’s been since March 2021. Though the overall CPI has increased 20% since February 2020.¹

📈 Stock market surge: The S&P 500 was up 15.2% in the first six months of 2024, having scored several new record closes in recent months; though stock market concentration is the highest it’s been in 60 years, with a few companies driving most of the returns.

🟢 Open to work: The number of job openings has steadily decreased from about 8.9 million in December 2023 to roughly 8.1 million in May 2024. Average hourly pay was also up 3.9% year over year to $35.00 — though it’s the smallest annual wage growth in three years.^2,3

🚩 Recession red flags: Recession warning signs are flashing, with a 0.43% rise in unemployment edging closer to the 0.5% mark that typically indicates a recession by the “Sahm Rule” standards.

Let’s zoom in on how inflation, markets, jobs, and AI are faring this year.

Inflation progress

Through 2023, inflation measured by the Consumer Price Index (CPI) averaged 4.1%.⁴ At last reading, it was down to 3.0%, its lowest level in more than three years.⁵ Meanwhile, Core Personal Consumption Expenditures (PCE) — the version of the price index excluding food and energy — started the year at 2.9%, but fell to 2.6% in May.⁶

Housing costs have been one of the biggest sticking points this year, accounting for more than 32% of May’s total PCE inflation.⁷  The average sales price as of new houses sold in May was $520,000, while 30-year fixed mortgages hoover at 7.37%.^8,9 However, the Fed has repeatedly emphasized that those price gains are expected to cool. Overall inflation excluding shelter has mostly returned to sustainable levels, so this has given the Fed more confidence that it will soon achieve its 2% target.

The Fed has held interest rates steady at a multi-decade high of 5.25% to 5.5% for every meeting in 2024 to date, but relief from both inflation and interest rates may be just around the bend.

Market moves

U.S. equities fared well in the first six months of 2024: The S&P 500 increased just over 15%, and the index, along with the tech-heavy Nasdaq Composite, notched several new record closes in recent months.

However, the rally is not necessarily a broad one, as it has been highly concentrated in a few tech companies benefiting from advancements in generative AI technology. Chipmaker NVIDIA, for example, surged 150% in those six months, briefly taking the #1 spot in the world by market capitalization.

Still, it has translated into good news for investor portfolios and retirement accounts. Household net worth increased to a record high of $5.1 trillion in the first quarter, largely driven by stock and housing market gains, which only continued higher in the second quarter.¹⁰

The past six months haven’t been without some bumps in the road. The 10-Year U.S. Treasury yield — the basis of most lending throughout the economy, including mortgage rates — had a relatively volatile six months, rising from 3.87% to 4.4%. This has sent borrowing rates for credit cards, auto loans, and mortgages higher, putting a squeeze on consumers.

The U.S. dollar rose roughly 4.4% in the first half of the year, giving Americans more purchasing power abroad when traveling.

Labor market cooldown

One reason the Fed has delayed rate cuts for so long is the resilience of the labor market. In 2023, the U.S. economy added 225,000 per month on average, which suggested to the Fed that American households could withstand higher interest rates for longer.¹¹

But those high borrowing costs may finally be taking their toll on hiring. Average monthly job gains in the second quarter of 2024 were just 177,000, compared to 212,000 in the last three months of 2023. The unemployment rate also increased to 4.1% in June from a near-50-year low of 3.7% in December 2023.¹²

Meanwhile, the number of job openings has steadily decreased from about 8.9 million in December 2023 to roughly 8.1 million in May 2024.¹³ This slowdown in hiring was particularly noteworthy last month. Unemployment claims in the last four weeks of June saw the four highest levels of the year.¹⁴

Workers' pay continues to rise, with average hourly earnings up 3.9% in June compared to the previous year to $35 — a fraction of the $240 Americans say an hour of their time is worth on average, according to an Empower study. Though it’s the smallest annual wage growth in three years, it still outpaced the 3% increase in consumer prices.

When it comes to salary, Americans say they need $284,167 per year to be happy, according to Empower research. Millennials put the number at $525k, Gen Z $128k, Gen X $130k, and Boomers $124k, annually.

The economic outlook

The labor market isn’t the only one cooling. The economy is slowing, too, although it appears to remain on stable footing heading into the remainder of the year.

High borrowing costs and persistent inflation have proven to be a notable strain on consumers. The share of credit card balances delinquent for more than 90 days increased to 10.7% in the first quarter, compared to 8.2% the year prior.¹⁵ Retail sales growth is also slowing, suggesting consumers may be pulling back their budgets through year’s end.¹⁶

AI and what’s next

This year, the big five tech firms have big budgets for AI: $400 billion to be exact, mostly on AI-related hardware and for R&D.¹⁷ Yet, according to findings from the Census Bureau, only 5% of businesses have used AI products and services in the past two weeks. Looking ahead at the next six months, 6.5% business say they plan to start.¹⁸

Companies have now had multiple quarters to explore the potential of AI and, in the coming months, this should lead to a make or break moment for the industry.

The road ahead in 2024

• Recession risks: The Conference Board’s consumer survey showed a recessionary outlook for the fifth straight month in June.¹⁹
• Economic growth: The Congressional Budget Office projects growth slowing from 3.1% in 2023 to 2.0% in 2024 and inflation hitting 2% by 2026. Although growth is expected to slow, it would be hovering at the average of the last decade, which could be enough to secure a soft landing.²⁰
• Rate cuts: We are likely to see multiple rate cuts in 2024, especially after June’s deflationary CPI print, which would expedite relief to consumers, potentially shifting their recessionary outlook.
• Investment opportunities: Rate cuts could drive $6 trillion from money market funds into the stock market as investors facing lower returns look for new opportunities.²¹