U.S. Economy: Three Important Themes for Investors

Download the PDF version of this insight

In contrast to financial markets’ rate-cut optimism in January after the December 2023 Fed pivot—at the start of the year, fed funds futures priced a total of 150 basis points (bps) in cuts to take place over the next 12 months, with the first one coming in March—U.S. Federal Reserve (Fed) Chair Jerome Powell had to address market concerns that the central bank would have to raise rates.¹

There was no rate cut in March. Following the May 1 meeting of the Federal Open Market Committee (FOMC) at which policymakers held rates steady, Powell emphasized at a press conference that he did not believe that it was likely that the FOMC would need to hike rates. Instead, depending on upcoming data on growth and inflation, the FOMC would either hold the policy rate steady or start cutting. Cuts could still be forthcoming in 2024 if inflation data dips again, or the labor market weakens suddenly. Following Powell’s remarks on May 1, fed funds futures indicated expectations of only one or two 25-bp rate cuts over the next 12 months.

How did the policy landscape change so markedly in a few short months? And what are the implications for investors? We think a look at the key factors shaping the current U.S. economy can provide some insights.

1. “Stronger-for-Longer” U.S. Economic Growth

The United States has had a very strong economic recovery in a global context. If we compare recent U.S. gross domestic product (GDP) growth to where it was in 2019 before the COVID-19 pandemic, it has outstripped the performance of almost any other advanced economy except Australia. (Figure 1 presents data through the first quarter for key global economies.)

Figure 1. The U.S. Economy Has Outperformed Most Other Advanced Economies

Year-over-year percentage change in real (inflation-adjusted) gross domestic product for the first quarter of 2024

Source: International Monetary Fund. For Illustrative purposes only.

In quantity terms, that means that after adjusting for the effects of inflation, real GDP in the United States is almost 10% above where it was before COVID-19. For context, that pre-pandemic level was achieved at the end of the longest expansion in U.S. economic history, when the economy was well into what most people would consider to be full employment—or even beyond full employment.

What has powered this very strong economic recovery? Initially, in the first year after shutdowns ended, it was just the economy bouncing back and going back to more normal activity levels with more businesses open again, but also the very powerful fiscal stimulus that came in two legislative packages in the spring of 2020 and 2021. Also, interest rates were cut to zero, and the Fed was providing monetary stimulus in other forms as well.

But for the past two and one-half years or so, the forces propelling growth have shifted. What has driven the economy forward is wealth creation through an appreciation in home values, which is very important in the United States, because two-thirds of American households own the home that they live in, based on data compiled by Statista. The recovery in financial markets from the downturns of 2022 has also boosted household wealth.

That has stimulated consumer spending, which has been a primary feature of the economic recovery. The public sector has done its part as well, with government spending coming back quite strongly after lagging in the early phases of the recovery. And that's what has created this strong GDP growth and taken the unemployment rate all the way back down to where it was before COVID-19.

2. Inflation and the “Last Mile” Problem

Of course, the ongoing strength in the U.S. economy has been accompanied by a resurgence in inflation, which picked up sharply during the shutdown period and immediately afterward.

Part of it was due to disruptions in global supply chains; during the pandemic and its immediate aftermath, it was very difficult to get intermediate goods (products used to produce a final good or finished product) from one place to another and to ship finished goods between countries. The onset of the war in Ukraine in early 2022 provided a big upward shock to food and energy prices for a while. As a result, key inflation measures rose to high single-digit percentages.

Looking at the personal consumption expenditures (PCE) deflator, which is the index that the Fed uses to gauge and to define its inflation target, you can see that on a year-over-year basis, the rate peaked in late 2022 at about 6.5% and then started to decrease. And it came down quite substantially through the beginning of this year; for the shorter-run data, both the three- and six-month annualized rates had come down even more sharply.

Figure 2. The U.S. Federal Reserve’s 2% Inflation Target Remains Elusive

Data for the U.S. personal consumption expenditures deflator (PCE) deflator, January 31, 2019–March 31, 2024

Source: U.S. Bureau of Economic Analysis. SAAR=Seasonally adjusted annual rate. The U.S. Personal Consumption Expenditure price index (PCE), also referred to as the PCE deflator, is a United States-wide indicator of the average increase in prices for all domestic personal consumption. Data presented on three-month, six-month, and 12-month annualized bases. Fed target refers to the U.S. Federal Reserve’s stated inflation target of 2%. For illustrative purposes only.

But in more recent months, there has been a reversal, and inflation has gone back up. And that's why the Fed did not follow through with rate cuts in March and May, and why rate cut expectations have been scaled back.

Indeed, at the press conference following the May 1 FOMC meeting, Powell asserted that the current level of short-term interest rates was restrictive, citing the normalization of the labor market and restrained spending on interest-sensitive demand categories—all factors that should contribute to a reduction in inflation. However, the last three months of higher-than-expected inflation rates have forced policymakers to wait for longer than expected before concluding that inflation was falling back to the 2% target sustainably.

And it’s that “sticky” quality in recent inflation data that points up what some observers call the “last mile” problem. Inflation came down quite sharply over the past 18 months because the supply side of the economy responded very well; supply chain issues faded; and inflation receded as the economy’s supply capacity increased very strongly. But what we seem to have now is a more difficult situation: the strength of demand in a full-employment economy that is starting to manifest itself. And demand-side inflation is what is pushing things up right now. That will be more difficult to solve because it usually takes a sharp economic slowdown, or a mild recession at least, to bring inflation down by restraining demand.

So, the last mile of bringing inflation back to the level that's considered to be consistent with a healthy economy and the Fed's target is going to be difficult. That's what investors and markets have started to worry about.

3. A Robust Pace of Job Creation

As mentioned earlier, another thing that's been very distinctive about this economy is the strength of employment creation. In the last economic expansion of the 2010s, monthly job growth, as measured by nonfarm payrolls, averaged 167,000. In the current economic expansion, we've had job growth averaging as much as 400,000 to 500,000 a month. While the pace of job creation moderated to 175,000 in the April 2024 employment report, in the three most recent months, average monthly job growth totaled 242,000, a sharply higher level than the pace seen in the last economic expansion.

As you can see in the bar chart on the left of Figure 3, the U.S. economy has consistently generated strong job growth. There have been only a few months in the past three years where payrolls have dropped below the level that was averaged for the last expansion.

Figure 3. U.S. Job Growth Remains Strong …

Monthly job growth (as measured by nonfarm payrolls) in the United States in January 2021–March 2024 versus average of 2009–2019 economic expansion

…While the Jobless Rate Remains Near Historical Lows

Headline U.S. unemployment Rate, January 1948–March 2024

Source: U.S. Bureau of Labor Statistics. For illustrative purposes only.

Job growth generates income growth, which in turn generates consumer spending, and consumer spending drives the U.S. economy because it represents nearly 70% of GDP, based on data from the U.S. Bureau of Economic Analysis. At the same time, very strong job growth leads to low unemployment. The right panel of Figure 3 shows that the current jobs boom has taken the unemployment rate back below 4%, where it was at the end of the last economic expansion.

This is a very tight labor market, a circumstance that typically puts upward pressure on wages. Not only are incomes rising because jobs are increasing rapidly, but wages are also increasing at a solid clip as well. That's good for spending and for demand, but there is a downside: excess demand keeps inflation high. Alongside the increased spending generated by higher employment in a very tight economy comes the pressure of rising labor costs on businesses’ bottom lines, and thus, their need to pass higher costs along to their customers. In such an environment, it will be hard to get inflation all the way back to 2%.

What should investors take away from all this?

Equities

Right now, there doesn’t appear to be any U.S. recession on the horizon. So corporate earnings should continue to grow; the market, keying on those improved profits, should continue to rise in price. Equities will have to overcome higher bond yields, which is a negative. Overall, this is not a booming scenario where “all systems are go,” but we think it's a positive market environment for stocks.

We also think that in an environment where inflation is a worry, you want to own companies that have pricing power because they can pass on cost increases much more easily. Where do you find these kinds of companies? We believe the innovation space is the place.

We have also emphasized stocks of quality companies in our portfolios, which is an appropriate focus in this environment because it tends to locate companies that have steady, consistent revenue growth. That growth stems from the quality of their businesses and how they're run, and their superior competitive positioning.

What about outside the United States? International markets are quite attractively valued relative to the United States right now. We think that over the medium to long run, they present the opportunity for some attractive returns.

Fixed Income

If bond yields are going up, we think it makes sense for investors to shorten the duration of their exposure and emphasize shorter-maturity investments. They may also want to take advantage of floating-rate-related products, which can react very quickly to rising short-term interest rates. Core strategies focused on shorter-duration investing are also well positioned, in our view.

And if there is no recession on the horizon, credit may continue to outperform. As of April 26, high yield spreads (based on the ICE BofA U.S. High Yield Constrained Index) were around 300 bps, which is, historically, on the tight side. We are not likely to get the opportunity for a dramatic post-recession compression of spreads, but investors can still realize attractive positive carry above U.S. Treasury yields. Getting 300 bps of yield over Treasuries in a 3% inflation environment offers the opportunity for a solid real (inflation-adjusted) return. And that should translate to other parts of the taxable bond market such as asset-backed securities or other components of credit.

LLDYX

Class I

Short Duration Income Fund

The Lord Abbett Short Duration Income Fund seeks to deliver a high level of current income consistent with the preservation of capital. Learn more.

Learn More

LGLIX

Class I

Growth Leaders Fund

The Lord Abbett Growth Leaders Fund Class A seeks to deliver long-term growth of capital by investing primarily in stocks of U.S. companies. Learn more.

Learn More

LAFYX

Class I

Affiliated Fund

The Lord Abbett Affiliated Fund Class A invests primarily in dividend-paying stocks of large U.S. companies. Access performance and portfolio information.

Learn More

EMILX

Class I

Emerging Markets Equity Fund

The strategy will seek to deliver long-term capital appreciation by investing in equity securities that are tied economically to emerging market countries.

Learn More

LAFYX

Class I

Affiliated Fund

The Lord Abbett Affiliated Fund Class A invests primarily in dividend-paying stocks of large U.S. companies. Access performance and portfolio information.

Learn More

About the Author

Giulio Martini

Partner, Director of Strategic Asset Allocation

Giulio Martini is responsible for directing the portfolio management, research, and trading activities for the firm’s multi asset class strategies. Mr. Martini is also responsible for overseeing the currency team.

Important Information

¹Source for all fed funds futures data referenced herein: Bloomberg.

Unless otherwise noted, all discussions are based on U.S. markets and U.S. monetary and fiscal policies.

References to fund yields are for informational purposes only and are not meant to represent any specific Lord Abbett bond fund or portfolio.

Asset allocation or diversification does not guarantee a profit or protect against loss in declining markets.

No investing strategy can overcome all market volatility or guarantee future results.

The value of investments and any income from them is not guaranteed and may fall as well as rise, and an investor may not get back the amount originally invested. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon, and risk tolerance.

Market forecasts and projections are based on current market conditions and are subject to change without notice.

Projections should not be considered a guarantee.

Equity Investing Risks

The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. While growth stocks are subject to the daily ups and downs of the stock market, their long-term potential as well as their volatility can be substantial. Value investing involves the risk that the market may not recognize that securities are undervalued, and they may not appreciate as anticipated. Smaller companies tend to be more volatile and less liquid than larger companies. Small cap companies may also have more limited product lines, markets, or financial resources and typically experience a higher risk of failure than large cap companies.

Fixed-Income Investing Risks

The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise. High yield securities, sometimes called junk bonds, carry increased risks of price volatility, illiquidity, and the possibility of default in the timely payment of interest and principal. Bonds may also be subject to other types of risk, such as call, credit, liquidity, and general market risks. Longer-term debt securities are usually more sensitive to interest-rate changes; the longer the maturity of a security, the greater the effect a change in interest rates is likely to have on its price.

The credit quality of fixed-income securities in a portfolio is assigned by a nationally recognized statistical rating organization (NRSRO), such as Standard & Poor’s, Moody’s, or Fitch, as an indication of an issuer’s creditworthiness. Ratings range from ‘AAA’ (highest) to ‘D’ (lowest). Bonds rated ‘BBB’ or above are considered investment grade. Credit ratings ‘BB’ and below are lower-rated securities (junk bonds). High-yielding, non-investment-grade bonds (junk bonds) involve higher risks than investment-grade bonds. Adverse conditions may affect the issuer’s ability to pay interest and principal on these securities.

Glossary & Index Definitions

A basis point is one one-hundredth of a percentage point.

Carry is the difference between the yield on a longer-maturity bond and the cost of borrowing.

Duration is a measure of the sensitivity of the price (the value of principal) of a fixed income investment to a change in interest rates.

The Federal Reserve (Fed) is the central bank of the United States. The Federal Open Market Committee (FOMC) is the branch of the Fed that determines the direction of monetary policy in the United States.

The federal funds rate is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight on an uncollateralized basis. Fed funds futures are financial futures contracts based on the federal funds rate and traded on the Chicago Mercantile Exchange. These futures are considered a direct reflection of collective marketplace insight regarding the future course of the Federal Reserve's monetary policy.

Spread is the percentage difference in current yields of various classes of fixed-income securities versus Treasury bonds or another benchmark bond measure. A bond spread is often expressed as a difference in percentage points or basis points (which equal one-one hundredth of a percentage point). The option-adjusted spread (OAS) is the measurement of the spread of a fixed-income security rate and the risk-free rate of return, which is adjusted to take into account an embedded option. Typically, an analyst uses the Treasury securities yield for the risk-free rate.

The U.S. Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them.

The U.S. Personal Consumption Expenditure price index (PCE), also referred to as the PCE deflator, is a United States-wide indicator of the average increase in prices for all domestic personal consumption. It is benchmarked to a base of 2009 = 100. Using a variety of data including U.S. Consumer Price Index and Producer Price Index prices, it is derived from personal consumption expenditures, the largest component of U.S. gross domestic product in the U.S. Bureau of Economic Analysis’ National Income and Product Accounts report.

The ICE BofA U.S. High Yield Constrained Index is a rules-based index consisting of U.S. dollar-denominated, high yield corporate bonds for sale in the U.S. The index is designed to provide a broad representation of the U.S. dollar-denominated, high yield corporate bond market. The index is a modified market value-weighted index with a cap on each issuer of 2%.

Source ICE Data Indices, LLC (“ICE”), used with permission. ICE PERMITS USE OF THE ICE BofAML INDICES AND RELATED DATA ON AN “AS IS” BASIS, MAKES NO WARRANTIES REGARDING SAME, DOES NOT GUARANTEE THE SUITABILITY, QUALITY, ACCURACY, TIMELINESS, AND/OR COMPLETENESS OF THE ICE BofAML INDICES OR ANY DATA INCLUDED IN, RELATED TO, OR DERIVED THEREFROM, ASSUMES NO LIABILITY IN CONNECTION WITH THE USE OF THE FOREGOING, AND DOES NOT SPONSOR, ENDORSE, OR RECOMMEND LORD ABBETT, OR ANY OF ITS PRODUCTS OR SERVICES.

Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.

This material may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

The views and opinions expressed are as of the date of publication, and do not necessarily represent the views of the firm as a whole. Any such views are subject to change at any time based upon market or other conditions, and Lord Abbett disclaims any responsibility to update such views. Lord Abbett cannot be responsible for any direct or incidental loss incurred by applying any of the information offered.

This material is provided for general and educational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Lord Abbett product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice.

Please consult your investment professional for additional information concerning your specific situation.

Important Information for U.S. Investors

Lord Abbett mutual funds are distributed by Lord Abbett Distributor LLC.

FOR MORE INFORMATION ON ANY LORD ABBETT FUNDS, CONTACT YOUR INVESTMENT PROFESSIONAL OR LORD ABBETT DISTRIBUTOR LLC AT 888-522-2388, OR VISIT US AT LORDABBETT.COM FOR A PROSPECTUS, WHICH CONTAINS IMPORTANT INFORMATION ABOUT A FUND'S INVESTMENT GOALS, SALES CHARGES, EXPENSES AND RISKS THAT AN INVESTOR SHOULD CONSIDER AND READ CAREFULLY BEFORE INVESTING.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett’s products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

Important Information for non-U.S. Investors

Note to Switzerland Investors: In Switzerland, the Representative is ACOLIN Fund Services AG, Leutschenbachstrasse 50, CH-8050 Zurich, whilst the Paying Agent is Bank Vontobel Ltd., Gotthardstrasse 43, CH- 8022 Zurich. The prospectus, the key information documents or the key investor information documents, the instrument of incorporation, as well as the annual and semi-annual reports may be obtained free of charge from the representative. In respect of the units offered in Switzerland, the place of performance is at the registered office of the representative. The place of jurisdiction shall be at the registered office of the representative or at the registered office or domicile of the investor.

Note to European Investors: This communication is issued in the United Kingdom and distributed throughout the European Union by Lord Abbett (Ireland) Limited, UK Branch and throughout the United Kingdom by Lord Abbett (UK) Ltd. Both Lord Abbett (Ireland) Limited, UK Branch and Lord Abbett (UK) Ltd are authorized and regulated by the Financial Conduct Authority.

A decision may be taken at any time to terminate the arrangements made for the marketing of the Fund in any EEA Member State in which it is currently marketed. In such circumstances, Shareholders in the affected EEA Member State will be notified of this decision and will be provided with the opportunity to redeem their shareholding in the Fund free of any charges or deductions for at least 30 working days from the date of such notification.

Lord Abbett (Middle East) Limited is authorised and regulated by the Dubai Financial Services Authority (“DFSA”). The entire content of this document is subject to copyright with all rights reserved. This research and the information contained herein may not be reproduced, distributed or transmitted in any jurisdiction or to any other person or incorporated in any way into another document or other material without our prior written consent. This document is directed at Professional Clients and not Retail Clients. Any other persons in receipt of this document must not rely upon or otherwise act upon it. This document is provided for informational purposes only. Nothing in this document should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction. Nothing contained in this document constitutes an investment, an offer to invest, legal, tax or other advice or guidance and should be disregarded when considering or making investment decisions.

Note to Singapore Investors: Lord Abbett Global Funds I plc (the “Company”) and the offer of shares of each sub-fund of the Company do not relate to a collective investment scheme which is authorized under Section 286 of the Securities and Futures Act, Ch. 289 of Singapore (“SFA”) or recognized under Section 287 of the SFA, and shares in each sub-fund of the Company are not allowed to be offered to the retail public. Pursuant to Section 305 of the SFA, read in conjunction with Regulation 32 of and the Sixth Schedule to the Securities and Futures (Offers of Investments) (Collective Investment Schemes) Regulations 2005 (the “Regulations”), the Lord Abbett Global Multi-Sector Bond Fund, the Lord Abbett High Yield Fund, the Lord Abbett Short Duration Income Fund, the Lord Abbett Ultra Short Bond Fund, the Lord Abbett Climate Focused Bond Fund, the Lord Abbett Emerging Markets Corporate Debt Fund and the Lord Abbett Multi Sector Income Fund have been entered into the list of restricted schemes maintained by the Monetary Authority of Singapore for the purposes of the offer of shares in such sub-funds made or intended to be made to relevant persons (as defined in section 305(5) of the SFA), or, the offer of shares in such sub-funds made or intended to be made in accordance with the conditions of section 305(2) of the SFA. These materials do not constitute an offer or solicitation by anyone in Singapore or any jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation.

Note to Hong Kong Investors: The contents of this material have not been reviewed nor endorsed by any regulatory authority in Hong Kong. An investment in the Fund may not be suitable for everyone. If you are in any doubt about the contents of this material, you should consult your stockbroker, bank manager, solicitor, accountant or other financial adviser for independent professional advice. The Fund is not authorised by the Securities and Futures Commission ("SFC") in Hong Kong pursuant to Section 104 of the Securities and Futures Ordinance (Cap 571, Laws of Hong Kong) ("SFO"). This material has not been approved by the SFC in Hong Kong, nor has a copy of it been registered with the Registrar of Companies in Hong Kong and, must not, therefore, be issued, or possessed for the purpose of issue, to persons in Hong Kong other than (1) professional investors within the meaning of the SFO (including professional investors as defined by the Securities and Futures (Professional Investors) Rules); or (2) in circumstances which do not constitute an offer to the public for the purposes of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32, Laws of Hong Kong) or the SFO. This material is distributed on a confidential basis and may not be reproduced in any form or transmitted to any person other than the person to whom it is addressed.