Economic and business conditions in the American real economy remain solid as firms continue to register displeasure with the permanent increase in price levels, even as large majorities of survey participants express confidence that the economy, revenues and earnings will improve over the next six months.
Data through midyear indicates that the U.S. economy expanded at a 3.1% year-over-year pace. Our proxy for the health of the American real economy—real final private demand from domestic purchasers, excluding volatile trade, inventory accumulation and government consumption—increased at a rock-solid 2.9%, activity that clearly generated sufficient momentum to support elevated levels of business confidence.
That business confidence in turn has generated stout increases in forward-looking capital expenditures, providing businesses with the capabilities to meet demand, even as the pace of hiring has slowed.
While clear displeasure with the permanent upward shift in price levels presents an ongoing source of tension for the middle market firms that generate roughly 40% of U.S. gross domestic product, the ability to meet demand while slowing the pace of hiring should result in improved revenues and earnings. This is illustrated in the optimistic forward look in the third-quarter survey.
As the Federal Reserve embarks on its long-awaited policy pivot toward lower interest rates, we will keenly monitor the release of pent-up demand among firms looking to purchase a greater quantity of equipment, software and intellectual property. These capital outlays underscore the integration of sophisticated technology into the production of goods and provision of services inside the beating heart of the American real economy.
The data
A full 57% of survey participants expect the economy to improve during the final three months of 2024 and into the first quarter of 2025, in contrast with the 38% who stated the economy improved during the current quarter and the 34% who said it remained unchanged.
As the economy moves further away from the current price shock and past the upcoming presidential election, we suspect that topline views of it will improve.
So it was of little surprise that 65% of respondents noted an increase in prices paid in the current quarter, and 67% said they expect to pay more going forward. Similarly, 49% said they had passed along some of those price increases downstream, while 63% registered that they will do so over the next six months.
However, much like what occurred following the period of elevated inflation from 1965−1985, both households and businesses will continue to express displeasure about prices paid and prices received well past the point at which price stability has been restored to the U.S. economy; this is why business executives must improve their capacity to differentiate between noise and signal in business sentiment and condition surveys.
An inability to do so will result in lost opportunities as well as potential revenues and net earnings left on the table.
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