Watermark Wire-Q1 2024-Economic Commentary

Watermark Wire: Q1’24 Economic Commentary

News, Wire

Economic growth in the last quarter of 2023 was stronger than expected, leading to hopes for a ‘soft landing’ in Q1’24 for the US economy. While a robust stock market performance during the first quarter increased investor optimism, inflationary pressures, a delay in rate cuts, and rising concerns over national debt levels have signaled an unfavorable opening for 2024. This commentary will discuss 4 key developments in the economy and what they mean for you and your business.

1. Leading/Lagging Indicators

US GDP Growth of 1.4% for Q1’24 was a disappointment, below the Atlanta Fed’s projection of 2.5% growth. This trend indicates a deceleration from the 3.3% GDP expansion witnessed in Q4’23 and represents a more significant decline from the 4.9% growth observed in Q3’23.

In March, the U.S. economy added 303k jobs, much higher than the 200k expected and the most since last summer. Concurrently, the unemployment rate declined to 3.8%[1]. Despite these positive developments, there are concerns regarding the interpretative accuracy of the job report. Observers note minimal changes in both the labor force participation rate and the employment-to-population ratio during the month, suggesting that the reduction in the unemployment rate could be attributed to new entrants into the job market, driven by the recent surge in illegal immigration. In the private sector, the 3-month annualized growth rate of payrolls was 1.91%, which was below the historical median. The annualized growth rate in Government payrolls was 3.41%, which was above the historical median. When considering these two sectors together in the context of a positive jobs report, a larger proportion of the newly created jobs were in the government sector, as opposed to the private sector[2].

Inflation remains significantly below 2023 heights, stubbornly above the Federal Reserve’s target of 2%. The Consumer Price Index (CPI) increased 0.3% in January and 0.4% in February. Consumer prices increased by 0.4% in March, totaling 3.5% annually, which was higher than expected and the highest annual reading since 2023[3]. The rising costs of gasoline and shelter drove over half of the monthly increase in the index for all items with the price for crude oil approaching $90 a barrel. Due to the hot inflation data in Q1, the futures market no longer expects a rate cut at the June Federal Reserve Meeting[4].


According to data from the Bureau of Labor Statistics, the Producer Price Index (PPI), an important indicator of wholesale inflation, experienced a 2.1% increase over the 12 months ending March 2024, up from a 1.6% gain in February. While the 2.1% increase was lower than economist’s estimates of 2.3%, the uptick in the prices producers pay for goods and services points to the persistence of inflation in Q1 of 2024, the bumpy path to bring it lower, and reinforces concerns that interest rates may remain elevated for an extended period. See a summary of lagging and leading economic indicators below.

Lagging Indicators as of April 2024

Real GDP GrowthUnemployment RateConsumer Price Index % ChangePPI Index % ChangeFederal Funds Rate
2021 Average5.9%5.4%4.7%10%0.08%
2022 Average0.7%3.6%8.0%6.40%1.68%
2023 Average1.6%3.7%3.2%1.10%4.58%
Q1 2024 Actual1.4%3.8%3.5%3.60%5.25%
2024 Projected1.6%4.2%2.6%N/A4.60%

Leading Indicators as of April 2024

1 Year U.S. TreasuryBuilding Permit % Change% Change in Durable GoodsManufacturing JobsStock Market (S&P 500)
2021 Average0.1%13.3%18.5%1.55%26.89%
2022 Average2.8%-5.9%-0.4%3.93%-19.44%
2023 Average5.1%1.9%1.1%0.10%26.29%
Q1 2024 Actual5.1%1.5%-2.7%-13.50%30.60%
2024 Projected4.8%1.4%N/AN/AN/A
Source: Bureau of Labor Statistics, March 2024

Takeaways. The odds of at least one 25bp cut by the end of the June meeting declined from over 50% to less than 8% currently, representing the most pessimistic forecast since last October.  A takeaway is that macro uncertainty must be factored into business planning. Timing considerations, always a key factor in strategy and M&A, are even more important in today’s rapidly changing macro environments.

2. Ballooning U.S. Debt

The government continues to stimulate the economy through significant deficit spending, exponentially increasing national debt levels. U.S. national debt currently exceeds $34 trillion with $1 trillion in additional debt being added every 100 days!  Foreign entities hold $7.6 trillion of U.S. debt in treasuries, indicating that debt escalation could drastically increase interest payments to foreign creditors. National debt interest expense is projected to surpass the marginal increase of nominal GDP annually, putting the U.S. economy in a vulnerable position[5]. The Congressional Budget Office has forecasted that the debt-to-GDP ratio, which stood at 97% at the end of the previous year, is likely to escalate to 156% by the year 2054. These issues have prompted Fitch to downgrade the credit rating of the nation’s long term credit score from AAA to AA+, citing concern over the government’s ability to address the debt issue[6].

JPMorgan CEO Jamie Dimon states in his annual letter to shareholders that interest rates could soar to 8% in the coming years if the government continues its high deficit spending, citing fiscal policy, remilitarization of the world, the green transition, and increased energy costs as culprits. Dimon says, “the economy is being fueled by large amounts of government deficit spending and past stimulus. This may lead to stickier inflation and higher rates than markets expect.” [7]

Takeaways.  The economic impact of the soaring US debt levels will have several implications. In the short term, the stimulus spending may artificially boost economic growth by adding jobs, but in the long run the high levels of debt will have the opposite impact as the government will need to raise taxes to offset the spending. As the national debt increases, there also will be an upward pressure on interest rates, making borrowing more expensive for consumers and businesses and discouraging economic activity. Finally, high levels of debt might impact the strength and stability of the US dollar, otherwise known as “de-dollarization.” This has a higher chance of occurring due to decreased confidence of investors in the US government’s ability to pay debt and against a backdrop of high national debt and interest rates, the U.S dollar is becoming more expensive for foreign nations.  These forces are working against businesses and must be taken into account as macro factors that will influence your businesses’ performance.

3. The Stock Market

Despite the Federal Reserve’s delay in rate cuts and hawkish repricing of monetary policy, the stock market has been resilient. The S&P 500 gained 10.6% in Q1, taking total returns to just below 30% over the last 12 months.  Gains were dominated by technology stocks due to the strong performance of large caps with a key driver being artificial intelligence (AI).  A primary concern among investors is the soaring valuations of tech companies, driven by exuberant AI sentiment and speculative fervor.  Although these companies have shown impressive growth potential, their lofty valuations raise concerns about their sustainability and vulnerability to a potential market correction. This also points to the concentration risk present in major stock indices, characterized by a few companies having a disproportionate impact on overall market performance. For example, NVIDIA was the single largest contributor to S&P500 performance with a return of 83% in Q1 alone. A downturn in a small number of influential stocks triggers wider market repercussions, heightened volatility and an increase in loss potential.

Takeaways. Overall, investors remain vigilant even as the potential for rate cuts has diminished. Additionally, slightly over 70% of S&P 500 companies that issued guidance for the first quarter of 2024 gave “negative” EPS guidance or expectations for earnings to contract. This is the second-highest percentage of companies issuing negative guidance since Q1’16, although it is tied with Q2’19. However, a similar scenario occurred in Q1’23, after which the S&P 500 still managed an annual return of 24.8%. Similarly, following Q2’19, the S&P 500 concluded the year with an 11.4% gain[8]. So, despite the pessimistic sentiment of these S&P 500 companies, the last few times this happened, it appears that the market largely overlooked the negativity, and continued to perform robustly.   Therefore, a takeaway is to closely monitor these macro-economic issues and instill into your company highly adaptable, executable strategies to protect your competitive advantages despite the uncertainties of the stock market.

4. Geopolitics

The current macroeconomic environment will have a large impact on the 2024 Presidential Election as voters assess President Biden and former President Trump’s ability to navigate looming economic issues. As demonstrated historically in the US, the Central Bank has significant autonomy to control monetary policy.  However, some economists call into question whether the Federal Reserve’s policies will be swayed by one side of the political spectrum before November, especially considering the opposing economic agendas of the candidates. The incoming president will oversee the expiration of several provisions of the Tax Cuts and Jobs Act (TCJA), originally passed by Trump in 2017. Upon the TCJA expiration in 2025, there will be a restoration/increase of the top marginal tax rate for high income earners from 37% to 39.6%. President Biden has called for repealing these tax cuts for the wealthy to reduce the budget deficit while imposing new taxes on businesses, as demonstrated in the table below.  If Trump wins the election and the Republicans secure Congress, it is more likely that the provisions of the TCJA benefiting businesses and high-income earners would be prolonged.

Tax increases

New Taxes Proposed
Unrealized Capital Gains TaxesBiden administration wants to impose a tax of up to 25% on unrealized capital gains which would redefine income taxes.
Corporate Tax RatesBiden administration wants to increase the federal corporate income tax rate from 21% to 28%.
Realized Capital Gains TaxesBiden administration wants to double tax rate on long term capital gains and dividends from a current top rate of 23.8% to a top rate of 44.6%. States add their own cap gains taxes on top of federal cap gains taxes.
Surtax on Small Business IncomeBiden administration would extend the net investment income surtax to profits earned by small businesses. The tax on small business income would phase in between $200K - $400K, depending on filing status.
28% Withholding TaxBiden administration would prohibit companies from deducting compensation paid to top earners in the calculation of taxable corporate income. The 28% federal corporate tax rate would be layered onto individual wage taxes. An extra 28% tax would be paid by the business for the privilege of paying high-income individual wages.
Stock RepurchasesBiden administration would increase a 1% excise tax on stock buybacks to 4%.

Takeaways. The electoral battle between Trump and Biden holds significant implications for the U.S. economy and business.  The tax agendas of the two candidates differ significantly. Most of these tax increases would impact small and big businesses, entrepreneurs, investors, and job and wealth creators.  Such tax proposals described above would be detrimental to the M&A marketplace.  However, if divided government continues, the odds of all these proposals goes down.  The capital gains implications alone would likely drive many owners contemplating an exit to expedite such plans ideally before tax changes could be implemented.  This may mean a flood of M&A after the November elections, which would temporarily make the M&A market more competitive.

Key Takeaways

The economic performance of Q1 gave mixed signals.  Watermark’s conclusion is that macro factors described in this commentary necessitate increased attention by business leaders.  Make sure your company is positioned to be resilient.  If an exit is in your future, prioritize timing considerations, which are multifaceted.  Consider what is in your control as you anticipate future scenarios.  Many business owners don’t go through a long-term strategy exercise frequently enough.  Accompanying strategy should be a set of thoughtful projection scenarios (base case, downside case, and upside case).  As many successful business leaders have echoed throughout my career, “Numbers create clarity.”  And they do.

[1] “The Employment Situation,” U.S. Bureau of Labor Statistics. 2024. www.bls.gov

[2] “The Employment Situation,” U.S. Bureau of Labor Statistics. 2024. www.bls.gov

[3] “Consumer Price Index Summary,” U.S. Bureau of Labor Statistics. 2024. www.bls.gov

[4] Lucia Mutikani, “US consumer prices heat up in March; seen delaying Fed rate cut,” Reuters. 2024. www. reuters.com

[5] Eric Revell, “US national debt interest exceeds defense spending,” Fox Business. 2024. www.foxbusiness.com

[6] “United States of America,” Fitch Ratings. 2024. www.fitchratings.com

[7] Jamie Dimon, “Chairman & CEO Letter to Shareholders,” JP Morgan Chase & Co. 2024. www.reports.jpmorganchase.com

[8] John Butters, “Second-highest number of S&P 500 companies issuing negative EPS guidance since Q2 2019,” FactSet. 2024. www.factset.com