Markets with Megan

Megan Horneman, Chief Investment Officer at Verdence Capital Advisors, discusses the recently released third-quarter GDP report. The GDP growth came in at an impressive 4.9%, exceeding expectations of 4%. The growth is primarily attributed to a significant increase in personal spending, which hasn't been seen to this extent since the fourth quarter of 2021. Megan highlights the inflation component of the report, showing a notable deceleration from the previous quarter. However, she expresses concerns about service inflation, particularly noticeable for those renewing homeowners' insurance. Looking ahead, Megan is cautious about the sustainability of consumer spending, considering various economic challenges, such as rising interest rates, student loan repayments, high credit card debt, elevated gasoline prices, and geopolitical uncertainties. She discusses the Fed's role in managing the economy and controlling inflation as we move toward the next economic expansion.

Hello, this is Megan Horneman, the Chief Investment Officer for Verdence Capital Advisors, coming to you today with our regular segment of Markets with Megan, and this morning we got the much anticipated reading on third quarter GDP. There was a lot of expectations that this would be a good number, a solid number, and it was. It blew away. Some of the expectations came in at 4.9% versus the expectation of 4%. This is the first reading of three. Let's keep that in mind. So there are some economic data that is not fully in this report yet, but the big increase was led by personal spending. So personal spending jumped the most since we've seen since fourth quarter of 2021. There also was a pretty solid rebound in residential investment, which is confusing to me, given how weak the housing market is. Now let's dig in a little bit to what the Fed's going to look at prices. So we do get an inflation component of this GDP report the PCE core level. That only rose 2.4%. That was a pretty big deceleration from the last quarter, which was up 3.7%, and it was actually the slowest increase in that core number that we've seen since the fourth quarter of 2020. The Fed will love this, but when you dig down a little bit deeper and I hate to be the bearer of bad news every time but the other component of this, which is service inflation and let's keep in mind the consumer spends the majority of their money on services, not necessarily goods items the service inflation that spending did take higher compared to the third quarter and let's look at one of these components, because anybody who's had to pay their home owners insurance bill lately probably can relate to this. But the financial services and insurance component of that that jumped 10% for the quarter and that's in the third quarter, as you know, as a lot of people do renew home owners insurance and I surely felt that big increase as well. Let's talk about going forward, though let's remind investors that this is a third quarter report.

This is backward looking. We know that the consumer's been relatively resilient. We just don't see how this can continue and in fact, when we look at some of these numbers, I got to tell you, the more these consumers spend, I'm afraid it's the harder that they're going to fall. We're seeing this in some of the earnings reports that we've gotten thus far Some of the luxury earning that luxury companies are starting to discuss how they're seeing the higher interest rates as well as the slowing economy bite into higher income and luxury goods items. Whether you're looking at things like LVMH, porsche, tesla, gucci all of these are talking about how the luxury consumers starting to slow. We also got a report this week that in the year of 2022, it was the first time that we saw an increase of where Americans were reporting facing food insecurity. So these are things I just.

When things don't make sense, it typically means something is underlying and eventually will come out and this spending does not make sense to us. We don't see it sustainable. Let's remember, in the fourth quarter, I could go down the list of many things that consumers have to deal with higher interest rates, we're looking at student loan repayments, credit card debt that's at a record high, gasoline prices that are elevated. We have a war in the Middle East. We have the potential for government shutdown and we still don't know what the prolonged auto strike will do.

In some of the economic data in the fourth quarter, we're happy to see there was some agreement today between Ford and the UAW, but we still have a lot of work to be done with the other companies, so we just aren't as optimistic that this can continue. I know it's kind of a dire reading, but let's keep in mind this is all part of what the Fed needs to do to slow the economy, get inflation or control and get us into the next economic expansion. That's all we have today. If you have any questions or comments, please feel free to reach out to podcast at Verdence dot com Thank you.