Dispersion in Sector Outlooks – Fed Continues to Wait and See

Jeffrey Roach (00:03):

Hi, I am Jeffrey Roach, Chief Economist for LPL Financial with a few key charts to explain what we know about the current macro landscape. First, it's not all doom and gloom. The latest report on business for the services sectors revealed some disturbing realities for some sectors amid trade uncertainty. For example, the amount of new orders contracted for the first time in nearly a year, as I show in the chart, but some sectors are still growing. Power generation companies have some good things to report. Here's a direct quote, "business activity is increasing due to demand for data centers, commercial growth, and infrastructure." Tariff impacts are likely elevating prices paid by services sector companies with the Prices Index hitting its highest level since November, 2022. And that was when annual inflation rose to 7.1%. So the bottom line is this trade uncertainty is weighing down some sectors like healthcare, technology and construction, but it's not all doom and gloom because retailers and financial services firms reported some signs of growth opportunities, and that's despite the tariff variability.

Jeffrey Roach (01:10):

Given the wide dispersion in sector outlooks, investors should allocate wisely. Second inflation is likely at its near term lows. It's as good as it gets when we think about inflation since prices will likely reaccelerate in the coming months. But here's some highlights. Headline inflation decelerate at 2.1% annually, and that's the lowest print for this year. Core was 2.5% from a revised 2.7 in March. However, inflation will likely re-accelerate for the remainder of 2025 as both supply and demand pressures will push annual inflation rates higher, the savings rate rose to 4.9% the highest in the year. As incomes grew faster than spending real disposable personal income rose 0.7% from a month ago, that's the fastest pace since January, 2024, indicating the stable job market is providing the necessary support for an economy filled with uncertainty. Here's the bottom line. The growth in real income is providing the support for households uncertain about the current macro landscape.

Jeffrey Roach (02:16):

So as long as the job market remains stable for the rest of the year, the Fed has the luxury of remaining in wait and see mode. We think there is upside risk to inflation as many baseline forecasts cannot reasonably account for the fluid tariff policy. Third, is it the calm before the storm in the latest fed beige book, businesses reported plans to increase tariff related costs "within three months." That's a direct quote. Now granted, there's a lot of uncertainty with that threat, but here are some highlights from the June beige book, which provides investors with some business insights on industries across the country. We heard that all Fed districts described lower demand for labor, citing declining hours worked, and overtime hiring pauses and staff reduction plans. So we should expect to see lower payroll numbers in the coming months if we do not get more clarity. And by the way, this report is based on information collected on or before May 23rd, so this does not include the whiplash from the various court rulings. Bottom line here is on balance, the outlook is slightly pessimistic as businesses are in a wait and see mode and that mirrors the Fed's posture. As a result, growth in the coming months will likely be muted. Well, that's all for now. If you want more insights on global market trends, follow us on social media and take care.