Reinhart Week in Review by Madison Investments 8.30.2024

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INFLATION

The Personal Consumption Expenditures Price Index (PCE) rose 0.2% in July and is up 2.7% year-over-year. Core PCE increased 0.2% and 2.6%, respectively, over the same time periods.

Our Take: Inflation continues to moderate, making a rate cut in September a near certainty. The question on the market’s mind now is whether the cut will be 25 or 50 basis points. The employment and CPI reports prior to the September 18 Federal Open Market Committee (FOMC) meeting will likely shape that decision.

GDP REVISION

Second quarter GDP was revised higher, to 3.0% annualized growth from 2.8%. The revision was driven by stronger personal consumption.

Our Take: The consumer was still chugging along in Q2 according to this week’s GDP revision and has proven very resilient. It remains to be seen whether this can continue as employment markets slow.

PERSONAL INCOME AND SPENDING

Personal income rose 0.3% in July while spending increased 0.5%. The personal savings rate fell to 2.9% from 3.1%.

Our Take: While the consumer continues to spend, they are doing it by increasing debt and reducing savings. This is not indefinitely sustainable, meaning continued income increases will be needed to fund future consumption.

MUNICIPALS

In a briefing with reporters, Chicago Mayor Brandon Johnson estimated that the city will have a $982.4 million budget shortfall in 2025. In addition, Mayor Johnson projected a $222.9 million deficit for the current year. Mayor Johnson pointed out that the current budget gap is not due to overspending. He attributed the current year gap to lower-than-expected personal property replacement taxes from the state along with a $175 million pension payment that Chicago Public Schools has not made to the city on behalf of its non-teaching employees.

Our Take: The nearly $1 billion 2025 shortfall is not the largest budget deficit that Chicago lawmakers have had to tackle. Former Mayor Lori Lightfoot faced a $1.2 billion budget shortfall in 2021 amid the pandemic. Mayor Johnson did not indicate how he would close the budget gap but told reporters that “there will be sacrifices that will be made.” The 2025 balanced budget will be presented in October.

About Reinhart Fixed Income
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