Year: 2023

Summer Spending Surge Shows Consumers Driving Economic Growth Fed likely to leave rates unchanged in September as price pressures ease

Household spending, the primary driver of economic growth, rose a robust 0.8% in July, the Commerce Department said Thursday, up from an upwardly revised 0.6% increase in June and the fastest rate since January. Americans spent more on groceries, recreational goods and vehicles, and on services such as housing, dining out and insurance. Adjusted for inflation, consumer spending rose 0.6% in July.

The Fed’s preferred gauge of consumer prices, the personal-consumption expenditures price index, rose 0.2% in July from a month earlier, the same pace as in June. So-called core prices, which exclude volatile food and energy categories, rose at the same rate.

Inflation ran at a 2.1% annualized rate over the three months through July, close to the Fed’s 2% target. Core prices rose at a 2.9% annualized rate over the previous three months, the lowest such reading since January 2021. (…)

The inflation figures support the case for an extended pause in interest rates, Federal Reserve Bank of Atlanta President Raphael Bostic said in a speech Thursday in South Africa.

Excluding housing costs, which have eased but flow through to official inflation gauges with a lag, 12-month core inflation using the consumer-price index was 2.6% in July, Bostic said. “Given the lagging nature of rental prices in the calculation of [official inflation gauges], underlying inflation may well be close to our target already,” he said.

Robust spending is causing economists to raise their projections for third-quarter economic growth. An Atlanta Fed forecast Thursday estimated gross domestic product will expand at a 5.6% annual rate for the July to September period. A separate forecast by S&P Global Market Intelligence estimated a 3.8% growth rate in the third quarter after the release of Thursday’s data.

Both estimates would be far more rapid than the second quarter’s 2.1% rate. (…)

Consumer spending on services—including doctor visits, hair cuts and dining out—rose more quickly in July, for the second straight month.

Americans opened their wallets more for travel, as well as the “Barbie” film, Beyoncé’s “Renaissance Tour,” and Taylor Swift’s “Eras Tour.”

The number of Uber rides in the U.S. and Canada surpassed prepandemic levels for the first time this spring, and demand for meal delivery stayed strong despite restaurant reopenings. The company projected bookings would grow further this summer. 

Walmart, the nation’s largest retailer by revenue, recently said the outlook for consumer spending has brightened since the start of the year, amid low unemployment and solid wage growth. It raised its full-year financial outlook. (…)

The personal saving rate, a measure of how much money people have left each month after spending and taxes, dropped to 3.5% in July, the lowest since last November. Adjusted for inflation, households’ income after taxes declined 0.2% in July another sign Americans could struggle to maintain their current pace of spending. (…)

We knew that goods demand was strong after the retail sales report 2 weeks ago. But +0.9% MoM after +0.7% in June! That’s a 10% annualized rate!

Even including May’s -0.1%, we are at +6.1% a.r. in the last 3 months. Durables? +9.5% a.r. in the last 3 months. These are in real terms, not nominal dollars.

Mind you, goods were deflating again in July, -0.3% MoM after -0.1% in each of May and June. Durables prices dropped 0.7% in July after -0.3% in June.

Booming demand, yet declining prices. Or is it deflated prices triggering demand for bargains?

The FOMC won’t find any signs of waning demand so far, even after boosting rates 525bps. A case in point from Axios:

Data: U.S. Bureau of Economic Analysis, FactSet. Chart: Axios Visuals

And real spending on services did not make way; they were up 0.4% after +0.3% in June, +4.3% annualized in 2 months, even with prices up by identical percentages.

All this spending while real disposable income declined 0.2% after being unchanged in July.

So, savings got pulled: the savings rate dropped from 4.3% to 3.5%.

But the fact remains that Americans roughly spend what they earn: consumption expenditures are up 6.4% YoY in July with labor income up 5.7%. Last 3 months average: expenditures +6.0%, labor income +6.1%.

The income side of the PCE release shows wages and salaries up 0.4% MoM in July, after +0.6% and +0.5% in the two previous months respectively. That’s 6.1% a.r. in the last 3 months, up from +4.0% in the previous 3 months.

Meanwhile, annualized PCE inflation slowed from +2.8% to +2.0%.

And “market-based” PCE inflation, which excludes most imputed prices, stood at +0.1% in each of the last 3 months, +1.2% a.r., after +2.9% in the previous 3 months.

• But Will the Good Times Last? (Wells Fargo)

(…) these new data still leave us questioning is this resilience or madness on behalf of the consumer? (…)

The strong start to the third quarter following an already solid gain in June that was revised higher (+0.4%) sets up third quarter real personal consumption expenditures (PCE) to be quite strong. If growth was flat in the remaining two months of the quarter, real PCE would rise at a 3.6% annualized rate. Even with some moderation in August/September, at this point we expect spending to rise at around a 3% annualized clip. (…)

We estimate households now have about $360 billion in excess savings remaining, which based on the rate at which households have spent this down over the past six months, suggests this source of spending capacity will be tapped by year-end. (…)

While the pandemic-induced downturn was not a balance sheet one for households, consumers will grow more financially vulnerable as excess liquidity runs dry and credit becomes more difficult to obtain and afford. (…)

The jump in spending and still-elevated rates of inflation keep the heat turned up on the Fed. But we look for growth to slow more meaningfully in the remaining months of the year. Household liquidity is draining and debt dynamics are growing less favorable. The most important source of purchasing power—income—is showing some initial signs of softening, and as demand for labor eases, wage growth should follow.

• US spending surges, but it’s not sustainable (ING)

(…) The problem is savings are finite and the banks are tightening lending standards significantly. Credit card borrowing costs are the highest since records began in 1972 so there is going to be a lot of pain out there. (…)

At the current run-rate [excess savings] will all be gone by the end of the second quarter of 2024 and for low and middle incomes that point will come far sooner. With banks far more reluctant to provide unsecured consumer credit, based on the Federal Reserve’s Senior Loan Officer Opinion survey, the clear threat is that many struggling households may soon find their credit cards are being maxed out and they can’t obtain more credit. With student loan repayments restarting, we expect consumer spending to slow meaningfully from late fourth quarter onwards and turn negative in early 2024.

Looks like an easy call given the 3.5% savings rate, unsustainable given history.

But if the savings rate does not rise (it is still above June 2022’s 2.7%), disposable income rising 7.2% YoY like in July could well sustain expenditures in the +5-7% range which, if inflation holds below 3%, would keep real spending up 2-4%.

Would that kind of demand keep inflation so low for long?

The Fed’s “super core” inflation, or core services excluding housing, rose 0.46% in July, a 5.6% annual rate (+4.7% YoY from 4.1% in June).

Some consumers are suffering, however, as “CPI-Essentials” (food, energy, rent) is rising well above overall inflation (and gas prices up 7% in August):

• Dollar Stores Flash Warning Signs on Consumer Spending Dollar General, Dollar Tree say shoppers are shifting spending toward food, essentials

Dollar General reported slowing sales in the recently ended quarter and said its inventory of unsold goods is piling up. The Goodlettsville, Tenn., company said it plans to burn through profit in the second half of the year to reduce inventory and improve performance at its stores. Like other retailers, Dollar General also said it expects store theft to keep rising.

“Our core customers continue to tell us they feel financially constrained,” Chief Executive Jeff Owen said. “Her savings are gone, and so certainly she is still living with the inflationary pressures.”

The chain has been trying to avoid passing along higher prices to its customers and has even reduced prices in some areas, Owen said.

Sales in May held strong, he said, before deteriorating through the summer as shoppers focused on necessities. Heading into the holiday season and the second half of the year, Owen said Dollar General plans to whittle down its inventory through markdowns. (…)

Other discount retailers have issued dour outlooks for the remainder of the year as higher prices and rising interest rates weigh on consumers’ appetite for discretionary spending. Retailers, especially those that cater to middle- and lower-income customers, have also cited reductions in government food-assistance benefits and lower tax refunds as sources of pressure.

Both Dollar General and rival Dollar Tree have said their customers are pulling back on discretionary purchases while spending more on food and essentials, which are less profitable. The companies are also grappling with higher labor costs.

Five Below, a value retailer catering to teens and tweens, earlier this week also cut its full-year profit outlook, citing challenges with shrink, an industry term that refers to goods lost to damages and theft. Executives, though, said demand is holding up as more shoppers hunt for deals. (…)

Off-price apparel retailer Ross Stores earlier this month issued an upbeat outlook for the rest of the year and said customers are still spending on clothes, but looking for value. (…)

Ollie’s Bargain Outlet, which offers steep discounts on products that it buys from overstocked stores or others that are going out of business, raised its full-year sales and profit outlook on Thursday. The company is benefiting as other retailers look to reduce their inventories amid the pullback in spending. (…)

In today’s WSJ:

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Dockworkers Ratify Labor Deal at West Coast Ports The agreement ends a period of uncertainty during drawn-out negotiations that triggered shifts in some U.S. supply chains.

(…) A spokesman for the ILWU declined to disclose the contract’s terms or to comment on the vote. People familiar with the agreement have previously said that it included a 32% pay increase through 2028 and a one-time “hero bonus” for dockworkers who worked through the pandemic. (…)

What to Know About Covid This Fall Covid-19 cases are up due to a summer bump. The latest on new variants, vaccines and testing.

Covid-19 cases, hospitalizations and deaths are up because of a summer bump that doctors note started from very low rates.

Still, there’s concern where Covid infections will go due to an expected increase in the fall and winter months when respiratory viruses typically peak and a new highly mutated variant that is surfacing.

The variants responsible for the small summer wave are all XBB variants, such as EG.5 unofficially named Eris. These variants are descendants of Omicron and the good news is scientists anticipate that the booster expected to roll out next month will be a good match for the XBB variants.

The bad news is there’s another variant—BA.2.96, dubbed “pirola” on social media—that has more than 30 mutations, making it very different from the Omicron descendants. If this variant proliferates, scientists say it likely won’t be a good match to the new booster and will be able to better evade immunity from both vaccines and natural infection. (…)

China’s Economy Shows Fresh Weakness Signs Gauges of activity in China’s economy showed signs of weakness in August, heaping extra pressure on policy makers to revive crumbling growth.

(…) Official purchasing managers’ indexes for China’s economy, published by the National Bureau of Statistics Thursday, showed manufacturing activity shrank for the sixth straight month in August, albeit at a slower pace than a month earlier. Activity in the services sector slowed again, data showed, a sign that consumers cut spending more over the summer.

The official purchasing managers index for manufacturing posted a reading of 49.7 in August, an improvement from the 49.3 registered in July but still below the 50 mark that separates an expansion in activity from a contraction, the statistics bureau said.

A similar index for services declined to 50.5 from 51.5 a month earlier, marking the sixth consecutive month of weakening activity.

(…) Chinese consumers have trimmed outlays and saved more, reflecting anxiety over jobs, earnings and a weak housing market. China expanded just 0.8% in the second quarter compared with the first, and many economists now expect China will just about meet the government’s growth goal of 5% for the year. (…)

One brighter spot was construction, where an index of activity rose in August, signaling an expansion as government spending on infrastructure picked up.  (…)

Bloomberg’s take:

• China’s Factory Activity Sparks Hope Slump Is Bottoming Out Manufacturing is still in contraction, but PMI beat estimates.

China’s manufacturing contraction eased slightly in August and a gauge of new orders improved, providing some hope that the worst of the sector’s slump may be ending. (…)

The manufacturing PMI “looks as if activity will be flatlining in the near term,” said Robert Carnell, chief economist for Asia Pacific at ING Groep NV. “It could be worse. Flatlining is not plunging.” (…)

• A sub-index measuring new orders expanded for the first time since March, reaching 50.2
• Employment weakened to 48 in August from the prior month
• New export orders improved slightly to 46.7 but remained in contraction for a fifth straight month

Tomorrow we get S&P Global’s PMIs.

Country Garden Posts Record Loss, Warns of Possible Default

Country Garden Holdings Co. warned that it may default on its debt and raised concerns about staying in business after the embattled Chinese developer posted a record first-half loss of almost $7 billion.

The Foshan-based company said that if its financial performance continues to deteriorate, the group might not be able to meet its debt obligations, “which may result in default,” according to a filing Wednesday. It also cited “material uncertainties” that may cast “significant doubt on the group’s ability to continue as a going concern.” (…)

“The avoidance of a default is dependent on additional financing support from regulators in coming weeks,” Morgan Stanley analysts including Stephen Cheung wrote in a note. “But we see a decreasing chance for this to happen.” (…)

Signs of contagion from the property woes have grown in recent weeks, from missed payments by one of China’s biggest shadow banks to a bond rout among Hong Kong developers. (…)

“With or without an official default, Country Garden will no longer be able to grow, and we have doubt on its ability as a going concern,” JPMorgan Chase & Co. analysts including Karl Chan wrote in a note. “Going forward, the company’s priority will be solely on ‘ensuring home delivery’ until it depletes its land bank.” (…)

“The profundity and persistence of the market’s downtrend still caught the company off guard,” Country Garden said. (…)

• China Builder Sino-Ocean Wins Vote to Extend Yuan Bond

Representatives of closely watched state-backed Chinese developer Sino-Ocean Group Holding Ltd. told some holders of a yuan note it has secured enough bondholder support to extend repayment.

That would help the firm, among the biggest homebuilders last year in locales including Beijing and nearby Tianjin, as it tries to avert a potential first default. (…)

The company, whose two biggest shareholders are state-owned insurers, has been among the primary sources of recent concern in China’s credit market. Once one of the stronger names in the sector, debt struggles for Sino-Ocean and larger peer Country Garden Holdings Co. have been emblematic of the ongoing cash crunch constraints for many of the country’s private-sector developers. (…)

Euro-Zone Inflation Stops Slowing in Alarm Signal for ECB

Consumer prices rose 5.3% from a year earlier, stuck more than 2 1/2 times above the goal sought by policymakers, because of energy. Economists had anticipated weakening. An underlying measure stripping out volatile items slowed as expected to reach exactly the same level as the headline gauge. (…)

Traders continued to pare bets on further increases in ECB borrowing costs after the data, pricing in a 30% chance of such a move next month. (…)

A slight hint of encouragement for policymakers was evidence of slowing services inflation in the overall regional numbers. That’s now at 5.5%, down from 5.6% in July. (…)

Apartment List National Rent Report

Note: keep in mind that Apartment List data is for new leases. Renewals account for some 90% of leases.

(…) monthly rent growth turned negative this month [August], marking the beginning of the rental market’s slow season. Our national rent index decreased 0.1 percent in August, flipping negative one month earlier than it did last year.

Rent swings are largely driven by the balance between the number of vacant apartments available and the number of renters looking to move into them. A massive shortage of vacant units helped drive tremendous rent growth in 2021 and 2022, and today the opposite is true. Our vacancy index has increased for 22 consecutive months and now sits at 6.4 percent, slightly above the pre-pandemic average. Additionally, with a record number of apartments under construction, we expect vacancies to remain strong in the coming months.

On a local level, rents fell month-over-month in August in 53 of the nation’s 100 largest cities, but thanks to sluggish rent growth throughout the past 12 months, prices are down year-over-year in 72 of these 100 cities.

But here’s a longer term perspective of the vacancy rate:

Charts featuring the blue line below, multi-family units under construction, are merrily displayed by rent deflationists as proof of a coming tsunami of rental supply.

But builders can only complete what they start, even if construction gets disrupted or delayed by shortages (lumber, appliances, labor) which all boosted units under construction, but only temporarily, and do not increase the ultimate number of completions.

The reality is that monthly multi-family starts averaged 480k between January 2020 and July 2023. While that is 180k more than between 2016 and 2019, it is less than half the number of units under construction in July.

Completions (black) will rise in coming months but the actual supply of multi-family units will not exceed the numbers of starts.

The other reality is that since 2016, 12.5 million new households were formed but only 8.7 million new housing units (single + multi) have been completed. This during a period of unusually low interest rates.

Average rent on new leases is up 23% from its pre-pandemic level. Flat since August 2022.

CPI-Rent is up 18% from its pre-pandemic level. Up 7.2% since August 2022.

Interesting to see how the new leases trend line mimics that of house prices, and how house prices and CPI-Rent were correlated between 2017 and 2020.

Actually, that relationship holds quite well over the longer term, with house prices turning back up this year.

Notice also that CPI-Rent kept rising during the GFC while house prices collapsed 20% and vacancy rates rose from 9.6% (!) to 11.1%. Still a long way from 6.4%.

Rent deflation? Not a slam dunk.

NAR: Pending Home Sales Up 0.9% in July; Down 14.0% Year-over-year

Private employers added 177,000 jobs in August (ADP)

Q2 GDP Revised Modestly Lower and Profits Under Pressure

The second estimate of Q2 GDP showed the economy expanded at a 2.1% annualized pace. While still strong, this is a slightly slower pace of growth than first estimated [2.4%]. Data on the income side of the economy suggest a much slower pace of expansion in H1-2023, though real GDP and GDI are diverging at an unusual rate. (…)

Source: U.S. Department of Commerce and Wells Fargo Economics

Gross domestic income (GDI), which was released for the first time for the second quarter, signals a slower pace of growth through the first half of the year having risen at just a 0.5% annualized pace after contracting for two consecutive quarters. Real GDP and GDI should be equivalent in theory, but usually somewhat differ. On a year-ago basis, the measures have diverged further and signal the widest gap between the two measures on record. This unusually wide gap suggests the two may converge in subsequent data releases.

GDI was held back by corporate profits. Pre-tax profits were a bit worse than anticipated, slipping 0.4% (not annualized), or by $10.6 billion, in Q2. Profits have rolled over–they have now slipped for the fourth consecutive quarter and are about 6.5% off where they stood a year ago. That said, the details paint a somewhat better picture of Q2 profitability.

The pullback can be traced to the domestic financial industry specifically, which saw profits slide by nearly $50 billion during the quarter. Nonfinancial domestic profits actually rose $17.1 billion after stumbling the past two quarters. We will get the underlying nonfinancial industries’ data in the next estimate of GDP, but these high-level figures suggest some stabilization in underlying profits amid a still resilient pace of spending.

More traditionally recognized measures of profits, like earnings of the S&P 500, have also held up better. Economy-wide profits differ from that of the S&P 500 in accounting methodology and scope, but the two tend to track over time.

After-tax profits, without inventory valuation or capital adjustment, tends to follow operating earnings of the S&P 500 most closely. By this measure, economy-wide margins improved in Q2 as did the S&P operating margins. The two measures remain elevated compared to pre-pandemic levels.

The gradual slowdown in profits signals the still resilient pace of underlying activity. But we continue to anticipate the economy will moderate over the second half of the year under the weight of tighter policy, which should weigh further on firms’ profitability and thus their ability to invest and hire. Recession in the first half of next year is still more likely than not in our view.

• Profits for all U.S. corporations — not just the large, publicly traded firms on the stock market — were down 6.5% from Q2 of 2022, the Commerce Department reported.

  • A 25% profit downturn at financial firms hammered by interest rate increases over the last year helped drive the downturn.
  • Other companies did a bit better, with profits down just 4.5% compared to a year earlier. (Axios)

Data: FactSet, U.S. Bureau of Economic Analysis; Chart: Axios Visuals

The Nifty Seven

The S&P 7 [META, AMZN, AAPL,
MSFT, GOOGL, TSLA, NVDA], a handful of technology stocks, are now up an incredible 54% this year. 3 weeks ago, the S&P 7 was up a massive 70%. Meanwhile, the remaining S&P 493 is up just 4%. These same stocks have accounted for 75% of the ENTIRE Nasdaq’s gain this year. (@KobeissiLetter)

AI is ruining the internet AI bots and AI-generated content are flooding the internet with spam, scams, and misinformation. And it’s making it a nightmare to be online.

Patrick S., a long time reader (BTW, thank you very much Pat for your continued financial support ), sent me this link to an interesting Business Insider piece.

A teaser:

Though these AI-generated news websites don’t have a significant audience yet, their rapid rise is a precursor to how easily AI-generated content will distort information on social media. In his research, Filippo Menczer, a computer science professor and director of Indiana University’s Observatory on Social Media, has already found networks of bots that are posting large volumes of ChatGPT-generated content to social-media sites like X (formerly Twitter) and Facebook. And while AI bots have telltale signs now, experts indicate that they will soon get better at mimicking humans and evading the detection systems developed by Menczer and social networks.