Personal income increased 0.3% (3.5% y/y) during December following a 0.1% November uptick, initially reported as no change. A 0.4% rise had been expected in the Action Economics Forecast Survey. During all of 2016, income grew 3.5%, the weakest rise since 2013. Wages & salaries rebounded 0.4% last month (3.6% y/y) after a 0.1% slip. (…)
Disposable personal income increased 0.3% (3.7% y/y) following a 0.1% rise. Adjusted for price inflation, take-home pay edged 0.1% higher (2.1% y/y).
Personal consumption expenditures jumped an expected 0.5% (4.5% y/y). It was the strongest rise in three months. During all of last year expenditures rose 3.8%. In constant dollars, spending improved 0.3% (2.8% y/y). Real durable goods purchases increased 1.4% (8.1% y/y) as motor vehicle purchases rebounded 2.4% (8.7% y/y). (…) Real spending on services rose 0.3% (2.2% y/y) as housing & utilities outlays jumped 1.2% (2.3% y/y). (…)
The personal savings rate declined to 5.4%, its lowest level since March 2015. Personal saving declined 8.0% y/y.
The chain price index increased 0.2% (1.6% y/y). The nondurable goods price index rose 0.2% (1.2% y/y). The durable goods price index was little changed (-2.5% y/y), while the services price index gained 0.2% (2.4% y/y). The price index excluding good & energy inched 0.1% higher (1.7% y/y).
Strong trend at yearend with Q4 growth in Disposable Income of +3.6% annualized and expenditures +4.5% annualized while inflation was +2.4% annualized but a very low +0.8% on the core. The risk is that Americans restore their savings during 2017. In effect, real expenditures rose +2.4% annualized in Q4 but real disposable income was up only 1.2%.
Oh! in case you forgot, the Fed is tightening. Generally nothing to boost credit-sensitive areas like housing, furniture, autos…That said, consumer surveys are boosted by hopes. The U. of Michigan Survey of Consumers has a chart showing the percent of respondents hearing favorable news from the government. Since 1978, that is nearly 40 years, the range has been 0-8% with an average of about 3%. It was 2% last October, rose to 7% in November and jumped to 20% in December!
The National Association of Realtors (NAR) reported that pending home sales increased 1.6% m/m (0.3% y/y) in December after an unrevised 2.5% November decline. These sales are reported as an index with 2001=100. During all of last year, sales improved 0.9%. The December reading of 109.0 was 5.2% below the April peak, but 41.4% above the June 2010 low.
Pending sales were mixed across the country. Sales declined 1.6% m/m (-1.2% y/y) in the Northeast, and fell 0.8% m/m (-3.4% y/y) in the Midwest. Sales improved 2.4% m/m (0.5% y/y) in the South, and increased 5.0% m/m (5.0% y/y) in the West.
Rebound? Following –2.5% in November and +0.1% in October. Q4: –0.8%. All regions are negative in Q4.
Eurozone Economy Grows at Faster Pace Than U.S. Eurozone economic growth accelerated at the end of 2016 while the jobless rate fell to its lowest level since 2009, putting the currency area on a steadier footing at the start of a year clouded by political uncertainty.
The fourth quarter pickup allowed the eurozone economy to grow more rapidly than its U.S. counterpart during 2016 as a whole, expanding by 1.7% compared with 1.6% for the U.S., the first time that has happened since the crisis-year of 2008. (…)
Buoyed by the ECB’s stimulus programs and a weaker currency that appears to have aided exports, Eurosat said the eurozone’s gross domestic product in the fourth quarter was 0.5% higher than in the three months to September, and 1.8% higher than in the final three months of 2015. On an annualized basis, growth picked up to 2.0% from 1.8% in the third quarter.
For 2016 as a whole, the economy expanded by 1.7%, compared with 1.6% for the U.S.. That marked a slowdown from 2015.
Figures also released Tuesday showed stronger consumer spending growth and a sharp rebound in business investment helped raise French GDP 0.4% quarter-on-quarter, a pickup from the 0.2% growth recorded in the third quarter. (…)
Figures released Tuesday by the European Union’s statistics agency showed consumer prices were 1.8% higher in Jan. than a year earlier, the highest inflation rate since Feb. 2013.
But higher wages have become slightly more likely with a sharper fall in unemployment toward the end of last year. Figures also released Tuesday by the Eurostat showed the jobless rate fell to 9.6% in Dec. from 9.7% in Nov., its lowest since May 2009. (…)
(FT)
Corporate Criticism of Trump’s Travel Ban Moves Beyond Tech Criticism of President Trump’s immigration order moved beyond Silicon Valley on Monday, with the heads of business giants including Ford, Coca-Cola and Goldman Sachs weighing in on travel restrictions
Trump Vows Regulatory Rollback The Trump administration’s ambitious regulatory rollback, billed as the biggest action since the Reagan era to cut federal red tape, could have far-reaching impacts on businesses and the economy.
(…) The most basic change requires federal agencies to repeal two existing rules for each new rule they enact going forward.
To ensure that those changes are meaningful, the administration also will adopt what amounts to a regulatory budget for agencies—a long-sought goal for some conservatives. The White House said it would restrict agencies’ ability to increase the regulatory costs that they impose on businesses and others, with the aim of forcing agencies to roll back existing regulatory costs to offset new costs. (…)
“We’ll be reducing them [rules] big league and their damaging effects on our small businesses, our economy, our entrepreneurial spirit,” he said. “So the American dream is back, and we’re going to create an environment for small business like we haven’t had in many, many decades.”
He said regulations could be reduced as much as 75% or more, and that the government will retain “great protection for the consumer.” Big businesses will benefit as well, he said. (…)
How Much Can Cutting Federal Regulation Boost the U.S. Economy? Financial markets and the White House are betting that a rollback of federal regulations can provide a significant boost to the U.S. economy. Research suggests that’s no sure thing.
(…) In its most recent report, OMB estimated regulatory costs of between $74 billion and $110 billion. The benefits of the regulations, however, were significantly higher: $269 billion to $872 billion. The OMB is part of the executive office of the president, and thus inherently political. But even under the most recent Republican, President George W. Bush, the OMB estimated the cost of regulations ($45 billion to $54 billion in his final 2008 report) to be significantly lower than the benefits (pegged at $122 billion to $655 billion.) (…)
The most aggressive of these studies find that regulation reduces the annual growth rate every year, and that therefore, compounded over time, the effects become enormous. One study from George Mason University‘s Mercatus Center, known for its antiregulation stance, estimated regulations across 22 industries reduced the growth rate by about 0.8% per year. (…)
The authors of the Mercatus study concede they may miss some regulatory benefits: “Some regulations may lead to benefits, such as improvements in environmental quality, which are well known to be mainly missing from GDP measurements,” they write.
The results of such analyses are also highly sensitive to modeling assumptions. A 2012 study from George Washington University’s Regulatory Studies Center slightly tweaked a few assumptions of previous estimates and determined that, “statistically speaking, our results reveal no impact.” (…)
There’s little doubt that regulatory improvements can boost an economy. The World Bank produces an annual “Doing Business” report that gauges the difficulty of navigating regulations in different countries. Moving up the rankings has a clear association with improved economic performance. For example, one 2006 analysis by a trio of researchers at the London School of Economics and World Bank found that moving from having more burdensome regulations—in the bottom 25% of all countries—to more business-friendly ones—in the top 25%—could boost annual economic growth by as much as 2.3 percentage points.
That supports the notion that regulatory improvement could lead to much faster growth. But it’s unclear if such gains are available for the U.S., because it’s already ranked as having the eighth-best regulatory environment.
The report suggests the U.S. has room for meaningful improvement on a few dimensions. The World Bank ranks the U.S. 51st (out of 190) for starting a business, 39th for ease of obtaining construction permits, and 36th for ease of paying taxes.
But that raises yet another complication. Many of those regulations are at the state and local, not federal, level.
Germany is using a “grossly undervalued” euro to “exploit” the US and its EU partners, Donald Trump’s top trade adviser has said in comments that are likely to trigger alarm in Europe’s largest economy.
Peter Navarro, the head of Mr Trump’s new National Trade Council, told the Financial Times the euro was like an “implicit Deutsche Mark” whose low valuation gave Germany an advantage over its main trading partners. His views suggest the new administration is focusing on currency as part of its hard-charging approach on trade ties.
In a departure from past US policy, Mr Navarro also called Germany one of the main hurdles to an American trade deal with the EU and declared talks with the bloc over a US-EU agreement, known as the Transatlantic Trade and Investment Partnership, dead. (…)
“A big obstacle to viewing TTIP as a bilateral deal is Germany, which continues to exploit other countries in the EU as well as the US with an ‘implicit Deutsche Mark’ that is grossly undervalued,” Mr Navarro said. “The German structural imbalance in trade with the rest of the EU and the US underscores the economic heterogeneity [diversity] within the EU — ergo, this is a multilateral deal in bilateral dress.” (…)
This reminds me of October 1987…
POLITICS
A few readers told me they wish that I continue to stay out of politics. I do to…but given where equity valuations are and the hype on what this government can do with its rather unorthodox policies, I am afraid we all have to watch Washington a lot more than usual for a while.
Edge and Odds will thus monitor government actions and media coverage with its usual thoroughness and objectivity, in as much as it pertains to investors sentiment and equity valuation.
EARNINGS WATCH
- 175 companies (47.6% of the S&P 500’s market cap) have reported. Earnings are beating by 2.3% (+1.3% ex-Financials) while revenues are meeting expectations.
- Expectations are for revenue, earnings, and EPS growth of 4.1%, 4.6%, and 6.7%, respectively. Ex-Financials, EPS would rise 4.4%.
- EPS is on pace for 7.9%, assuming the current beat rate for the remainder of the season. This would be 6.4% excluding the benefit of easy comps at AIG and GS. (RBC)
So far, the beat rate at 68% (66% ex-Financials) is only so-so and the EPS surprise is well below average at +2.3%. It was +5.5% in Q3 and between +3.9% and +4.6% in the 5 quarters previous.
Interesting stuff from Bespoke:
Roughly 500 companies have reported earnings so far this season (which began on January 9th), and believe it or not, more companies have raised guidance this earnings season than lowered.
While you might think that a positive guidance spread isn’t a big deal, it is when you look at the data over the last six years. Below is a chart showing the quarterly guidance spread (% of companies raising guidance minus % of companies lowering guidance) for each earnings season going back to 2001. As you can see, just two out of the last twenty-one earnings seasons have finished with a positive guidance spread.
This season, the guidance spread is positive not so much because companies are raising guidance at a higher clip, but more because less companies are lowering guidance. Even still, the spread is currently just barely positive. There’s still a long way to go before this earnings season ends.
Given the big jump in economic and stock market sentiment measures following the election, we’ve been curious to see how corporate America would respond as well. Guidance that’s released along with quarterly earnings numbers is one way to track this. Should this season’s spread finish in positive territory, it could be a sign that companies are finally coming out of a six-year funk.
Maybe executives are in a wait and see mode.
Looking at Thomson Reuters/IBES data for Q1’17, analysts are forecasting EPS to rise 12.2%, down from +13.8% one month ago. However, sector trends are very uneven although every sector but Utes are slowing, some quite a bit. Industrials are particularly weaker.
At 55.2 in January, up from 54.9 in December, the final Markit Eurozone Manufacturing PMI® rose to a 69-month high and was above its earlier flash estimate of 55.1. National PMI data signalled that growth was fastest in Austria, the Netherlands and Germany. The rate of improvement in business conditions hit a 70-month record in Austria, a three-year high in Germany and remained elevated in the Netherlands despite easing to a three-month low. Strong growth was also signalled in Spain (20-month high) and Ireland (2-month low). The recent improved performance of France continued to gather pace, as highlighted by the French PMI rising to a 68-month high. 
