Note: I am travelling (Pacific time zone) until August 10. Posting will be irregular and possibly limited by time and equipment constraints.

CONSUMER WATCH

Spending in July:

Bank of America aggregated credit and debit card spending per household fell 0.4% year-over-year (YoY) in July, compared to a drop of 0.5% YoY in June. On a monthly, seasonally adjusted (SA) basis, July’s total card spending per household rose 0.3% month-over-month (MoM), following a drop of 0.1% MoM in June.

July was a strong month for services, including restaurants spending, increasing by 0.5% MoM SA, while retail spending ex restaurants rose 0.2%.

The summer travel season appears to be providing momentum to consumer spending and internationally, some of this has been ‘event’ driven. Bank of America internal data shows a 27% rise in spending in Paris and other Olympic cities over the period July 25th to August 4th compared to the same days in 2023. This figure compares to around a 23% increase in spending in London at the time of the 2012 Olympics.

Taylor Swift concerts in Europe also continue to draw US consumers too, and we saw a 35% YoY increase in spending in the cities hosting the Eras tour compared to spending in these cities over the same dates in last year.

In addition, a number of one-off factors influenced spending in July. At the start of the month, Hurricane Beryl made landfall in Texas resulting in in some downward impact on spending there. Toward the end of the month, IT system crashes globally may have frustrated some spending. On the upside, online promotions likely boosted retail spending in the middle of the month. Overall, none of these factors seemed to be a significant driver of total card spending in the aggregate.

Labor markets – growing but slowing:

(…) there are no obvious signs of a surge in joblessness in Bank of America internal deposit data on households receiving unemployment income, though there was a small rise in the YoY growth rate of households receiving unemployment income in July 2024 across income cohorts.

We’ve noted many times that the labor market remains a key source of consumer spending momentum. Our data on after-tax wages and salaries growth continues to show robust wage growth with wages for lower- and middle-income households growing faster than higher-income households. It appears that higher-income households wage growth is improving, having been close to zero for much of 2023.

In our view, wage growth should continue to underpin the consumer for some time.

Data on July retail sales will be released next week. Nominal retail trade, though still up 2.0% YoY, has declined MoM in 2 of the last 3 months. I have argued that this apparent slowdown was due to declining goods prices and that volume remained reasonably strong.

This chart shows that retail trade growth is still positive vs CPI-Nondurables and especially CPI-Durables:

In Q2, retail trade grew 0.5% QoQ but CPI-Nondurables rose 0.3% and CPI-Durables declined 1.2%. My proxy for retail inflation was –0.2% QoQ in Q2 suggesting real growth of 0.7% or 2.8% annualized.

Here’s what BofA data says:

A concern would be if households are buying fewer things per transaction, essentially reducing their ‘basket size’ and implying less overall volume expansion for a given number of transactions. While this is possible, Exhibit 9 and Exhibit 10 show that consumers are also increasingly looking to stretch their dollars. For example, in groceries and clothing, spending growth in stores focusing on ‘value’ products is stronger than overall spending in these categories. As a result, we think it likely that consumers have thus far been successful at wringing volume growth from their spending by becoming more price sensitive, even as overall inflation drops back.

  

Interestingly, BofA data also suggest that “For now, however, credit card utilization rates remain below 2019 levels.”

It’s important to note that not all the drawdown in savings and checking balances has been spent, either. Some households have been moving their money into less-liquid investment accounts. Bank of America internal data shows the July 2024 median balances per account for certificates of deposits (CDs) are up 25% YoY, on top of the 70% YoY growth that occurred this time last year (Exhibit 13). Some households may also have been taking money out of liquid deposits to invest directly in stocks, bonds and other financial assets.

Another area of household savings are retirement accounts. According to Bank of America’s 2024 Q2 Participant Pulse, the average 401(k) contribution rate of 6.5% remained consistent with year-end 2023, and more participants – almost 90% – kept their contribution rate consistent than in 1Q (81.2%). However, there was an increase in 401(k) plan participants that took a hardship distribution in 2Q 2024 to 0.67% from 0.61% in 1Q 2024 and 0.52% in 2Q 2023. While the overall percentage share is low, it could be an indication that there are some pressures building for some pockets of consumers.

Job Growth Stalls in Canada; Unemployment Rate Holds at 6.4% Country loses 2.8K jobs in July; economists saw 25K gain

(…) Wage growth for permanent employees decelerated to 5.2% from 5.6% a month earlier, though it remained faster than expectations of 4.8%.

Combined, the data point to an economy that’s struggling to churn out jobs, and while the unemployment rate didn’t rise as expected, it’s still 1.4 percentage points higher than in January of last year. The report adds to evidence that Canada’s job market is on track to loosen gradually, preserving a soft landing without a sharp spike in unemployment so far. (…)

“While the strong increase in full-time jobs is a positive by pushing hours worked higher, most of the job creation looks to be once again in the public sector. This suggests that economic activity remains weak in the private sector. In addition, the details shows the labour market deteriorated more for the younger cohorts,” he said.

The youth unemployment rate surged in July, rising 0.7 percentage points to 14.2%, the highest level since September 2012 outside the pandemic.

Total hours worked rose 1.9% from a year ago and were up 1% on the month.

The participation rate fell to 65%, as the labor force fell by 11,300, the first decline since September 2022.

The employment rate — the proportion of the working-age population that’s employed — fell 0.2 percentage point to 60.9%.

Job losses were led by decreases by retail and wholesale trade, as well as the financial sector, which shed 44,100 and 15,000 positions respectively. Public administration hiring rose 20,000. (…)

Note: I am travelling (Pacific time zone) until August 10. Posting will be irregular and possibly limited by time and equipment constraints.

US Initial Jobless Claims Decline by Most in Nearly a Year Data potentially alleviate some concerns that the labor market is cooling too fast.

Initial claims decreased by 17,000 to 233,000 in the week ended Aug. 3, according to Labor Department data released Thursday. That was helped by fewer applications in states that had registered large increases in recent weeks, such as Michigan, Missouri and Texas.

The decline in initial applications may help reassure markets that the workforce is simply reverting to its pre-pandemic trend rather than rapidly deteriorating. (…)

The four-week moving average, a closely-watched metric that helps smooth out the data, moved up to 240,750, the highest in a year.

Continuing claims, a proxy for the number of people receiving unemployment benefits, edged up to 1.88 million in the week ended July 27, according to Labor Department data released Thursday.

While both initial and continuing applications for unemployment benefits have trended higher this year, they’re still hovering around 2019 levels.

Initial claims, before adjustment for seasonal factors, dropped by around 13,600 to 203,054, the lowest since May. Claims in Texas have subsided recently after spiking when Hurricane Beryl made landfall in early July, but the effects of Hurricane Debby on the Southeast may surface in next week’s data.

• Layoffs Are a Last Resort Looming for More US Companies

(…) “Employers have an intermediate lever they can pull, which is hours worked,” said Richard Moody, chief economist at Regions Financial Corp., adding that many firms remain hesitant to implement layoffs for now. “If they start to feel that things are slowing down and they’re going to stay slowed down, at some point they’re going to start letting workers go.” (…)

“People aren’t hiring, but people aren’t firing, okay, and that’s not normal,” Thomas Barkin, president of the Richmond Fed, said following Friday’s jobs report. “The question you have to ask is, ‘How long does a low-hiring, low-firing environment persist?’” (…)

Now, with roughly one vacancy per unemployed worker, in line with 2019 levels, officials have warned weaker demand may generate higher unemployment. (…)

“The old normal relationships are likely to start happening,” Fed Governor Christopher Waller said in May. “It’s not like we can continue from here on counting on vacancies absorbing any further decreases. We’re getting to that point where the traditional relationships are going to start popping out.” (…)

But demand seem to have stopped declining. Indeed Job Postings are up since July 1 through August 2.

My Recession Rule Was Meant to Be Broken The Sahm rule indicates that the US is in the midst of a downturn, but it’s not quite there yet.

(…) Right now, most of the data that the NBER considers look solid. For example, real consumer spending rose 2.6% at an annual rate in the second quarter, and monthly payroll gains averaged 170,000 in the past three months. A notable exception was employment as measured by the household survey, which is basically flat this year.

Still, while the economy is growing less quickly, it is growing. There is no recession, at least not yet.

The Sahm rule relies on a powerful feedback loop: Relatively small increases in the unemployment rate can turn into large ones. Workers without paychecks weigh on consumer demand, leading to more workers without paychecks. A rising unemployment rate also affects more than just the unemployed, since it normally coincides with fewer raises and job opportunities, as well as heightened uncertainty overall.

In US recessions from 1947 to 2007-09, the unemployment rate rose gradually in the early months and then increased substantially. On average, the peak unemployment rate is almost 3 percentage points above the pre-recession level. The increase in the unemployment rate over the past year fits within the range of earlier recessions.

The level of unemployment is not decisive — it’s the change that matters most. The US entered the 1969-70 recession with an unemployment rate of about 3.5%, for example, and the 1981-82 with it more than 7%. Over longer periods, changing demographics affect the overall unemployment rate. The Congressional Budget Office estimates that the equilibrium rate peaked at over 6% in the late 1970s and slowly fell to 4% last year, partly reflecting an aging, more experienced workforce. Focusing on changes over shorter horizons, like a year, makes recessions more comparable.

Which brings us back to Friday’s jobs report. The rise in the unemployment rate in July to 4.3% brought the Sahm rule to 0.53 — just above its trigger. Even so, there is good reason to view the current rise in the unemployment rate as overstating the recessionary dynamics.

Last fall, when the unemployment rate began to rise, and again this spring, as it rose notably in several states, I explained that things might be different this time — that is, why the Sahm rule might not be an indicator the US was in a recession. The increase in the labor force, particularly the surge in immigration, would contribute substantially to the rise in unemployment.

A rise in the unemployment rate due to weakening demand for workers gains momentum in recessions, which is why the Sahm rule has worked well historically. But a rise in the unemployment rate due to an increase in the supply of workers is different. The rate will decrease once the jobs “catch up” with the new job seekers and more workers allow the economy to grow more. The Sahm rule does not distinguish between these two dynamics, and can look more ominous when the labor force is expanding rapidly.

There are signs that stronger labor supply, not just weaker labor demand, helped push the Sahm rule past its 0.50 percentage point threshold. Unemployed entrants to the labor force (new or returning) accounted for about half of the increase. That’s a notably higher share than in recent recessions, when most of the contribution came from unemployed workers who had been laid off temporarily or permanently. The current Sahm rule reading is likely overstating the weakening in demand and not at recessionary levels.

Even so, there are risks. Recessions have occurred while the labor force is expanding, as in the 1970s, so the current episode would not be a historical outlier for the early stages of recessions. And the hiring rate is now back down to its 2014 levels, when the unemployment rate was 6%. Some of the contributions to the Sahm rule from entrants may also reflect less demand. The layoff rate often rises later in recessions.

Fed Chair Jerome Powell said last week that the data show “an ongoing, gradual normalization of labor market conditions.” And yet the rise in the unemployment rate over the past year, which my rule reflects, now looks like we are past normal and uncomfortably close to recession. It’s time for the Fed to use its own tools and reduce interest rates.

This Apollo chart shows the rise in immigration (only the legal entries).

Also from Apollo. Challenger job cuts are not problematic at all, so far…

David Rosenberg yesterday:

The YoY trend in Household employment is now running at 0% from +1.9% a year ago and +3.6% two years ago. Never before, not once, all the way back to 1950, has the complete evaporation in job creation in this survey over a twelve-month period failed to trigger the recession signal. Ergo, we are sticking with the call, as delayed as it has been.

This chart does not verify that. It also shows that employment is a lagging indicator.

JPMorgan Says Three Quarters of Global Carry Trades Now Unwound