Note: I will be travelling (ancient word: “go from one place to another, typically over a distance of some length”) in Europe until August 23rd. Postings will thus be erratic and time-zones impacted.
Consumer Spending Grew Much Faster in June Spending rose 1.1% as inflation accelerated, curbing purchasing power
Wow! What a deceptive, misleading headline from none other than the WSJ! And the reporters don’t bother to inform the reader that, in real terms, spending actually stalled, +0.1% after -0.3% in May.
Last 5 months: +0.8% annualized; last 3 months: +0.17% annualized; last 2 months; -1.3% annualized. Much faster?
There was much hope that services would take over from goods but it’s not happening: they both rose 0.1% MoM in June
There were 2 surprises in this report:
- spending on goods held up, particularly real durable goods which rose 0.9% MoM after -3.2% MoM in May; a negative trend but better than feared.
- the personal savings rate declined from 5.5% in May to 5.1%, explaining #1. The savings rate averaged 5.6% in Q1 and 5.3% in Q2. It was 7.4% in Q4’19.
Americans are keeping the economy afloat, but only barely, with their pandemic savings. Real disposable income declined 0.3% MoM in June, after being unchanged in May and up 0.2% in April. Year-to-date, real DPI is down 4.4% annualized. On a YoY basis, it is down 3.2%. How much excess savings are left, inflation adjusted?
Wages and Salaries rose 0.5% MoM in June and 6.5% annualized in Q2. But inflation per the PCE deflator was +1.0% in June and +7.4% annualized in Q2.
The core price index rose by 4.8% YoY in June, up slightly from 4.7% in May. On a MoM basis, core prices rose 0.6% in June, up sharply from the 0.3% increase in each of the prior four months.
Services prices rose 0.6% MoM (4.9% YoY). Housing cost rose 0.7% MoM (5.5% YoY) in June, the largest monthly gain since June 1990. Housing cost is 15% of the headline PCE price index and 17% of the core index.
Much has been said of the boosts in minimum wages during the pandemic. Spinning wheels going nowhere.
(The Daily Shot)
More broadly, the BLS Friday published the Employment cost index (see below) with this chart of YoY growth in real comp:
U.S. Employment Costs Advance 5.1% Over a Year Ago
The employment cost index (ECI) for civilian workers increased 1.3% in 2Q’22 after rising 1.4% in 1Q’22. This latest quarterly move produced 5.1% growth in employment costs over a year ago. This is the largest year/year advance since 3Q’1990. The Action Economics Forecast Survey expected a 1.2% quarterly gain.
Wages & salaries advanced 1.4% in Q2 (5.3% y/y), up from 1.2% in Q1. Benefits growth slowed to 1.2% in Q2 (4.8% y/y), but they had surged by 1.8% in Q1.
Private-sector compensation picked up to a 1.5% advance in Q2 (5.5% y/y) following 1.4% (4.8% y/y) in Q1. Wages & salaries in the private sector were up 1.6% in Q2, yielding an advance of 5.7% over a year ago. This followed a 1.3% quarterly rise in Q1. Benefit costs moderated somewhat in Q2, increasing 1.3% (5.3% y/y) following their 1.9% surge in Q1.
Compensation in goods-producing industries slowed somewhat in Q2, rising 1.2% (4.7% y/y) after 1.5% in Q1. Compensation in service-providing industries repeated its 1.4% Q1 advance in Q2 and that yielded a 5.2% rise over Q2’2021.
We will get unit labor cost and productivity data on August 9 but David Rosenberg has a preview:
Real private sector output contracted at a 0.7% annual rate. At the same time, total labor input (aggregate hours worked) expanded at a +2.7% annual rate. This means we likely saw productivity decay once again, and this time at a -3.4% annual rate. This would mean three declines in the past four quarters and place the YoY trend at a woeful -2% pace. This tells us that not only did the business sector over-stockpile this past year on a faulty set of domestic demand assumptions, but they over-hired as well.
We have already seen the workweek decline, and this is a leading indicator — hours always lead bodies. We have only seen productivity recede like it is today just three other times in the past sixty years — 1974Q2, 1979Q4 and 1982Q1 and not once did we see any employment growth the following year. In fact, the average here was a -1.3% rightsizing of staff levels in the ensuing four quarters.
The question is — to turn the productivity situation around, absent a revival in output, what sort of job loss would we be talking about over the coming year? Try 2 million. That would retrace one-third of the gains over the past twelve months — which may be an attempt to sugar-coat the situation, except for the fact that this would end up taking the unemployment rate back up towards 5% from today’s 3.6% level and far above the Fed’s forecast of closer to 4%.
China’s Manufacturing Sector Unexpectedly Contracts Amid Weak Demand, Covid Lockdowns Just 10 of the 21 sectors tracked by China’s statistics bureau expanded in July, versus 13 in June
The official manufacturing purchasing managers index pulled back to 49.0 in July from 50.2 in June, China’s National Bureau of Statistics said Sunday. The result pointed to a surprise contraction in economic activity, dropping below the 50 line that separates expansion from contraction and falling short of the median forecast of 50.3 among economists polled by The Wall Street Journal. (…)
Only 10 out of the 21 industries surveyed by the statistics bureau showed expansion in July, versus 13 in June. June’s PMI reading of 50.2 had been the expansionary reading after three straight months in which the strict lockdown of Shanghai, China’s most prosperous city and a key manufacturing hub, had kept the gauge below the 50 mark.
China’s export sector, a key growth engine for the country’s initial postpandemic recovery, continued to disappoint, serving as a headwind for the overall manufacturing industry. In July, the PMI subindex tracking export orders remained in contractionary territory for a 15th consecutive month. (…)
Separately on Sunday, China’s official nonmanufacturing PMI eased to 53.8 in July, compared with a reading of 54.7 in June, the statistics bureau said. The subindex measuring service-sector activity pulled back to 52.8 in July, compared with 54.3 in June, while the subindex tracking construction activity rose to 59.2, from 56.6 in June. (…)
Joblessness among workers age 16 to 24 has also soared, rising to a record 19.3% in June, up from 18.4% in May. The manufacturing subindex tracking employment edged down to 48.6 from 48.7 in June, the statistics bureau said Sunday.
More details:
- The decrease was broad-based and all five major sub-indexes declined in July.
- The new orders sub-index decreased to 48.5 from 50.4.
- The new export order sub-index fell to 47.4 in July (49.5 in June).
- The import sub-index fell to 46.9 in July (49.2 in June).
- The input cost sub-index plunged to 40.4 (52.0 in June), the lowest reading since 2013.
- The output prices sub-index also dropped significantly to 40.1 (46.3 in June).
- The construction PMI rose to 59.2 (56.6 in June). NBS said that construction activity improved on acceleration of construction of infrastructure projects.
China Home Sales Plunge as Mortgage Revolt Deters Buyers Sales at the country’s top 100 property developers fell 39.7% in July from the same period last year, ending a budding recovery.
Sales at the country’s top 100 property developers fell 39.7% in July from the same period last year to the equivalent of $77.6 billion, or 523.14 billion yuan, according to data released Sunday by CRIC, a Chinese real-estate data provider.
July sales were down 28.6% from June, ending a two-month recovery in month-to-month sales growth. Apartment sales showed increases in May and June from the previous months, as activity picked up following Covid lockdowns in Shanghai and other Chinese cities earlier this year. (…)
Week-over-week data put together earlier by CRIC to study the impact of the mortgage revolt had signaled the July decline. In 30 cities CRIC determined to have been seriously affected by the revolt, new home sales dropped by 12% in the week ended July 10 from the week before, then fell 41% in the week ended July 17.
More home buyers are choosing second-hand homes or new ones built by state-owned developers, which are typically in a stronger financial position. (…)
The Politburo, China’s top policy-making body, made clear recently that local governments are ultimately responsible for fixing the property woes in their markets. (…)
“But the sector won’t stabilize if developers’ liquidity crunch is not relieved,” said Song Hongwei, a research director of Tongce Research Institute, which tracks and analyzes China’s real-estate market.
On Friday, troubled property developer China Evergrande Group sketched out the contours of a plan to restructure its billions of dollars in debt and said its contracted apartment sales in the first six months of the year had fallen about 97% from the same period a year earlier.
- Evergrande misses deadline for $300bn debt restructuring plan Last month, it told creditors it was on track to meet the deadline and urged patience amid threats of legal action.
EARNINGS WATCH
From Refinitiv/IBES:
Through July 29, 279 companies in the S&P 500 Index have reported earnings for Q2 2022. Of these companies, 77.8% reported earnings above analyst expectations and 18.6% reported earnings below analyst expectations. In a typical quarter (since 1994), 66% of companies beat estimates and 20% miss estimates. Over the past four quarters, 81% of companies beat the estimates and 16% missed estimates.
In aggregate, companies are reporting earnings that are 5.2% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.1% and the average surprise factor over the prior four quarters of 9.5%.
Of these companies, 66.7% reported revenue above analyst expectations and 33.3% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 78% of companies beat the estimates and 22% missed estimates.
In aggregate, companies are reporting revenues that are 1.6% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.2% and the average surprise factor over the prior four quarters of 3.4%.
The estimated earnings growth rate for the S&P 500 for 22Q2 is 7.7%. If the energy sector is excluded, the growth rate declines to -2.6%.
The estimated revenue growth rate for the S&P 500 for 22Q2 is 12.1%. If the energy sector is excluded, the growth rate declines to 7.4%.
The estimated earnings growth rate for the S&P 500 for 22Q3 is 8.2%. If the energy sector is excluded, the growth rate declines to 1.8%.
Trailing EPS are now $218.55. Full year 2022e: $227.02. 12-m forward: $236.83e.
The buzz word last week was “better than feared”.
In reality, Q2 is kind of a barbell: 4 strong growth (commodities, industrials), 4 negative growth (consumer, financials) and 3 midway (tech, HC, Staples). Typically, the weaker consumer/financials will soon impact fabrication.
But that’s not in analysts’ playbook yet:
Still, analysts are a little more cautious across the board:
Guidance:
At this point in time, 45 companies in the index have issued EPS guidance for Q3 2022. Of these 45 companies, 28 have issued negative EPS guidance and 17 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance for Q3 2022 is 62% (28 out of 45), which is above the 5-year average of 60% but below the 10-year average of 67%.
At this point in time, 243 companies in the index have issued EPS guidance for their current fiscal year (FY 2022 or FY 2023). Of these 243 companies, 134 have issued negative EPS guidance and 109 have issued positive EPS guidance
The percentage of companies issuing negative EPS guidance for their current fiscal year is 55% (134 out of 243). (Factset)
There may be more hope than reality in some of these estimates. For example, AMZN sees Q3 revenues up 13-17% after 7% in the last 6 months. True, Prime day falls in Q3 this year but the likes of WMT and TGT are aggressively clearing inventory amid weakening demand for goods. These 3 behemoths are certainly not in a strong buying mode approaching the holidays season. How will all this filter through producers and finance companies?
FYI: Monthly Seasonality Statistics Table: August is a mixed bag, can be very good or very bad (September is where it gets a bit messy though).
Source: @topdowncharts