Cooling Consumer Spending Points to Further Economic Slowdown Household spending in May rose at the slowest rate this year. Some economists see a second-straight quarterly contraction.
Consumer spending cooled to a 0.2% advance in May, the Commerce Department said Thursday. That was the smallest monthly gain this year, and down from the revised 0.6% increase in April [from +0.9%].
Following the soft spending figures, economists at S&P Global Market Intelligence said they forecast gross domestic product to contract at a 0.7% annual rate in the second quarter, which ends Thursday. They previously forecast very slight economic growth. (…)
Thursday’s report showed personal income grew by 0.5% in May, the same as April’s rate. Adjusted for inflation, after-tax income declined by 0.1% in May, showing that wage increases have been struggling to keep up with price rises. Inflation-adjusted spending declined by 0.4% in May, the first decline in real spending since December.
The personal-consumption expenditures price index, an inflation gauge closely watched by the Federal Reserve, rose 6.3% in May from a year earlier, the same as April’s annual rate. Core inflation, which strips out volatile food and energy components, rose 4.7% in May on an annual basis and has been declining since February when it was 5.3%. (…)
In May, the saving rate rose modestly to 5.4%, after the rate fell to its lowest level in more than a decade in April. (…)
Spending on long-lasting goods fell by 3.2% from the prior month, but spending on non-durable goods—including gasoline—rose 0.7%, a sign that consumers are putting off big-ticket purchases in favor of more immediate needs and services spending, which also rose 0.7% over the prior month. (…)
The BEA revised back to January. Disposable income was unchanged but real expenditures were revised sharply lower: Jan-April went from +2.8% to +1.9% with Mar-Apr growth cut in half from +1.2% to +0.6%. Given May’s -0.4%, real spending grew only at a 0.6% annualized rate in the last 4 months against real DPI down 0.6% a.r..
Real expenditures on goods were down 1.6% in May after +0.3% (from +1.0%) in April. Real services were revised down every month this year, from +0.6% on average to +0.4% Jan. to Apr. and to +0.3% in May.
In effect, services are not the assumed offset. Real consumption is 4% above real income. These two line will meet again and real income is showing no upward trend lately, is it?
The only positive is that core inflation has stabilized at +0.3% for the 4th consecutive month. Quite encouraging. Durable goods inflation has been zero over the last 4 months while services prices are steadily up 4.9% annualized.
Meanwhile, the wages and salaries component of personal income has been decelerating from +8.7% annualized in the last 4 months to +6.6% in the last 2 months and +6.0% in May. Goldman Sachs estimates that wage growth needs to slow to 3.5% for the Fed to reach its 2% inflation target. At this time, inflation in the 3-4% range looks like a more achievable level
While on demand for services:
- Las Vegas May 2022: Visitor Traffic Down 6.6% Compared to 2019
- Hotels: Occupancy Rate Down 4.1% Compared to Same Week in 2019
U.S. Unemployment Claims Edged Down
Initial claims for unemployment insurance filed in the week ended June 25 declined by 2,000 to 231,000 (-43.0% y/y) from 233,000 in the previous week (revised up from 229,000). Weekly claims have been trending up modestly over the past few months but remain historically quite low and still indicative of tight labor-market conditions. The Action Economics Forecast Survey had expected 230,000 claims for the latest week. The four-week moving average of initial claims rose to 231,750 from 224,500 in the prior week.
Amid all the claims that the economy is strong and that the labor market is so tight, unemployment claims are rising. Nowhere near the pandemic levels but, at its current 232k, the four-week moving average of initial claims is up 35% from its April 2 low and is back to its pre-pandemic range.
MANUFACTURING PMIs
U.S. PMIs are out later today.
Eurozone: Manufacturing output falls for first time since depths of initial COVID-19 lockdowns in 2020
June PMI® survey data showed the eurozone manufacturing economy ending the second quarter on a low as production levels fell for the first time in two years. Evidence of worsening conditions for goods producers was seen across many of the sub-indices of the latest PMI survey as total new business intakes and export orders both declined, while business confidence slid to a 25-month low. Backlogs of work, which have been built up significantly throughout the pandemic, also fell for the first time in almost two years as companies focused on completing unfilled orders due to falling demand.
Elsewhere, there were further tentative signs of supply chains edging closer to stability as input lead times lengthened to the least marked extent in a year-and-a-half. There was also a softening of inflationary pressures as both input costs and output prices rose at slower rates.
The S&P Global Eurozone Manufacturing PMI® fell from 54.6 in May to 52.1 in June, its lowest reading since August 2020 and a fifth consecutive month of decline in the headline measure.
The slowdown trend seen across the euro area on aggregate reflected a broad-based weakening across all the monitored constituent nations during June. The best-performing country was once again the Netherlands, although growth here slumped to a 19-month low. Compared to May, Austria registered the sharpest slowdown, with its respective Manufacturing PMI falling by over 5 index points. The weakest-performing nation was Italy, which registered its softest upturn in two years.
For the first time since the initial wave of COVID-19 infections in the first half of 2020, June survey data highlighted a decline in eurozone manufacturing output. Weaker demand conditions, the war in Ukraine and persistent supply issues were cited as reasons for lower production.
Another drop in new orders was recorded in June. The rate of decline gathered pace and was the strongest since May 2020. A general slowdown in demand for goods was mentioned by survey respondents, although many commented on the reluctance of clients to place new orders at current price levels. Weakness was also seen in export flows during June as overseas new business fell for a fourth consecutive month.
There was also growing evidence of businesses looking to control costs as purchasing activity rose at the slowest rate across the current 22-month sequence of growth. A preference to use existing stocks, which firms have aggressively built up in recent months to mitigate supply issues and inflation, was also commonly mentioned.
However, there were signs, albeit limited, of supply-chain conditions stabilising, with the survey’s measure of delivery times rising to an 18-month high. Overall, this signalled the fewest incidences of delivery delays since December 2020.
The receipt of previously-ordered items supported continued stockpiling efforts, despite the marked slowdown in purchasing activity growth. Input stocks rose at the fastest rate in five months during June.
For the first time in just shy of two years, euro area manufacturers made inroads into their backlogs of work during June, with faltering demand conditions leading firms to turn their attention to incomplete orders. Employment growth meanwhile slowed to a three-month low.
There was a notable loss of confidence across the euro area manufacturing sector in June. Overall, business sentiment fell to its weakest level since May 2020 as concerns surrounding the global economic outlook and inflation weighed on growth expectations.
Lastly, there was a modest cooling of inflationary pressures in June. Increases in both input costs and output charges were slower when compared to May, with rates of inflation easing to 15- and six-month lows respectively. Nevertheless, price pressures remained historically elevated.
China: Manufacturing output rebounds as pandemic restrictions recede
The reduction in COVID -19 case numbers and subsequent easing of containment measures across China led to a renewed improvement in manufacturing business conditions in June. Output expanded sharply as disruption to operations receded, with the rate of growth the quickest seen for just over a year-and-a-half. New orders and new export sales also returned to growth, though rates of expansion were modest overall. Supply chains were meanwhile broadly stable, which ended a two-year streak of worsening lead times. While firms registered a further marked increase in input costs, prices charged were cut once again as part of efforts to attract sales.
The headline seasonally adjusted Purchasing Managers’ Index™ (PMI™) increased from 48.1 in May to 51.7 in June, to signal the first improvement in the health of the sector for four months. Though modest, the rate of increase was the strongest seen since May 2021.
Chinese manufacturers registered the first expansion of output since February at the end of the second quarter. The rate of growth was the quickest seen since November 2020 and sharp, with a number of firms linking the rise to the return to more normal operations and reopening of production lines as COVID-19 restrictions were eased.
Total new orders likewise returned to growth in June, though the rate of increase was only modest. A number of firms mentioned that the lingering impact of the pandemic and relatively subdued demand conditions had impacted new order intakes. New export business also rose modestly.
The return to more normal business conditions also helped to alleviate pressure on supply chains, as highlighted by a broad stabilisation of vendor performance in June. Notably, this ended a 24-month period of lengthening delivery times for inputs.
Although companies saw a rebound in activity in June, they remained relatively cautious in terms of staffing levels. Employment declined for the third month in a row, albeit modestly, with a number of firms linking this to the non-replacements of voluntary leavers as new business intakes were relatively subdued. Furthermore, there appeared little pressure on operating capacities as production schedules resumed, with companies registering a renewed fall in backlogs of work in the latest survey period.
Reflective of the trend seen for new orders, purchasing activity rose modestly in June. Inventories of purchased inputs expanded only fractionally, and stocks of finished goods fell marginally, as some companies were reluctant to build inventories in light of relatively muted demand conditions.
Higher costs for raw materials and transport drove a further sharp increase in input costs in June. Nonetheless, companies cut their selling prices for the second month in a row amid greater market competition and efforts to stimulate sales.
Business confidence regarding the 12-month outlook for output improved to a four-month high in June. Companies were generally upbeat in their forecasts as they anticipated further increases in production as the pandemic recedes and further improvements in client demand.
Japan: Manufacturing sector expands at softer pace in June
Businesses in the Japanese manufacturing sector signalled a further improvement in operating conditions in June, though the rate of expansion eased from that seen in May. Companies often noted that rising costs and sustained material shortages contributed to a slower rise in production levels, while new orders rose only fractionally. Ongoing supply chain disruption and delivery delays led to a further rapid increase in costs, resulting in a sharp increase in factory gate prices that was the quickest in the survey history. That said, firms were increasingly confident that these issues would dissipate in the year ahead, as the level of business confidence rose to the highest since March.
The headline au Jibun Bank Japan Manufacturing Purchasing Managers’ Index™ (PMI) dipped from 53.3 in May to 52.7 in June. This indicated a seventeenth consecutive monthly improvement in the health of the sector, although the pace of expansion was the joint-softest since last September.
The weaker headline reading was partly due to a near-stagnation of new orders. While remaining in expansion territory, the latest increase in sales was only fractional and the slowest in the current nine-month sequence of growth. The slowdown in demand was commonly linked to rising prices and weaker client confidence amid sustained material shortages and delivery delays. Firms also noted a reduction in new export sales in June for the fourth consecutive month, although the decline was only modest, as persistent weakness in China due to lockdowns were partially offset by stronger demand in North America.
Production growth also slowed in June. The rate of expansion was only marginal and the slowest recorded in four months. Firms noted that material shortages and surging prices had weighed on output volumes.
Japanese manufacturers indicated a rise in cost burdens for the twenty-fifth consecutive month in June. That said, the rate of input cost inflation eased for the first time in four months and was the slowest since February, albeit still rapid overall. Rising input prices were widely attributed to higher raw material costs and a weaker yen which also made imported material more expensive. Nonetheless, manufacturers often sought to pass higher costs on to customers through higher output charges, which rose at the fastest rate in the survey history.
Buying activity rose for the ninth time in as many months in June. Growth eased to the slowest in this sequence, however, and was only modest, as attempts to secure additional raw materials were hindered by delivery delays, material shortages and higher prices. As a result of additional purchases, firms built up their stocks of raw materials and finished items to protect against future disruption and price rises, with stocks of finished items rising for the first time since January. Suppliers’ delivery times meanwhile lengthened at the slowest rate for four months, albeit still rapidly overall.
Concurrently, employment levels continued to increase in June, with the rate of job creation broadly unchanged from May’s modest pace. In line with the trend for new orders, outstanding business also rose at a softer pace. A number of monitored firms attributed the latest accumulation in backlogs to material shortages.
Looking ahead, business confidence regarding output over the coming year remained robust. The degree of optimism strengthened to a three-month high amid hopes that supply chain disruption and inflationary pressures will diminish, and that the pandemic will subside globally.
S&P Global PMIs for other Asian countries tell the same story: the goods economy is in a major slowdown as contracting new orders will gradually lad to lower production rates and reduced employment:
- However, after a modest increase in the previous survey period, ASEAN manufacturing firms noted a drop in new business from abroad.
- [Taiwan] Manufacturers signalled a back-to-back monthly fall in overall new work in June. Though modest, the rate of decline was the quickest seen since the initial onset of the pandemic in June 2020. Panellists often commented on reduced demand across both domestic and external client bases, which was in part driven by the pandemic, rising costs and difficulties shipping items. Furthermore, new export business fell at the steepest pace for two years.
- [South Korea] businesses recorded a softer rise in
new orders in the latest survey period. Panellists often commented that client confidence was dampened by rising raw material prices in the midst of supply shortages. Foreign demand meanwhile contracted for the fourth consecutive month in June, although the rate of decline eased to the softest in this sequence. - The Chicago PMI new orders index decreased to a contraction-level 49.9 this month from 59.7 in May and 67.0 last June, registering its first contraction since June 2020. The Chicago Business Barometer is considered to be a leading indicator of the U.S. economy.
Price pressures are abating; lower overall demand against jacked up inventories will soon lead to discounting on a broad range of goods.
The key question is whether services will act as offsets, on both overall demand and inflation. Services PMIs will be out next week but last week’s flash PMIs and many other indicators are not supportive.
This next chart says that headline inflation should have already eased under the weight of declining commodity prices but rising wages and high energy costs are keeping services prices up, so far.
Inflation has decoupled from commodities as service prices surge.
Source: @RichardDias_CFA via The Daily Shot
Eurozone Inflation Hits Record in Boost for Big-Hike Calls
Driven once more by soaring food and energy costs, consumer prices jumped 8.6% from a year earlier in June — up from 8.1% in May. Economists surveyed by Bloomberg saw a gain of 8.5%. The median estimate in the poll has fallen short for 11 of the last 12 months. (…)
Goldman Strategists Warn Risk of Stock Selloff Is Still High
(…) “Much of the valuation de-rating this year has been due to higher rates/inflation,” strategists led by Christian Mueller-Glissmann wrote in a note dated June 30. “Unless bond yields start to decline and buffer rising equity risk premiums due to recession fears, equity valuations could decline further.” (…)
Corporate earnings are also likely come under pressure in the second half of the year, the strategists said, as margins face the test of surging prices and weakening consumer sentiment.
Airbus Wins $37 Billion China Jet Deals in Blow to Boeing
Airbus SE won one of its biggest ever single-day hauls, selling almost 300 airliners worth more than $37 billion to four Chinese airlines in a coup for the European manufacturer in its tussle with Boeing Co. for dominance in Asia’s largest economy.
China Eastern Airlines Corp. will buy 100 A320neo narrow-body jets, while Air China Ltd. will take 64 jets, with its Shenzhen Airlines subsidiary acquiring 32 more, according to separate company filings Friday. China Southern Airlines Co. said earlier it would buy 96 A320neos, as well as leasing additional planes. (…)
The orders come at a time of rising political tensions between the US and China. (…)