Worried About the American Consumer? Don’t Be. Households are still reaping the benefits of a surge in home equity and aren’t in the mood to save.
Following my yesterday post (The Wealth Defect), Bloomberg’s columnist Conor Sen argues similarly:
(…) If there’s one reason to remain optimistic on household spending, it’s that the “excess savings” framework doesn’t capture the full picture of household balance sheets. Adjusted for income, household net worth remains near a record high. That’s driven, importantly, by the surge in home values and home equity levels during the pandemic. (…)
Unlike stocks, which are held primarily by the wealthy, home equity is a middle-class phenomenon with two-thirds of American households owning their homes. And while home price expectations grew pessimistic last year in response to rising interest rates and worries about a housing market decline, they have been on the rise again this year, according to the New York Fed’s Survey of Consumer Expectations. Households have a lot of housing wealth and feel confident that their homes will continue to appreciate in the future. (…)
Households, in the aggregate, are just about as wealthy as they’ve ever been. As a result, they’re comfortable spending more and saving less than in the 2010s. Even modest declines in home values from here would leave housing wealth well above 2019 levels — for home equity as a percentage of disposable personal income to return just to 2019 levels, home prices nationwide would have to drop by nearly 20%.
Housing wealth would cover the 66% of households who own their homes and tend to be wealthier, but lower-income consumer spending has remained strong as well. Goldman Sachs Group Inc. said in a note this week that retailer same-store sales have risen by 5.6% year-over-year for companies whose stores tend to be in lower-income communities, likely due to lower-income workers getting the biggest raises in this tight labor market. (…)
Via The Transcript:
- The pandemic benefits are running out. People put those in their savings. Savings accounts are coming down quite meaningfully. Credit is at an all-time high right now. You’re beginning to see credit defaults tick up a little bit. And so I would say the consumer is fragile. I would say the economy is moving in the right direction, but it’s fragile here in the U.S.” – PayPal (PYPL ) CEO Dan Schulman
- “I would say I am very surprised by the consumer resilience. We continue to see very strong spend across the board. The consumer has been outperforming expectations. Obviously, our business is a good indicator of what the consumer is doing. We have more data than probably many others. So what we are seeing is a resilient consumer all throughout. We told you that in the second quarter conference call. And as we look at data running up until the end of August, we continued to see the same trends. So resilient consumer, that’s good.” – Mastercard (MA ) Co-President Ling Hai
UAW Bends on Wage Demands as Talks Progress The union has proposed a mid-30% wage hike, down from an initial demand of at least 40%.
(…) In the past two weeks, companies have countered earlier union proposals with offers of pay increases ranging from 9% to 14.5% over the life of the four-year contract, with some companies adding in at least $16,000 in bonuses and inflation-protection payments. (…)
Under the current contract negotiated in 2019, full-time unionized factory workers start off at around $18 an hour, and can earn up to $32 an hour. (…)
Aside from pay, the union has also called for a shortened 32-hour week, the re-establishment of medical benefits for retirees, and the return of cost-of-living adjustments.
Detroit automotive executives have expressed optimism about the pace of negotiations and their ability to reach a deal without a strike.
“We are on a good path and remain committed to reaching a tentative agreement without a work stoppage that would negatively impact our employees and our customers,” a Stellantis executive said in a release to employees on the company’s website Monday. (…)
- UPS Chief Says Year One of Pricey New Labor Deal Will Hurt Most Company faces initial cost jolt as pandemic-driven boom cools
United Parcel Service Inc. will pay out the biggest portion of its new, five-year labor pact over the next 12 months while trying to win back customers it lost during the contentious contract talks, making for a challenging upcoming year, its chief executive said.
The company will offer some customer-service improvements and lean into automation, UPS Chief Executive Officer Carol Tomé said Monday in an interview. That could help it boost sales and save money as it covers the large, initial pay rise Teamsters secured in a labor deal that took effect in August. (…)
“We put more cost in our business this year than we had anticipated, in an environment where the volume has receded,” Tomé said. “That puts some pressure on the margin, which is reflected, I think, in the share price.” (…)
UPS has to cover 46% of the Teamster agreement’s total cost increase in the first year. But on average, UPS’s labor costs will only rise 3.3% a year over the life of the deal. Tomé said the overall expense was within the company’s budget, though she didn’t expect the arrangement to be so front-loaded. (…)
The company, and rival FedEx, both said they’d increase prices by 5.9% in 2024. (…)
Country Garden Rebounds as Yuan Bond-Extension Votes Tallied The distressed Chinese property developer wins approval from creditors to extend some repayments.
(…) Yet, the firm, now China’s sixth-biggest developer as sales have slumped, had still faced nearly $2 billion of bond payments across different currencies due through the rest of the year.
Any payment failures could impact China’s housing market even more than a landmark default in late 2021 by China Evergrande Group, as the builder has four times as many projects. (…)
-
China Builders’ Bond-Extension Efforts Face Increased Opposition Sino-Ocean affiliate loses vote to extend yuan note by a year
Sino-Ocean Capital Holding Ltd. said Monday night that holders of a 1 billion yuan ($137 million) note voted against extending the bond by another year. The affiliate of Chinese state-backed developer Sino-Ocean Group Holding Ltd. instead won a 90-day grace period involving any event of default involving the bond. (…)
Offshore-bond defaults hit a record in 2022, and the figure is on pace to be topped this year with delinquencies exceeding $40 billion, according to data compiled by Bloomberg. (…)
A spurt of home sales in China’s biggest cities is losing momentum less than two weeks after authorities loosened mortgage restrictions, raising doubts over whether the steps are enough to revive the market before a crucial busy season.
While a dearth of official statistics makes it difficult to gain a comprehensive view, checks by industry watchers suggest that the rebound is fading in tier-1 cities.
Even in Beijing, which reacted the most to the stimulus, sales of existing homes plunged 35% to about 1,700 units last weekend from 2,600 in the weekend immediately after the easing, according to estimates by Centaline Group analyst Zhang Dawei based on his channel checks. New homes sold by developers in the capital city showed a similar trend. Centaline is one of China’s top property agencies.
In Shenzhen, new-home sales edged up 3.8% last week from a week earlier, while they continued to slide in Shanghai and Guangzhou, according to China Index Holdings. Across China, transactions continued to drop, falling more than 20% by area, the agency said. (…)
[But] Even after the initial sales spike tapered off, homebuyer visits were still about 20% to 30% higher than periods before the supportive measures, he added.
In another encouraging sign, some homeowners in the biggest cities have raised asking prices, suggesting residents expect demand to pick up, Centaline data showed. (…)
Listings of existing residences climbed 2.7% in Beijing, 2.3% in Shenzhen and 0.6% in Guangzhou last week, accelerating from the week before the easing, data monitored by China International Capital Corp. showed. (…)
@KobeissiLetter
MARGINS WATCH
Further piquing your interest:
Yesterday, I posted about interest expense using these 2 charts:
John Authers today explains the underperformance of U.S. small caps partly because of rising financing costs:
But a deeper driving factor could be the bizarre state of financing in the US. Smaller companies tend to use floating-rate debt (they often don’t have a choice about this), and so higher rates are already hurting them. Bigger companies used the exceptionally long period during 2020 and 2021, when rates were effectively zero, to lock in low rates well into the future.
Andrew Lapthorne, chief quantitative strategist at Societe Generale, says that smaller companies’ gross interest costs are rising faster “in large part because smaller companies have more debt, and a lot more of it is in floating rate instruments.”
The picture becomes even stronger if we look at net debt interest rates (meaning that interest received can be deducted), as large companies’ interest costs drop below -2.5%. So at least some of the startlingly poor small-cap performance can be attributed to unequal availability of credit:
(…) Corporate treasurers at larger companies have done a good job of pushing the maturities of their debt beyond next year. In 2025, however, much more debt will need to be renegotiated, creating what might be called a corporate version of a “fiscal cliff.” Meanwhile, the problems for smaller companies could soon become acute. If bond yields are still close to 5% by the end of next year, as begins to looks possible, monetary policy might finally bite in a big way.
This chart from Ed Yardeni (lines are mine) shows that larger caps’ margins have given back most of the pandemic boost to margins and are back to their trend line. Unlike smaller caps’ margins which remain well above their pre-pandemic levels and trend lines.
S&P 600 margins have been tending down for 6 years before Covid in spite of well above average revenue growth…
…which has more than offset their relative margins erosion on profits, but not on share prices…
…as investors have been increasingly discounting small caps’ profits.
I could not find relative debt levels, which could explain the slide in small caps’ relative P/Es but, going back to Andrew Lapthorne’s chart above, the faster increase in small companies’ interest expense since 2014 suggests an increasing relative leverage.
Ed Yardeni provides trends in shares o/s which indicate that small companies have been much more aggressive (beware the scales) than S&P 500 companies in their share buybacks.
S&P 600 companies have grown their EPS twice as fast as their dollar earnings since 2013. Given the trends in their interest costs and their relative P/Es, one can suspect that much of these buybacks was done with debt.
NFIB members are much, much smaller than S&P 600 companies but the latest survey highlights some of the difficulties small businesses are facing:
- Sales and earnings are weak since 2018:
- Employment plans are declining while debt cost has almost doubled:
