SKINNING THE RETAIL SALES CAT
Axios Friday morning:
For all the talk about a recession, the consumer — the bedrock of the economy — appears to be holding strong.
Such is the great weirdness of the U.S. economy right now: Americans’ spending behavior, as spelled out in today’s solid retail sales report, screams, “No recession here!”
The retail sales data shows a broad advance in spending, rising 1% in June, more than the 0.8% analysts had expected. The figure reflects higher prices — but even excluding gas stations, sales were up 0.7%.
The new number is consistent with overall consumption spending continuing to rise in the second quarter, which would lower the odds of a second straight quarter of shrinking GDP.
Solid? Sales rose 1% MoM but CPI rose 1.3%. All of Q2: sales up 2.2% vs CPI up 2.5%.
The first 2 charts plot nominal sales with real sales deflated using total CPI per the St-Louis Fed. Real sales were down 0.3% MoM (-0.5% YoY) in June after -1.0% in May. For Q2, real sales are off 0.23% from Q1 and -0.4% YoY.
Most of the time, using total CPI to estimate real retail sales is close enough even though it tends to underestimate real sales given generally deflating prices of durable goods.
However, with the sharp rise in goods inflation in the past 18 months against more subdued services inflation, using total CPI substantially underestimates retail inflation. On a YoY basis, total CPI is up 9.0% in June but a weighted average of inflation in durable and nondurable goods is 13.7%
Using only goods inflation vs total inflation reduces real sales by almost 7% in June and shows a much weaker trend, particularly since March which jibes with what retailers have been saying.
On a MoM basis, “adjusted” real sales (red bars) declined 1.4% in June after -1.7% in May. For all of Q2, “adjusted” real sales are down 1.5% (-6.1% annualized) after -0.2% in Q1
A comparison of real retail sales using total CPI (blue), with my “adjusted” CPI (red) and official real expenditures on goods (black, June will be out in 2 weeks) supports my calculations showing that real retail sales are much weaker than generally believed.
Early Read on Existing Home Sales in June
From housing economist Tom Lawler:
Based on publicly available local realtor/MLS reports released across the country through today, I project that existing home sales as estimated by the National Association of Realtors ran at a seasonally adjusted annual rate of 5.12 million in June, down 5.4% from May’s preliminary pace and down 14.2% from last June’s seasonally adjusted pace. (…)
Mortgage origination for purchase are the weakest since 2013:
Source: Daily Shot
- Most of U.S. Population Now in Areas With High Covid Levels Los Angeles County said it would reinstate an indoor masking requirement if levels remain high for two weeks as the BA.5 subvariant spreads.
- Biden expects Saudi Arabia to take ‘further steps’ to boost oil supply in the “coming weeks”. “If you say did we promise more oil it means that we see a shortage in oil,” he [state minister for foreign affairs Adel al-Jubeir] added. “If we see a shortage in oil, there will be more oil produced.”
U.S. Industrial Production Unexpectedly Declines in June
Total industrial production fell 0.2% m/m (+4.2% y/y) in June after holding steady in May (+0.1% previously reported on June 28 & +0.2% initially) and rising 0.8% in April (+1.3% previously reported on June 28 & +1.4% initially), according to the Federal Reserve Board. The June IP index at 104.4 was 2.7% above its pre-COVID (February 2020) level. A 0.1% m/m increase had been expected in the Action Economics Forecast Survey.
In industry groups, manufacturing production fell 0.5% (+3.6% y/y) in June following a 0.5% May decrease and three consecutive monthly gains. Durable goods declined 0.3% (+5.4% y/y) after a 1.2% slide, led by drops of 1.6% (-1.0% y/y) in primary metals, 1.5% (+12.5% y/y) in motor vehicles & parts, and 1.1% (+5.4% y/y) in machinery. (…)
In market groups, consumer goods output fell 0.7% (+2.6% y/y) in June after a 0.7% May drop and four consecutive m/m increases. Construction supplies dipped 0.1% (+6.0% y/y) for both June and May. Business equipment, however, ticked up 0.1% (7.9% y/y) following a 0.5% May decline and three straight monthly advances. Materials production inched up 0.1% (3.6% y/y), the smallest of five successive m/m gains.
In special classifications, factory output of selected high-tech industries rebounded 0.2% (1.8% y/y) in June after drops of 1.4% in May and 1.9% in April. Manufacturing production excluding selected high-tech industries fell 0.6% (+3.6% y/y) after a 0.5% May drop and three consecutive monthly increases. Manufacturing production excluding both selected high-tech and motor vehicles & parts fell 0.5% (+3.0% y/y), the second straight m/m fall.
Capacity utilization declined to 80.0% in June, a three-month low, from 80.3% in May; still 0.4 percentage point above its long-run (1972–2021) average. An 80.6% rate had been expected. Manufacturing capacity utilization fell to 79.3%, the lowest since February, from 79.8%.
MAGA has yet to kick in. Manufacturing production is at its 2018 level:
The Empire State Manufacturing Index of General Business Conditions recovered to positive territory in its July survey, reaching 11.1 from June’s -1.2 and -11.6 in May. The Action Economics Forecast Survey had expected a modest increase but still in negative territory at -0.6. The percentage of respondents reporting an increase in business conditions was 33.6%, up from 27.6% in June, while the percentage reporting a decrease was 22.6%, down from 28.8% in June.
The latest survey was conducted between July 5 and July 11. (…)
Among the survey components relating to current activity, shipments were up at a net of 25.3% of respondents, reflecting an increase in companies reporting an increase from 30.7% in June to 39.9% this month and a decrease in the number with a decline, from 26.7% in June to 14.6% this month.
New orders rose at a net of 6.2% of respondents, up marginally from 5.3% in June; there was a modest decrease in those experiencing larger new orders, at 33.7% in the July survey from 34.6% the month before and a decrease in those with a decline in new orders from 29.3% in June to 27.5% this month.
The unfilled orders index edged slightly lower to -5.2% from -4.3%. The share of companies with higher unfilled orders decreased to 18.3% from 22.2%, while the share with lower unfilled orders also decreased, edging down to 23.5% from 26.5%. With lower unfilled orders, it’s not surprising that the delivery times index declined on balance, from 14.5 in June to 8.7 in July. This is the lowest since February 2021. The inventories index decreased slightly to 14.8 from 17.1 in June.
The share of firms increasing the number of employees increased to 29.5% in July from 24.5% in June, while firms reducing the number of employees increased to 11.5% from 5.5%. These moves yield an employment index of 18.0, down modestly from 19.0 in June. The average workweek index eased to 4.3 this month from 6.4 in June.
Prices paid by firms and prices received by firms were still heavily tilted toward increases, but less so than in recent months. The prices paid index was 64.3 in July, down from 78.6 the prior month while the prices received index in July was 31.3 versus 43.6 in June.
Companies’ expectations for the next six months weakened noticeably in this July survey. The index of general business conditions fell below zero, reaching -6.2 after +14.0 in June. This is the first negative total since February 2009. Net negative responses marked all components except new orders, which were roundly at zero, and shipments, which were at 7.2, their lowest also since February 2009. Unfilled orders, delivery times and inventories all had net negative readings while other components moved negatively.
U.S. Import and Export Prices Continue to Post Double-Digit Year-on-Year Increases
Import prices rose 0.2% m/m (10.7% y/y) in June, following a 0.5% m/m (11.6% y/y) advance in May, downwardly revised from a 0.6% monthly rise. Export prices rose 0.7% m/m (18.2% y/y), after a strong 2.9% m/m (18.7% y/y) rise in May, revised down from 2.8% m/m. The monthly data are not seasonally adjusted. The Action Economics Forecast survey had expected rises of 0.7% in import prices and 0.9% in export prices in June.
(…) Import prices excluding fuels declined 0.5% m/m (+4.6% y/y), following a monthly decline of 0.3% (+5.9% y/y) in May. Import prices for foods, feeds and beverages declined 0.7% m/m (+8.7% y/y) in June after a 0.6% monthly decline (+11.5% y/y) in May. (…)
Import prices of automotive vehicles, parts and engines were unchanged over the month (3.0% y/y) in June after a rise of 0.4% m/m (3.2% y/y) the prior month, while import prices of consumer goods excluding automotives declined 0.3% m/m (+2.0% y/y) in June, following a decline of 0.2% (+2.6% y/y) in May.
The details of monthly export prices reveal a monthly rise of 1.7% (36.7% y/y) in industrial supplies and materials during Jung June, following a 5.9% m/m (37.0% y/y) in May, while capital goods export prices declined 0.1% m/m (+4.2% y/y), following a 0.3% monthly rise (4.8% y/y) in May. Automotive vehicles, parts and engines export prices were unchanged over the month (4.5% y/y), after a 0.3% m/m (4.6% y/y) rise in May. Consumer goods excluding automobiles export prices posted a 0.1% decline (+3.3% y/y) in June, after a 0.3% m/m drop (+4.3% y/y) in May. Foods, feeds and beverages export prices dropped 0.6% m/m (+13.4% y/y) in June after a monthly rise of 2.3% (15.9% y/y) in May. Export prices of agricultural commodities declined 0.3% m/m (+14.8% y/y) in June after a 2.2% m/m (16.7% y/y) rise in May, while nonagricultural commodities export prices rose 0.9% m/m (18.7% y/y) in June after a 3.0% m/m (19.0% y/y) rise in May.
GDPNow Q2 estimate now -1.5% vs -1.2% on July 8.
This Ned Davis chart says that we are, now, in recession:
As Fed Tightens, Economists Worry It Will Go Too Far Economists see nearly 50-50 recession probability in latest WSJ survey
Economists surveyed by The Wall Street Journal now put the chance of a recession sometime in the next 12 months at 49% in July, on average, up from 44% a month ago and just 18% in January.
Some 46% of economists said they expect the Fed to raise interest rates excessively and cause unnecessary economic weakness. Slightly fewer, 42%, said they anticipated the Fed increasing rates about the right amount to balance inflation and growth. Around 12.3% thought it would raise rates too little. (…)
Respondents cut their growth forecasts for 2022, projecting inflation-adjusted gross domestic product to rise 0.7% in the fourth quarter of this year from a year earlier. That’s down from 1.3% projected in June and 3.6% nine months ago. (…)
The survey was conducted before the June consumer-price index report, which might have altered the responses to some questions. The Wall Street Journal survey of 62 business, academic and financial forecasters was conducted July 8-12.
Canada Home Prices Slide Most Since at Least 2005 on Rates
The benchmark price of a home fell 1.9% in June versus the previous month, according to data released Friday by the Canadian Real Estate Association. That’s the third straight month of falling prices, and the biggest one-time drop in data going back to 2005. (…)
Sales fell 5.6% on a monthly basis in June.
Greater Toronto, the country’s largest city and the center of its financial industry, has seen benchmark prices fall 4.5% in three months to C$1.21 million (about $928,000). But the declines are steepest in the cities and towns around Toronto that gained the most during the Covid-19 pandemic as people used the freedom of remote work to move further away.
Oakville, a western suburb, has seen a 10% price drop in the last three months, while prices in the city of London, Ontario, about a two-hour drive away, have declined 13%. (…)
In Winnipeg, prices dropped 2.4% in June. They also fell in Vancouver and its outlying suburbs, Edmonton and Halifax.
In Montreal, prices fell 1.3%. (…)
Nationally, the June price decline was an acceleration from the 0.5% drop seen in May and a 1% fall in April.
It’s the first time since 2019 that national home prices have fallen for three consecutive months, though the soft patch is coming after a record-breaking two years for the Canadian housing market in which the benchmark price jumped 50%.
China’s Comeback Likely to Be Slow Economists expect a drawn-out rebound as weakness in the real-estate market, business confidence and exports drags on growth.
- China Is in Trouble, Even With Sliver of Growth New threats to the beating heart of the economy—housing—and an increase in Covid-19 cases suggest dangerous shoals ahead.
- China Covid Cases Climb in New Risk to Economic Activity
- Goldman Sachs: “the strong sequential improvement may not continue in July given the temporary boosts in June (e.g., pent-up demand for auto and property sales after the end of lockdown) and the resurfacing local Covid outbreaks. The sector that we think is likely to continue to outperform is government-led infrastructure investment. (…) many of the problems in the property sector – some overleveraged private developers are cash-strapped and cannot finish project construction on time – remain unresolved. (…) the timing and path of an eventual exit from zero-Covid policy remain unclear, which continues to impose risks to growth in the face of the latest, even more transmissible Omicron variants. (…) This leads us to forecast 3.3% full-year GDP growth for China, significantly lower than the government’s “around 5.5%” target.”
- China Weighs Mortgage Grace Period to Appease Angry Homebuyers
- China Seeks to Stem Mortgage Boycott With Developer Loans
EARNINGS WATCH
Earnings Season Off to Slow Start, Clouding the Outlook for Stocks Early reports put focus on threat of an economic slowdown, the pressure of rising costs on profits
Early reports from U.S. companies have refocused attention on some of the biggest challenges facing businesses, from the threat of an economic slowdown to the pressure that rising costs are putting on corporate profits. JPMorgan Chase JPM 4.58%▲ & Co., Delta Air Lines Inc. DAL 1.07%▲ and industrial supplier Fastenal Co. FAST 1.48%▲ are among those last week that warned they are facing strains or see clouds ahead. (…)
Two separate accounts of the 35 companies that have reported so far, with 2 distinct readings. Bank earnings are creating the confusion.
Factset:
60% have reported actual EPS above estimates, which is below the five-year average of 77%. In aggregate, companies are reporting earnings that are 2.0% above estimates, which is below the five-year average of 8.8%. (…)
The blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) earnings growth rate for the second quarter is 4.2% today, compared to an earnings growth rate of 4.4% last week and an earnings growth rate of 4.0% at the end of the second quarter (June 30).
Negative earnings surprises reported by companies in the Financials sector and downward revisions to estimates for a company in the Industrials sector were substantial contributors to the decline in the earnings growth rate over the past week. Upward revisions to estimates for companies in the Energy sector have been the largest contributor to the overall increase in earnings for the index since the end of the second quarter (June 30). (…)
Looking ahead, analysts expect earnings growth of 10.1% for Q3 2022, and 9.2% for Q4 2022. For CY 2022, analysts are predicting earnings growth of 9.9%.
From Refinitiv:
80.0% reported earnings above analyst expectations and 17.1% 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 4.1% 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, 68.6% reported revenue above analyst expectations and 31.4% 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 1.2% 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 5.6%. If the energy sector is excluded, the growth rate declines to -3.4%.
The estimated revenue growth rate for the S&P 500 for 22Q2 is 10.8%. If the energy sector is excluded, the growth rate declines to 6.6%.
The estimated earnings growth rate for the S&P 500 for 22Q3 is 10.7% [down from 11.1% on July 1]. If the energy sector is excluded, the growth rate declines to 4.6%.
Downward revisions accelerating:
Across the board:
Let’s see how far down that goes:
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Variant Perception’s business cycle indicator is at worse levels than mid-cycle slowdowns of 2012, 2015 and 2018. Our indicator combines the best long-leading growth and liquidity inputs, and provides an extremely good lead on corporate earnings growth.
Trailing EPS are now $217.61. Full year 2022: $228.26e. 12m forward EPS: $239.98e. The “e” is very important here…
Stock Investors Have Rarely Been This Bearish Traders are betting on bigger losses for equities after a punishing stretch that has pushed the S&P 500 toward its worst start to a year in two decades.
True, but they have been more bearish at times:
- TD Ameritrade Investor Movement Index: the June reading dropped to the lowest point since 2020, that’s a big round trip in investor sentiment right there…
Source: TD Ameritrade Investor Movement Index
- Retail Net flow vs SPX.
(JPM via The Market Ear)
This bear: not terribly deep and still short-lived
While there isn’t really a point to reiterating how painful YTD price action has been, Jefferies did think that it would be worthwhile to reiterate how it stacks up historically: not terribly deep and still short-lived. For example, while the current drawdown is deeper than the one we saw in ’18, it’s still several weeks shorter. Notably, for SPX bear markets that didn’t reach -25%, the average # of days until the next ATH was 568 trading days…far more than the current duration of 131 days. So despite extremely low sentiment readings, we are still churning around ‘no man’s land.’ (The Market Ear)
Goldman
Stanley Druckenmiller at Sohn 2022