Underlying Prices Cooled in August, Giving the Fed More Evidence of Softer Inflation Americans spent more on expensive gasoline and services last month
The Fed’s preferred inflation gauge, the personal-consumption expenditures price index, rose a seasonally adjusted 0.4% last month, largely reflecting energy costs. Core prices, which exclude food and energy, rose just 0.1% in August, the weakest monthly increase since 2020, the Commerce Department said Friday.
Over the three months through August, core prices rose at a 2.2% annualized rate. If that trend continues in the coming months, inflation would be running very close to the Fed’s 2% target. But higher energy prices pushed up overall inflation last month, highlighting why officials aren’t ready to declare victory.
Americans increased their spending by 0.4% in August from a month earlier, Friday’s report also showed. That is healthy growth but a slowdown from a 0.9% gain in July. Solid job prospects and rising gasoline prices helped fuel spending. (…)
In a speech published online Friday, New York Fed President John Williams pointed to signs that labor-market imbalances were diminishing and suggested the central bank might not need to raise rates again this year. (…)
The personal saving rate, a measure of how much money people have left each month after outlays and taxes, continued to decline and hit 3.9% last month. (…)
YoY, core goods +0.5%, services +4.9%, housing +7.4%, core services ex-housing +4.4%.
3m a.r., core goods -2.6%, services +4.1%, housing +5.4%, core services ex-housing +3.4%.
- Fed’s New Inflation Outlook Already Seems Outdated, Analysts Say Latest projections imply substantial pickup in months ahead
- Fed Chair Powell is due to participate in a roundtable discussion with workers, small business owners, and community leaders, in York. Audience questions are expected. (11:00AM EST)
Wells Fargo:
Before rounding, real personal spending rose just 0.05% in August, or at the slowest pace in five months. This likely somewhat reflects some base effects after spending in July was revised even higher to reflect a 0.6% monthly gain, but also points to some potential loss of momentum. Weakness was mostly concentrated in goods spending, as real services spending rose 0.2% last month.
Real disposable personal income has now edged lower for three straight months when you incorporate revisions, adding to concerns that consumers staying power is dwindling.
Source: U.S Department of Commerce and Wells Fargo Economics
Nominal personal income rose 0.4% in August and averaged +3.4% annualized in the past 3 months after +4.4% in the previous 3 months. But after tax disposable income rose only 0.2% in August and a slow 1.4% annualized in the last 3 months, down sharply from +6.4% in the previous 3 months.
The pandemic caused a sharp rise in personal tax rates in 2021 and 2022 which are now normalizing. Personal taxes dropped through May and rose in the past 3 months to their 12% historical average.
With the recent jump in oil prices (PCE deflator in black above), real disposable income took a hit this summer.
Yet, consumers dipped into their savings and spent merrily as real spending rose 4.1% annualized in the June-August period after zero growth sequentially in the previous 3 months.
Beyond all these stats, the fact is that Americans generally spend their labor income which was up 6.1% YoY in August compared with 5.8% for nominal expenditures.
Monthly growth in labor income (aggregate weekly payrolls) has been volatile but strong overall and well above inflation this year, even in August.
While oil prices rose, core inflation eased considerably:
US core personal consumer expenditure deflator (% change)
Source: Macrobond, ING
Wells Fargo adds:
There were significant revisions to the history though with incomes revised higher and consumer spending revised lower. This is important as it suggests that the household sector accrued more savings during the pandemic and have run down less than previously thought.
These aren’t insignificant numbers either. We are talking upwards of $700bn of pandemic-era accrued savings being available to households over and above what we previously thought, which could keep consumer spending more resilient than we had been thinking.
Stock of excess savings accrued since the pandemic ($bn)
Source: Macrobond, ING
Indeed, but let’s not forget that overall prices rose 16% since 2019, seriously eroding these savings’ purchasing power.
How consumers deal with the current headwinds from interest rates, oil and student loans will dictate the fate of the holidays season. Historically, absent a recession, Americans are willing to use their savings to sustain consumption. This time around, there is also The Wealth Defect.
Today’s WSJ headlines Americans Are Still Spending Like There’s No Tomorrow with several examples of folks apparently spending beyond their means to better enjoy life.
(…) Ally Bank, whose online platform started allowing customers to create savings buckets for different goals in 2020, says users create about one-and-a-half times more experience-oriented buckets such as travel and “fun funds” versus those associated with longer-term planning. (…)
In the New York Federal Reserve Bank’s August SCE Household Spending Survey, households reported spending 5.5% more than last year. The share of households that said they made at least one large purchase in the previous four months increased to 64% from 57%, its highest reading since August 2015. (…)
“All the rules that exist around money and lifestyle are just things people made up, so we’re playing a different game, and honestly I think we’re having more fun,” says Candice.
Friday, we get September’s employment report, critical given the above mentioned headwinds. Indications are that job growth was solid:
- S&P Global’s flash PMI (final out today) revealed that “US businesses registered greater hiring activity during September. The rate of job creation quickened to the fastest since May and was solid overall. In fact, the pace of employment growth was among the most elevated seen in the past year”.
- Initial claims have declined 23% since their June peak while continuing claims dropped 10%.
- Job openings, down 21% since December and 14% since April, could surprise on the upside Tuesday if Indeed’s Job Postings, current through September 22, are an indication:
We will also watch wages on Friday. The MoM growth in hourly earnings fell to 0.23% in August, +2.8% annualized, down from 4.9% a.r. between April and July. The YoY change has been steady at 4.3% since March.
That contrasts with the composition-adjusted Atlanta Fed Wage Tracker which stands at +5.3% YoY.
In March, we found that 5.5% was the magic mortgage rate, the tipping point beyond which most consumers say they would not buy a home. And despite six months of rates hovering between 6.5% and 7.5%, consumer attitudes haven’t budged a bit.
Consumers aren’t just stuck in the past; many told us they simply couldn’t afford the mortgage payment a rate above 5.5% would entail.
This explains why builders are finding success with rate buydowns. Affordability has never been worse. The monthly payment for a median-priced home at today’s rates would eat up 46% of a typical homeowner’s income. (33% is the norm.)
- Who Uses “Buy Now, Pay Later?” (NY Fed)
(…) Despite being fairly broad-based, with significant take-up among higher educated and higher income respondents, overall we find that those with lower credit scores and greater unmet credit needs make up a disproportionate share of all BNPL users. Indeed, 32.7 percent of BNPL users either held a credit score of less than 620, reported having a credit application rejected, or were delinquent on a loan over the past year; this group, meanwhile, represents just 16.6 percent of our full sample.
Furthermore, we find BNPL users to be overall more financially fragile, as measured by the average likelihood of being able to come up with $2,000 in the next month in case of an emergency. That probability stands at 66 percent across all respondents and respondents that have ever been offered the BNPL option, but only 52 percent among those who reported using BNPL over the past year.
BNPL users are also less likely to rely on savings when facing a financial shock. While 68 percent of all respondents would rely on savings to come up with the needed funds, only 42 percent of BNPL users would. Instead, they report that they are more likely to rely on borrowing (from friends, family, banks, or credit cards).
The fact that a disproportionate share of BNPL users are already financially fragile raises questions about the resilience of BNPL lending and its performance following an adverse economic shock. (…)
We cannot dismiss the potential risks of overextension, whereby frequent use of BNPL funding leads to excessive debt accumulation over time, affecting a consumer’s ability to meet non-BNPL obligations. The fact that many BNPL lenders do not currently furnish data to the major credit reporting agencies could contribute to such risks, as both BNPL lenders and other institutions will be unaware of a borrower’s current liabilities when deciding to originate new loans.
Also concerning in this regard is that BNPL might be enabling consumers to spend (and borrow) more than they otherwise would, rather than simply shifting purchases to a new payment platform. Berg et al (2023) find causal evidence for this, showing that customers spend 20 percent more when BNPL is available, with less creditworthy customers being most responsive to BNPL offers. (…)
Eurozone Manufacturing PMI: Manufacturing sector remains mired in deep downturn as factory orders plummet and job losses accelerate
The HCOB Eurozone Manufacturing PMI, compiled by S&P Global, fell fractionally to 43.4 in September, from 43.5 in August. Crucially, this marked the fifteenth successive month in which the headline index has recorded in sub-50.0 territory, thereby indicating a sustained deterioration in the health of the euro area manufacturing sector.
With the exception of Greece (where the Manufacturing PMI recorded only just inside expansion territory at 50.3), all of the other countries monitored by the survey registered downturns during September. Germany and Austria continued to observe the fastest rates of decline, followed by the Netherlands and France. In the case of the latter two, September’s contractions were the steepest seen in almost three-and-a-half years. While Italy and Spain also saw worsening manufacturing sector health, the rates of deterioration slowed.
The volume of new orders placed with eurozone goods producers fell rapidly once again during September. In fact, the rate of decline remained among the steepest seen in the survey’s 26-year history. Considerable weakness was also seen on the export front. The response by manufacturers was to reduce production levels for the fourteenth time in 16 months. The decrease was sharp and slightly faster than in August.
(…) further job cuts were made in September, with euro area factory employment falling at the quickest pace in almost three years.
Additional cuts to purchasing were also made during September, extending the current sequence of falling buying activity to 15 months. While the reduction was steep, especially by historical standards, it was the weakest since June. Given the aggressive nature of the pullback in spending, eurozone manufacturers’ stocks of inputs fell at a strong and accelerated pace during September.
Post-production inventories likewise fell, with the decline its quickest for two years.
Meanwhile, the latest survey data indicated a further decrease in eurozone factory operating expenses. The reduction was steep overall, despite easing to the slowest since April. Lower input prices continued to provide firms with more flexibility over their pricing strategies. Still, eurozone manufacturers remained focused on boosting competitiveness, with prices charged falling for a fifth month running and to one of the greatest extents since 2009.
With the exception of the great recession in 2008/2009, output prices have never decreased at a pace faster than the current three-month average, and it’s similar with input prices, which fell almost as fast as when oil prices hit rock bottom in the late-90s and during the bursting of the dot-com bubble in 2001. Given how rare falls of this magnitude are, a rebound seems likely. (…)
Finally, September survey data pointed to a marked softening of growth expectations, as evidenced by business confidence slumping to a ten-month low.
China’s Economy Picks Up Steam for Holiday Factory activity and travel bookings offered a glimmer of hope after months of anemic growth.
(…) An official gauge of activity in the nation’s manufacturing sector rose to 50.2 in September from 49.7 in August, China’s National Bureau of Statistics said Saturday, the first time since March that its purchasing managers index crept over the 50 mark that separates expansion from contraction.
A similar gauge of activity for nonmanufacturing sectors of the economy rose to 51.7 from 51, spurred by consumer spending on eating out, travel and other services. Construction activity also expanded at a faster clip, aided by a government push on infrastructure.
Separately, early indications suggest the holiday at the beginning of October will be a bumper one for tourism. The Civil Aviation Administration of China said this week that it expects 190 million people to travel by train during the week and 21 million people to take domestic and international flights. The number of international flights operating during the holiday is expected to be 18% higher than the same week in 2019, the administration said.
The number of passengers traveling by train on Friday, the first day of the holiday, topped 20 million for the first time in history, according to Chinese state media. (…)
Data for August showed consumers spent more freely on cars and smartphones and splurged on summer travel, helping to push inflation back above zero after consumer prices posted a year-over-year fall in July. The urban unemployment rate edged down in August for the first time since April, while banks lent more freely. (…)
Goldman Sachs:
Among five major sub-indexes, the output and new orders sub-index increased to 52.7 and 50.5 from 51.9 and 50.2 in August, respectively. The employment sub-indexes edged up to 48.1 from 48.0 in August. (…) The NBS commented that the output and new orders sub-indexes in some key sectors such as petroleum, coal and other fuel processing, auto and electrical machinery were above 53 in September.
S&P Global:
Manufacturing conditions across China improved slightly for the second consecutive month in September, according to latest PMI data. Production expanded at the strongest rate in four months amid a further modest increase in new business [a modest rate that was little-changed from August]. Meanwhile, the decline in new export work moderated, with foreign sales falling only slightly in September [the softest in three months].
Prices data pointed to a quicker rise in average input costs, which increased at the fastest rate since January. As a result, prices charged by manufacturers increased in September after a six month period of decline.
September survey data pointed to a further softening of growth momentum across China’s service sector. Business activity and overall new orders both expanded at the slowest rates in 2023 to date. The milder increase in total sales occurred despite a fresh improvement in new export business. Job creation across the sector also slowed, with payrolls expanding only marginally overall.
Cost pressures continued to ease, with average input costs rising at the slowest rate in 2023 so far. As a result, firms raised their own charges only slightly.
- Asia faces one of worst economic outlooks in half a century, World Bank warns Sluggish post-pandemic recovery, China’s property crisis and US trade policies expected to hinder growth next year
Canada’s economy flatlined in July, showed little momentum moving forward
The country’s real GDP was essentially unchanged in July compared to June, when it showed a slight contraction, Statistics Canada said in a report on Friday. A preliminary estimate showed GDP ticked up 0.1 per cent in August. (…)
The July numbers were impacted by several temporary factors, including port strikes in British Columbia and a recovery in sectors hit by forest fires in June. Still, the overall picture showed the Canadian economy lumbering under the weight of higher interest rates. (…)
The biggest drag on GDP came from the manufacturing sector, which shrank 1.5 per cent in July as a result of lower inventory build-up, the largest monthly drop since April, 2021. Plastics, rubber and chemical manufacturers were hit particularly hard by the B.C. port strikes, Statscan said.
The strikes impacted other sectors, notably the shipping industry, which contracted 3.4 per cent in July amid the shutdown of more than 30 ports in B.C. “Significant declines in both imports from and exports to countries other than the United States impacted the sector, in particular a decrease in goods coming from China,” Statscan noted.
This was partly offset by a rebound in economic activity in industries that had been affected by wildfires in June. Mining and quarrying rose 4.2 per cent, while accommodation and food services rose 2.3 per cent, the largest monthly increase since January.
Overall GDP in service-producing industries inched up 0.1 per cent in July, while goods-producing industries contracted 0.3 per cent. Only nine out of 20 sectors tracked by Statscan experienced growth. (…)
Corporate Bond Market Distress Index (CMDI)
We [the NY Fed] introduce the Corporate Bond Market Distress Index (CMDI), a unified measure that quantifies joint dislocations in the primary and secondary corporate bond markets. While there are a variety of measures for capturing aspects of corporate bond market functioning, there has been little consensus on how to use those measures to identify periods of widespread distress in the market and on how to weight different measures.
The index incorporates a wide range of indicators, including measures of primary market issuance and pricing, secondary market pricing and liquidity conditions, and the relative pricing between traded and nontraded bonds.
The index quantifies corporate bond market distress from a “preponderance of metrics” perspective. That is, the index identifies as “distress” periods during which a large number of individual measures of market functioning indicate deteriorating conditions in both the primary and the secondary markets for corporate bonds.
Alongside the market index, which varies from 0 to 1, we show the reading as a percentile of the pre-2020 CMDI distribution (right y-axis), which offers a more intuitive context and highlights the historically extreme levels of dislocation reached following COVID-19-related disruptions to asset markets.
- Corporate bond market functioning appears healthy. The end-of-month market-level CMDI is below its historical 20th percentile.
- Market functioning in both the high-yield and investment-grade sectors remained stable during the course of September.
Small Business Bankruptcies Rising at Worst Pace Since Pandemic Signs of financial distress among entrepreneurs are growing.
(…) The increased bankruptcies are coming from filings under Subchapter V, a newer provision in federal bankruptcy code that makes it easier for financially stressed small businesses to restructure.
Nearly 1,500 small businesses filed for Subchapter V bankruptcy this year through Sept. 28, nearly as many as in all of 2022, according to the American Bankruptcy Institute.
Bankruptcy petitions are just one sign of financial stress. Small-business loan delinquencies and defaults have edged upward since June 2022 and are now above prepandemic averages, according to Equifax. (…)
Seventy-three percent of small businesses reported that rising interest rates were having a negative impact on their business, according to a survey of more than 1,500 small businesses conducted in late August and early September by Goldman Sachs. (…)
More than 90% of small-business closures occur outside of bankruptcy, estimates Brook Gotberg, a visiting law professor at the University of Chicago. Many small businesses don’t have enough debt to make a bankruptcy filing worthwhile, she said. (…)
Congress created Subchapter V, which took effect in February 2020, because standard Chapter 11 bankruptcy filings were expensive and too restrictive for small companies, making it difficult for them to get a fresh start. Increased familiarity with the new options has contributed to an increase in filings, as has a temporary lift in the debt limit for Subchapter V filings to $7.5 million from $2.7 million, bankruptcy attorneys say. (…)
Robert Gonzales, a bankruptcy attorney in Nashville, said he’s now getting four times as many calls as he did a year ago from small businesses considering a bankruptcy filing.
“We are just at the front end of the impact of these dramatically higher interest rates,” Gonzales said. “There are going to be plenty of small businesses that are overleveraged.” (…)
But Fed data through Q2 don’t show any deterioration yet:
EARNINGS WATCH
Record-High Number of S&P 500 Companies Issuing EPS Guidance for Q3 2023
As of today, 116 S&P 500 companies have issued EPS guidance for the third quarter. Of these companies, 74 have issued negative EPS guidance and 42 have issued positive EPS guidance.
The percentage of companies issuing negative EPS is 64% (74 out of 116). This percentage is above the 5-year average of 59% but equal to the 10-year average of 64%. (…)
As a result, the overall number of S&P 500 companies issuing EPS guidance for the third quarter (116) is above the 5-year average of 97 and above the 10-year average of 99.
In fact, this is the highest number of S&P 500 companies issuing EPS guidance for a quarter since FactSet began tracking this metric in 2006. The current record-high number is 113, which occurred in the prior quarter (Q2 2023). The third quarter also marks the third consecutive quarter in which the number of S&P 500 companies issuing quarterly EPS guidance has increased. (…)
Thus, it appears more S&P 500 companies have confidence in their visibility on earnings over the near term compared to recent quarters, given the record-high number of S&P 500 companies issuing EPS and revenue guidance for the third quarter.
FYI:
