Big-Ticket Goods Orders, Pending Home Sales Point to Steady Demand May readings suggest economy is ‘bending rather than breaking’ as interest rates rise to counter inflation
This is the WSJ headline, hoping to boost investor morale. Don’t be fooled, read on:
Manufacturers’ new orders for durable goods exhibited unexpected improvement in May, posting a 0.7% gain (10.6% y/y) after a 0.4% April increase. The gain contrasted with an expected 0.1% rise in the in the Action Economics Forecast Survey.
New orders for nondefense capital goods excluding aircraft, key measure of capital goods spending, improved 0.5% in May following an unrevised 0.3% April gain. These orders improved 9.8% y/y.
Transportation equipment orders rose 0.8% (16.3% y/y) after a 0.7% April increase. Motor vehicle & parts orders improved 0.5% (16.2% y/y) after a 0.1% uptick. Defense aircraft orders rose 8.1% (9.7% y/y) after rising 2.4%.
Excluding transportation, orders rose 0.7% (8.1% y/y) in May following a 0.2% April improvement. Machinery orders rose 1.1% (10.5% y/y), about as they did in April. Electrical equipment & appliance orders fell 0.9% (+6.5% y/y), the same as in April. Computer & electronic product orders improved 0.5% (5.8% y/y) after holding steady in April. Primary metals orders surged 3.1% (13.5% y/y) but fabricated metals bookings held steady (8.2% y/y).
In this new inflation world, nominal dollar data can trick our judgement. There is no specific deflator for capex but this chart gives us an idea of what’s happening in manufacturing. It contrasts the MoM change in “capex” (blue) with PPI Manufacturing (black) and PPI Core Goods (red). Inflation on manufactured core goods is running above 10% annualized YtD while “capex” expenditures are +7.6% a.r..
Home buying weakness eased last month. The Pending Home Sales Index from the National Association of Realtors improved 0.7% during May after falling 4.0% in April, revised from -3.9%. It was the first increase following six consecutive monthly declines. Pending home sales have fallen 18.4% since the recent peak in October of 2021.
A 15.4% sales gain (-11.9% y/y) in the Northeast recovered a 15.9% April decline. In the South, sales did rise as well but just by 0.2% (-13.8% y/y), the first increase in seven months. In the Midwest, sales declined 1.7% (-8.8% y/y) after rising 6.1% in April. Sales weakened 5.0% in the West last month (-19.8% y/y) but they have fallen 21.1% since October.
This next one got no WSJ coverage. One would think the O&G biz would be booming these days. Only for workers…
- Texas Manufacturing Activity and Expectations Indexes Deteriorate in June
- General business activity lowest since May ’20; future general business activity lowest since April ’20.
- Company outlook posts negative readings for the fourth straight month.
- Production and new orders growth lowest since May ’20; orders were down 16.2% in June.
- Prices received lowest since March ’21 and prices paid lowest since January ’21.
However, the WSJ does inform us that the RV biz stalled since April. TGT and WMT and other retailers said the same.
Nearly 70% of RV dealers said demand had slowed noticeably since April, according to a spring survey by Truist. About 40% of those surveyed were expecting sales volumes to decline this year versus last year compared with just 5% surveyed in February. (…)
The Truist survey found a quarter of dealers reported they were already too heavy on inventory—the highest such reading in three or four years. Data from analytics firm J.D. Power shows the average retail value across RV classes in the U.S. had eroded this year through April. And since then, trends have declined further, according to the firm’s vice president of specialty vehicles. (…)
While formal guidance for fiscal 2023 won’t come until the fall, a hypothetical downside scenario provided by Thor shows the company still generating $365 million in net income, even if sales decreased approximately 35% from the last 12 months. Wall Street analysts are currently modeling a 16% annual sales decline for the 12 months ending next April. Maybe Ragnarök isn’t coming for the god of thunder, but neither are clear skies. (…)
Filling up a large motorized RV in California could cost you nearly $1,000 a tank…
58% of Americans are living paycheck to paycheck after inflation spike — including 30% of those earning $250,000 or more
As of May, 58% of Americans — roughly 150 million adults — live paycheck to paycheck, according to a new LendingClub report. That’s down slightly from 61% who reported living paycheck to paycheck in April but up from 54% in May 2021.
Even top earners say they are stretched thin, the report found. Of those earning $250,000 or more, 30% are living paycheck to paycheck. (Another recent survey, from consulting firm Willis Towers Watson, estimated 36% of those earning $100,000 or more are living paycheck to paycheck.) (…)
Goldman’s Current Activity Indicator is at -0.1% in June.
Axios, and many other pundits, wonder why investors are so worried on the economy given the strong job market. But unemployment is always low just before recessions and job openings per unemployed always high…
US Profit Margin Estimates Are Too Optimistic, Goldman Strategists Say Profit margins for the median S&P 500 company will likely decline next year, whether or not the economy falls into recession, the strategists said.
(…) “Economists have begun to cut their top-down economic forecasts for GDP, and yet fundamental company analysts are sitting there like deer in headlights not knowing what to do with numbers,” the Morgan Stanley Wealth Management chief investment officer said on Bloomberg TV.
Goldman strategists expect aggregate S&P 500 net profit margins to remain flat in 2023, even if the economy doesn’t contract. The risk is lower for the 10 biggest S&P 500 companies, they said, which account for 19% of the index’s earnings. The energy sector will also be a tailwind for aggregate index margins, benefiting from higher commodity prices. (…)
This BB piece is confusing. Here’s what Ben Snider actually wrote:
Our model points to a 70 bp EBIT margin decline next year for the typical S&P 500 company in our economists’ non-recessionary base case, and a 130 bp compression in a recession scenario. In contrast, analyst estimates show the median stock’s EBIT margin expanding by 60 bp next year. (…)
While investors are focused on the possibility of recession, the equity market does not appear to be fully reflecting the downside risks to earnings. The S&P 500 decline this year has been driven entirely by falling valuations, which in turn have moved in line with rising interest rates. As a result, the equity risk premium remains close to where it started the year. While rotations within the equity market have signaled expectations of slowing growth, index valuation does not appear to be providing a buffer for the uncertainty around the path of future earnings. (…)
The 10 largest S&P 500 companies account for 19% of aggregate earnings, and net margins for these companies are projected to rise by a median of 30 bp in 2023. As a result, index margin and EPS estimates face less downside risk than those for the median stock. Our base case forecast, assuming no recession, shows aggregate S&P 500 net profit margins remaining flat in 2023. Consensus estimates embed margin expansion of 30 bp.
Nike Posts Flat Sales, Jump in Inventories Declining revenues in North America and China offset gains in Europe. The results were better than Wall Street analysts had predicted.
(…) For the company’s quarter ended May 31, total sales decreased 1% to $12.2 billion. Net income fell 5% to $1.44 billion, or 90 cents a share. (…)
Revenue in the North American market, which accounts for the majority of total sales, declined 5% to $5.1 billion. Sales in China declined 19% to $1.56 billion, mostly because of Covid-19 restrictions in the country. Sales jumped in Europe, the Middle East and parts of Asia, compared with a year ago. (…)
The company reported a 23% increase in inventory in the May quarter, compared with the prior year. Mr. Friend said that extended production and shipping times caused about two-thirds of the company’s inventory to be in transit at the end of the quarter. (…)
FYI, CPI Footwear was +4.5% YoY in May while CPI Sports Equipment was +7.1%.
China Cuts Travel Quarantine in Biggest Covid Zero Shift Yet
Travelers will now only need to spend seven days in a quarantine facility, and then monitor their health at home for a further three days, according to a revised government protocol released Tuesday by China’s National Health Commission. That’s down from 14 days hotel quarantine in many parts of China currently, and as many as 21 days of isolation in the past. (…)
But Chinese officials said the decision was not a sign of reopening, and based solely on the shorter incubation period of the omicron variant. (…)
China’s Property Slump Is a Bigger Threat Than Its Lockdowns The worst decline on record could hold growth below 4% for the rest of the decade.
An official index that tracks apartment and house sales has posted year-on-year declines for 11 months straight—a record since China created a private property market in the 1990s. With demand for services and commodities generated by housing construction and sales accounting for about 20% of gross domestic product, that represents a big drag on growth this year.
“This is the worst property downturn on record,” says Lu Ting, chief China economist at Nomura Holdings Inc. The length of the drop exceeds those in 2008 and 2014 that reverberated through global commodity markets by curbing Chinese demand for imported steel and copper. (…)
The property market pain is expected to crimp China’s growth by 1.4 percentage points this year, which is just 0.2 percentage point less than the impact of policies to control Covid-19, according to Goldman Sachs Group Inc. economists. That puts the official 2022 GDP growth goal of about 5.5% out of reach. Some economists think getting to 3% will be a struggle. (…)
Despite steep declines in sales and construction, prices haven’t fallen as much as in previous downturns because there’s less excess supply of housing, giving officials more room to maintain tight policies without enraging Chinese households, most of whose wealth is tied up in property. (…)
Even if Beijing wanted a construction boom, the fundamentals aren’t there. China’s massive urbanization process is maturing: Population growth in towns and cities dipped below 1% last year for the first time since 1996. In more developed provinces such as Guangdong in the south, about 75% of the population is urban—not far off the US rate of 83%.
Investment in housing accounts for about 11% of China’s GDP, and that will fall closer to 7% by 2030, according to a study by the Lowy Institute, a think tank in Sydney. Other kinds of investment such as infrastructure and factory construction won’t expand fast enough to fill the gap created by shrinking spending on apartment building, it argues.
The Lowy study concludes that even if China can avoid a financial crisis from the housing decline, lower investment will drag overall GDP growth to an average of about 4% for the rest of this decade. “Slowing growth would make clear that China cannot really establish a meaningful economic lead over the US. It has important implications for perceptions about where the world is headed,” says Roland Rajah, Lowy’s chief economist.
Goldman Sachs, Wells Fargo Boost Shareholder Payouts Four of the six biggest U.S. banks raised their dividends after the Federal Reserve cleared the way.
Copper Intensity of the Energy Transition
According to the International Renewable Energy Agency (IRENA), solar and wind energy installations need to scale up significantly under their REmap scenario, in which efforts are made to limit global temperature rise to less than 2 degrees by 2050.
Based on the copper content figures from Navigant Research and IRENA’s required capacity projections, here are the copper requirements for annual solar and wind installations in 2020 and 2050:
Relative to 2020 levels, annual copper demand from solar PV installations could more than double by 2030, and almost triple by 2050. The largest percentage increase in copper requirements comes from offshore wind farms. IRENA’s REmap scenario requires 45,000 MW of annual offshore wind installations in 2050, which translates into 432,000 tonnes of copper—a 648% increase from 2020 levels.
By 2050, annual copper demand from wind and solar technologies could exceed 3 million tonnes or around 15% of 2020 copper production.
