Spending Surges in Spite of Inflation Consumers Rely on Income and Still Dip Into Savings to Fuel Spending
(…) Even as the path lower for inflation continues to be disrupted, paychecks outpaced price gains with personal income rising 0.5% in March. Real disposable personal income rose 0.2% last month. (…)
Nominal spending rose 0.8% for each of the past two months—a feat not surpassed since November 2021. On an inflation adjusted basis, real spending started the year on a dour note falling 0.3%, but since then it has risen 0.5% in back-to-back months.
We learned in yesterday’s GDP report that goods spending contracted in the first quarter, but the weakness was mostly in durables, and we now know that weakness was concentrated in January. Real durables rose 0.9% in March after 1.4% in February. (…)
Upward revisions to January and February data reveal that much of the upside surprise in the annualized rate was due to more inflation in January and not a significant pickup late in the quarter. The monthly changes of core PCE in January and February were revised up to reveal a monthly pattern of 0.50%, 0.27% and 0.32% from January-March.
Still, core inflation picked up in March and that caused the annual rate to hold steady at 2.8%, but the composition of price gains is increasingly important in getting down to 2%.
The “super core” measure of inflation, which focuses on services and strips housing from the estimates, rose at an annualized rate of 5.5% over the past three months. A quick glance at the nearby chart will fan hawkish views that the Fed is nowhere near ready to ease policy as the rate rivals its 2020-23 highs of around 6%.
But here the concern over a fresh acceleration in inflation may be a bit overblown. Super core inflation was firm in March—it rose 0.4%, but the 0.7% gain in January was a major source of the jump in the annualized rate. If we simply match the monthly change in April, the three-month annualized rate will slip back to 4%—still above the roughly 2% pace of this component pre-pandemic but not quite as menacing as the recent three-month pace.
The question for the rates outlook is clouded by whether higher financing costs begin to bite and slow economic activity. There is evidence that financing costs are taking a toll on manufacturing and housing, but it has been difficult to spot the damage of financing costs to consumer outlays. Yet when we look at personal interest expense as a share of disposable income over the past 30 years, we find that peaks in the fed funds rate are associated with peaks in interest costs. At 2.6% in March, personal interest costs comprise about as large a share of income as they have at any point since the start of the financial crisis. How long can spending defy gravity?
You don’t get far in this business betting against the consumer, but earlier in this cycle we saw households dipping into savings to sustain spending when real income growth was flat or down. It is perhaps a symptom of the YOLO mentality of today’s consumer that now consumers are reaching into savings even when real income growth is strong. The personal saving rate slid to 3.2% in March, the lowest since October 2022. Households continue to pull out all the stops to keep spending.
Strong economic growth and a sturdy consumer is not necessarily a problem for the Fed unless it causes sticky inflation, or worst case an acceleration. Price growth was firm in March. That suggests easing isn’t around the corner, and it puts more emphasis on how inflation evolves into Q2 to determine the eventual start of Fed easing.
Other important details:
- Wages and Salaries, which rose at a 4.1% annualized rate in Q4’23, jumped 7.4% a.r. in Q1’24, including +8.5% a.r. in February and March.
- Rental income rose 1.6% MoM after +1.7 in each of January and February. Somebody’s income is somebody else’s expense. Many thought that it was only start-of-the year adjustments…
- Growth in real disposable income is anemic, normally bad for spending. But the huge effect from housing and equities is more than compensating. In nominal terms, DPI rose 4.5% a.r. in Q1’24 from +3.7% in Q4’23. Americans are not bothered, yet, by rising inflation. (see The Wealth Defect )
ING:
Remember that the top 20% of US households by income spend the same amount of money as the bottom 60% of households by income. The top 20% are doing very well with good, high-paying jobs, tending to own their own home (largely with low long-term mortgage rates) and can make 4% in money market funds while feeling the benefits of higher stock and home prices. The bottom 60% are feeling more stress with far less wealth exposure. They are more likely to rent and are more likely to have exhausted pandemic-era-accrued savings. The key question for the spending and growth in general is how long that top 20% can keep offsetting intensifying stresses faced by the bottom 60%.
But the wealth effect (or defect!) is reaching wider this time around as Axios reports:
Average household wealth for those under 40 in the U.S. is up 49% from its pre-pandemic level, Axios’ Emily Peck writes from a new analysis by the left-leaning Center for American Progress.
- Why it matters: Young households haven’t seen wealth growth like this since the Fed started tracking the data in 1989.
Stunning stat: Millennials — currently ages 27-43 — saw their wealth double over this period, according to the analysis.
Zoom in: Americans under 40 have seen big asset gains while reducing some liabilities:
- Average housing wealth rose $22,000 — as homeownership rose and home prices soared.
- Liquid assets climbed courtesy of leftover savings from pandemic relief and higher wages.
- Financial assets, mostly stocks and mutual funds, increased by an average of $31,000.
- Nonhousing debt fell by $5,000. With more money in their pockets, people could pay off credit cards (the student loan moratorium helped), or not take that debt on at all.
Data: Center for American Progress analysis of Fed data. Chart: Axios Visuals
A few month ago, Jay Powell suggested that splurging on goods would end from a “lack of storage space” but Americans are resourceful, taking advantage of the 3.5% durable goods deflation between September 2022 and December 2023 (they rose 0.5% since).
Consumption of services is only back to trend but it has perked up lately, potentially making services inflation a bigger headache for the FOMC going forward. PCE-services inflation was +5.7% a.r. in Q1’24, much faster than the +3.3% trend of Q4’23.
Maybe, the warnings from the April flash PMI will ease pressures:
- Employment decreased solidly and to the largest extent since mid-2020. In fact, excluding the opening wave of the COVID-19 pandemic, the decline in services staffing levels in April was the most pronounced since the end of 2009. In contrast, manufacturing employment continued to increase modestly.
- Output prices increased at a solid but slower rate during April, the pace of inflation cooling again having accelerated to a ten-month high in March. Prices charged inflation was in line with the series long-run average, though still elevated by pre-pandemic standards. Slower charge inflation was seen across both the manufacturing and services sectors.
There was also this other warning:
Input prices continued to rise sharply in April, although the pace of inflation eased from the six-month high seen in March. This was in spite of the fastest increase in manufacturing input costs for a year amid rising raw material prices. Service providers often noted higher staff and shipping costs, though reported the second-lowest overall cost increase for three-and-a-half years.
Rising costs and strong demand is a combo for higher prices. That’s what small business people are planning for.
Steve Blumenthal writes that
Month-over-month inflation has been rising on average 0.4% for the past three months and 0.3% for the past six months. If inflation continues to rise at this pace for the rest of the year, then year-over-year core CPI inflation will increase from currently 3.8% to 4% to 4.5%, see chart below.
Even if month-over-month increases in core CPI comes in at the historical average of 0.2% for the rest of the year, then year-over-year inflation will still end the year at 3%. To get inflation back to the Fed’s 2% inflation target, core CPI for the rest of the year will have to come in at an unprecedented 0.1% month over month.
If you wish to put odds on the black line above (2% target), know that +0.10% or lower average MoM core CPI over 9 consecutive months has only happened 2% of the times since 1966. Less than 0.21%, only 37% of the times. Which means that the odds of 3%+ inflation by the end of 2024 are 63% on that basis.
EARNINGS WATCH
From LSEG IBES:
229 companies in the S&P 500 Index have reported earnings for Q1 2024. Of these companies, 77.7% reported earnings above analyst expectations and 16.2% reported earnings below analyst expectations. In a typical quarter (since 1994), 67% of companies beat estimates and 20% miss estimates. Over the past four quarters, 79% of companies beat the estimates and 17% missed estimates.
In aggregate, companies are reporting earnings that are 9.5% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.2% and the average surprise factor over the prior four quarters of 7.0%.
Of these companies, 59.4% reported revenue above analyst expectations and 40.6% 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, 65% of companies beat the estimates and 35% missed estimates.
The estimated revenue growth rate for the S&P 500 for 24Q1 is 3.8%. If the energy sector is excluded, the growth rate improves to 4.4%.
In aggregate, companies are reporting revenues that are 1.3% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 1.5%. The estimated earnings growth rate for the S&P 500 for 24Q1 is 5.6%. If the energy sector is excluded, the growth rate improves to 8.5%.
The estimated earnings growth rate for the S&P 500 for 24Q2 is 10.9%. If the energy sector is excluded, the growth rate declines to 10.4%.
Trailing EPS are now $224.30. Full year 2024: $242.32e. Forward EPS: $252.55e.
Revisions up and up!
- Earnings Growth — Mag 7 and the Rest: OK, in the short-term, Mag 7 have indeed been on a dream run when it comes to earnings growth. But here’s an interesting development… later this year the rest of the market is expected to start outperforming Mag 7 on earnings growth. Trees never grow to the sky, night never lasts forever. Stay alert for narrative changes! (Callum Thomas)
Source: NewEdge Wealth Weekly Note
RBA’s Richard Bernstein hits the same nail showing that the Mag-7 are no longer exceptional growers …
… yet sell at exceptional multiples:
SMALL VS LARGE
Callum Thomas: “While the cycles vary in magnitude and duration, there does appear to be a distinct tendency for small vs large relative performance to undergo cycles, and on a number of fronts the current one seems overdue for a turn.”
Source: @ISABELNET_SA
Source: Daily Chartbook
That’s because the economy is strengthening and broadening.
A few great charts from Ed Yardeni:
- Small caps’ revenues are flat:
- Small caps’ profits are down:
- Small caps’ margins are down:
- Small caps are cheap, but for good reasons:
- But S&P 600 forward EPS are seen up 12.4%, same as S&P 500 EPS. Note however that while S&P 500 trailing earnings met expectations, S&P 600 earnings are 7% below forecast one year ago.
Remember that about 40% of the companies in the Russell 2000 are losing money. None in the S&P 600 index.
Why the large cap advantages?
- Smaller banks are more exposed to the commercial real estate bust. CRE loans make up just 6% of large bank balance sheets, versus 30% for small banks per Gavekal.
- Smaller banks are more vulnerable to deposit flight as short term interest rates stay higher for longer and to depositors’ angst about unrealized bond losses as longer rates rise.
- Financials represent 18% of the S&P 600 Index vs 13% for the S&P 500.
- Non-financial small-cap companies tend to borrow more at the short end of the curve, relying on short-term or variable interest-rate bank loans. Larger companies make broader use of the fixed-rate bond market.
- Large companies in need of financing have no trouble issuing bonds while small businesses, which generally have less liquid balance sheets, suffer from reduced credit availability.
As this RBA chart shows, small caps used to do well when long rates were rising, symptom of a strengthening economy. The pandemic seems to have impacted smaller companies more than usual. Is this the new normal?
Musk Wins China’s Backing for Tesla’s Driver-Assistance Service Beijing gives tentative approval for carmaker’s tech in its second-biggest market
After his flurry of meetings with top officials in Beijing, China’s government signaled its blessing for Tesla to roll out its advanced driver-assistance service in the carmaker’s second-biggest market. (…)
Chinese officials told Tesla that Beijing has tentatively approved the company’s plan to launch its “Full Self-Driving,” or FSD, software feature in the country, people familiar with the matter said Monday.
The U.S. electric-vehicle maker will deploy its autonomous driving services based on mapping and navigation functions provided by Chinese technology giant Baidu, the people said.
The partnership clears an important regulatory hurdle for Tesla to offer its driver-assistance system there. Working with a Chinese company helps ease regulators’ concerns over any data-security risks, the people said. Bloomberg earlier reported the deal with Baidu, which in addition to its core search-engine business has expanded into autonomous driving and artificial intelligence. (…)
The approval follows a meeting on Sunday between Musk and top Chinese officials including Premier Li Qiang, who was previously the Communist Party chief in Shanghai when Tesla was setting up its production facilities there. (…)
Chinese officials haven’t responded to Musk’s request for approval to transfer data that Tesla’s cars collect in China to the U.S. to train its driver-assistance features, people familiar with the matter said. Data from China, where Tesla has 1.7 million drivers, would help Tesla improve its algorithms.
It is a potentially thorny issue given Beijing regards protecting such data as a matter of national security. Tesla would have to go through China’s stringent approval process for data cross-border transfer, the people said.
The China Association of Automobile Manufacturers said Sunday that Tesla’s Model 3 and Model Y had passed its tests and were compliant with China’s data-security requirements. The government-backed industry group checked how vehicles process facial-recognition data they collect using cameras outside the cars, as well as real-time data of drivers and passengers.
That clearance may pave the way for local authorities to loosen restrictions on where Tesla’s cars can go in China, the people said. Tesla’s EVs are banned from entering sensitive locations of the Chinese military and government and, in some cases, airports and train stations over concerns that data its cars collected could pose national-security risks.
Tesla has said that all data generated by its cars sold in China is stored locally in a data center it built in 2021.
On Monday, Musk also met with Robin Zeng, chairman of Tesla’s key battery supplier Contemporary Amperex Technology, in Beijing, a person familiar with the matter said. In an interview last month, Zeng said CATL was in talks with Tesla and other automakers to license its battery technology in the U.S.
So, China would let Tesla completely loose within China without making sure the U.S. would allow entry of Chinese cars in the U.S.? Such one-sided deal ain’t Chinese, is it? Why the “tentative” approval?
Last February:
Biden Is Looking Beyond Tariffs to Keep Chinese ‘Smart Cars’ Out of the US US considers restrictions to address data security concerns
(…) The measures would apply to electric vehicles and parts originating from China, no matter where they’re finally assembled, to prevent Chinese makers from moving cars and components into American markets through third countries like Mexico, the people said. The measures could also apply to other countries about which the US has data concerns, one of the people said. Tariffs alone, they added, won’t fully address this issue.
US officials are particularly concerned about the troves of data collected by so-called smart cars — which include EVs and other types of connected and autonomous vehicles — said the people, who were granted anonymity to discuss confidential conversations. Many of today’s cars, both gas and electric, are equipped with modems connecting them to the internet, making them potential targets for hacking.
The administration may try to address data security concerns using existing Commerce Department authorities to regulate some information and communications technology transactions, some of the people said, but no decision has been made as officials conduct a sweeping policy study.
A separate executive order intended to ensure data privacy in general is expected to be released as soon as next week, and officials are also weighing adjustments to a 27.5% tariff on Chinese EVs originally imposed by President Donald Trump. (…)
Commerce Secretary Gina Raimondo worries that data could wind up in Beijing’s hands, she said last week, pointing to China’s ban on Tesla Inc. cars near government gatherings and for military use. “You can’t drive a Tesla on certain parts of Chinese roads, they say for national security reasons,” she said at an Atlantic Council event. “Well, think about that. What are the national security concerns?”
Chinese automakers like BYD Co. have stayed out of American markets in part because of high tariffs, but US officials think they may eventually choose to swallow those costs. The retail price of EVs made in China is less than half that of those manufactured in the US, so a flood a Chinese cars could upend President Joe Biden’s efforts to turbocharge domestic EV production. There’s also worry in Congress that Chinese companies like Contemporary Amperex Technology Co., the world’s biggest EV battery maker, may try to take advantage of tax credits in the Inflation Reduction Act, Democrats’ signature climate law. (…)
Trump, who has for years been vocal about Chinese EV firms’ ambitions in Mexico, has pledged to ratchet up tariffs on China if elected president in November, saying this month he may even go beyond a previously floated across-the-board figure of 60%.