U.S. Durable-Goods Orders Rose 1.7% in August
Excluding the transportation segment, durable-goods orders rose a modest 0.2% in August. Excluding defense goods, orders jumped 2.2% from July. (…)
More broadly, total durable-goods orders rose 5.0% in the first eight months of the year from the same period in 2016.
A closely watched proxy for business spending on new equipment, new orders for nondefense capital goods excluding aircraft, rose 0.9% in August after a 1.1% gain in July. The category was up 3.3% in the first eight months of 2017 compared with a year earlier. (…)
Oil prices have helped a little…
…but the basic trend is pretty good and abnormally stable. Over the last 11 months, only two negatives and +6.2% annualized in capex orders!
U.S. Pending Home Sales Decline Sharply
The National Association of Realtors (NAR) reported that pending home sales fell 2.6% (-2.6% y/y) during August to an index level of 106.3 (2001=100). That followed an unrevised 0.8% July decline, falling to the lowest level since January 2016. It was the sixth monthly shortfall this year and left sales 6.4% below the peak during April 2016.
Pending home sales declined m/m across each region of the country. (…)
U.S. GDP Growth is Revised Up as Profits Weakened
Economic growth during Q2’17 was revised higher to 3.1% (2.2% y/y) from 3.0% in the second estimate, and compared to 2.6% in the advance report. It was the quickest rate of increase since Q1’15.
After-tax corporate profits without IVA & CCA fell 2.0% (+7.4% y/y), revised from -1.4% following a 1.3% gain during Q1. Before-tax earnings with IVA & CCA improved a lessened 0.7% (+6.4% y/y) following a 2.1% Q1 decline. Nonfinancial sector earnings rose a reduced 4.9% (7.2% y/y). Financial sector earnings declined a sharper 7.1% (+8.6% y/y) while foreign sector profits fell a larger 2.5% (+6.8% y/y). (…)
Growth in domestic final sales was unrevised at 2.7% (2.4% y/y). Consumer spending growth held at 3.3% (2.7% y/y), the strongest growth in four quarters. The gain in durable goods buying was lessened to 7.6% (6.4% y/y), the quarterly strength led by a 13.2% jump (10.7% y/y) in recreational goods & vehicles buying. Home furnishings & appliance purchases rose 9.1% (6.2 % y/y), twice the growth during Q1 while spending on motor vehicles increased 0.8% (+4.4% y/y). Each of these figures were revised lower. (…)
Services spending gained an upwardly revised 2.1% (2.3% y/y) and equaled growth during all of last year. Spending on housing & utilities grew a little-changed 3.4% (1.1% y/y) while health care spending grew 1.3% (+2.0% y/y), instead of declining slightly as previously indicated. (…)
Trailing 2 quarters annualized, last 4 quarters: +2.5%, +2.3%, +1.5%, +2.1%. Good thing the consumer is cooperating; problem is his income is not growing as fast: Last 4 quarters YoY:
- Real expenditures: +2.8%, +2.8%, +2.9%, +2.7%.
- Real Disp. Income: +1.4%, +0.2%, +0.9%, +1.3%.
Such divergence between income an spending growth happened before. In 1993, savings were high, employment was accelerating rapidly and oil prices fell. In 1999, savings were low, employment growth was steady at around 2.5% YoY and oil prices rose…until employment growth slowed down and led to the 2001 recession. At the end of 2005, savings were also low, employment growth was +2.0% YoY and oil prices rose…until employment growth slowed down and led to the 2008 recession. Currently, savings are low, employment growth is slowing down rapidly (+1.4% in August) and oil prices are rising.
The recent weakness in consumer-related stocks may have to do with more than just the Amazon effect.
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‘Amazon Effect’ Leads Global Retail Stocks to Lose Favor Amazon.com’s expanding reach is prompting investors to dump shares of retailers far from the U.S. While the “Amazon effect” has been most pronounced in the U.S., investor concern overseas has risen.
AMZN itself is down 5% from its July high. It now trades below its 100-day m.a. which is flattening and is only 4.4% above its 200-d m.a. which is also flattening.
Republican Tax Plan Hits First Hurdle A day after announcing their ambitious tax plan, Republicans debated scaling back one of their largest and most controversial proposals: repeal of the individual deduction for state and local taxes.
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The Tenuous Logic Behind Republicans’ About-Face on Debt Donald Trump and congressional leaders take a politically convenient but risky path in drive to overhaul taxes
(…) Lower tax rates will unleash so much new economic activity and thus added tax revenue that, contrary to history and mainstream economic opinion, the debt actually won’t rise much, if at all. It’s a politically convenient face-saver, but it undermines a process Republicans themselves put in place to minimize the abuse of such reasoning. (…)
But permanently widening deficits is risky when the publicly held federal debt, now 77% of GDP, is on track to hit 91% in a decade as aging baby boomers draw on Social Security and Medicare. A $1.5 trillion tax cut would push that to 100%, according to the Committee for a Responsible Federal Budget, a watchdog group. (…)
Debt rose as a share of gross domestic product after Ronald Reagan and George W. Bush cut taxes; it fell after Bill Clinton raised them. Independent economists think tax reform could boost growth by anywhere from 0.1 point to 0.6 point over a decade. JCT and CBO would likely be at the low end of that range since they believe higher deficits nudge up interest rates and crowd out private investment. (…)
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What Awaits Wall Street in Trump Tax Plan A 20% corporate tax rate would boost profits, but there are downsides to the administration’s framework
Wall Street has hungered for a tax overhaul, and with good reason. If it spurs stronger economic growth, corporate borrowing and finance firms’ profits could jump.
A lower corporate tax rate as called for in the tax framework unveiled by the Trump administration Wednesday should immediately boost banks’ own profits. Bankers expect some pain points, but are confident the benefits will outweigh them.
Morgan Stanley Chief Executive James Gorman said at an industry conference in June that a 25% corporate tax rate would lift his bank’s earnings by 15%, assuming no changes to the business mix. The Trump framework calls for a 20% rate, so the benefit could be even greater.
Citigroup Inc. has said that a cut to a 25% rate plus a tax holiday on foreign earnings would have boosted its annual net income by $800 million, or by about 5%. It would also improve the bank’s return on equity by more than 1 percentage point, estimated John McDonald, an analyst at Sanford Bernstein. (…)
Smaller banks could also reap bigger gains since they have relatively high effective tax rates and businesses that are almost purely domestic, Evercore ISI analysts said in a note. A potential tax cut from 35% to 28% could boost 2018 earnings for regional banks by a median 9%, they said. (…)
A number of banks have what are called “deferred tax assets.” These are created by losses, in many cases huge ones racked up during the financial crisis, and act as IOUs that can be used to offset future tax bills. Those will lose value.
Citigroup Inc., for example, had $46 billion of the assets at the end of the second quarter. A reduction in the corporate tax rate to 20%, plus a shift to a territorial regime that only taxed income generated in the U.S., could reduce the assets’ value by more than $15 billion, according to figures the bank has provided. Citigroup would have to take that charge as a one-time hit to profits.
Bank of America had $19.2 billion in net deferred tax assets at the end of 2016. Only about $7 billion of these apply to the U.S. and so would be subject to revaluation. That would lead to a write-down of around $3 billion if the tax rate was lowered to 20%. (…)
Another issue is a proposal to partially limit companies’ ability to deduct net interest expense. The administration didn’t define what partially limited meant. (…)
For the private-equity industry, which relies heavily on debt financing, that change could translate into firms paying lower prices for assets. (…)
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The Fate of Trump’s Tax Cut Is in the Hands of These Six Key GOP Senators
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Here’s How Tax Reform Could Squeeze the Middle Class
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The New Republican Tax Plan Still Isn’t a Plan