GDP Dip Was Bigger Than Thought
I generally don’t post about revisions to GDP data; backward looking, they are also normally insignificant. Note that this was the third estimate for Q1.
This one, however, is a true shocker and deserves everybody’s attention. Not because GDP contracted 1.6% vs 1.5% previously released but because of the huge revisions in the composition. Here’s the very short WSJ account:
Consumer spending, the economy’s main engine, was much softer in the first quarter than previously reported, according to Commerce Department gross domestic product revisions released Wednesday. Spending grew at a revised annual rate of 1.8% in the first quarter, down from a previous estimate of 3.1%.
A revision in consumer spending growth from +3.1% to +1.8% is a pretty big deal on its own, particularly when the consumer currently acts as the main growth engine supposed to be fueled by its large excess savings and prevent us from contracting or stagflating.
The narrative was that the consumer is healthy and flush with cash. Weaker goods consumption would be more than offset by revenge spending on services.
Well, we are now told that:
- spending on goods was weaker than originally measured: -0.3% vs 0.0%.
- spending on services, originally seen up 4.8%, was actually up 3.0%.
Perhaps not that big a deal, Omicron can take most of the blame given weaker recreation services consumption.
But the bigger, shocking, revision was on personal disposable income revised down “primarily reflecting an upward revision to personal current taxes.” See the trends from the first estimate to the second and to yesterday’s third revision:
Disposable Income
Nominal $ Constant $
First estimate: +4.8% -2.0%
Second estimate: -0.2% -6.7%
Third estimate: -1.3% -7.8%
No, the columns are ok, real disposable income actually fell 7.8% annualized in Q1.
Never mind slower overall consumption growth and lesser revenge spending on services, the fact, and the problem, is that the unspent money is not resting in savings since disposable income is actually much lower than thought, which will continue to impact consumers’ ability to spend in future quarters.
Expenditures are now 5.0% above disposable income, the latter being flat with its pre-pandemic level and falling:
As somebody said, it’s difficult to make predictions, particularly about the future, but the facts are that the American consumer is spent out and has fewer savings than thought. The narrative featuring “a very strong, healthy consumer” needs to change, starting with Mr. Powell himself.
Hopefully, predictions that “excess savings” will save us all will prove better than those on inflation…
Yesterday, prior to the GDP revisions release:
Powell Says Fed Must Accept Higher Recession Risk to Combat Inflation Federal Reserve is raising interest rates at aggressive pace as price pressures hit 40-year high
Federal Reserve Chairman Jerome Powell said he was more concerned about the risk of failing to stamp out high inflation than about the possibility of raising interest rates too high and pushing the economy into a recession.
“Is there a risk we would go too far? Certainly there’s a risk,” Mr. Powell said Wednesday. “The bigger mistake to make—let’s put it that way—would be to fail to restore price stability.” (…)
“There’s a clock running here,” Mr. Powell said during a moderated discussion Wednesday at the European Central Bank’s annual economic policy conference in Portugal. “The risk is that because of the multiplicity of shocks, you start to transition into a higher-inflation regime. Our job is literally to prevent that from happening, and we will prevent that from happening.” (…)
“There’s no guarantee” of a more benign outcome, Mr. Powell said Wednesday. “It has gotten harder. The pathways have gotten narrower.” Later, he added, “The process is highly likely to involve some pain, but the worse pain would be in failing to address this high inflation and allowing it to become persistent.”
Europe’s top central bankers, speaking on the same panel as Mr. Powell, indicated they would proceed more cautiously than the Fed in increasing interest rates as they gauge the economic fallout of the war in Ukraine. The conflict is driving up energy and commodity prices in Europe while sapping consumers’ purchasing power in a region that relies heavily on imported energy.
“Moving gradually is certainly appropriate in times of high uncertainty,” said ECB President Christine Lagarde.
Ms. Lagarde reaffirmed plans to gradually raise the bank’s key interest rates at policy meetings in July and September. She said the bank could move more quickly if it became easier to judge the trajectory of the economy. (…)
Bank of England Gov. Andrew Bailey said the U.K. economy was dealing with “a very large national real income shock” as a result of the war, and that it wasn’t clear how that would pass through to inflation.
Mr. Bailey signaled that U.K. policy makers could consider a 0.5 percentage point interest-rate rise at their July policy meeting if there are persistent signs that price increases are a problem. The bank increased its key rate by 0.25 percentage point earlier this month, to 1.25%, as inflation rose above 9%.
“There will be circumstances in which we will have to do more. We’re not there yet,” Mr. Bailey said. (…)
BTW: McCormick and Bed Bath take beyond a bath
Companies with a May quarter end are now reporting and continuing the cascading since the end of the rather solid March quarter. Retailers with an April quarter end warned us of the poor April. MCK and BBBY had 2 of their 3 months in the squeeze:
- BBBY reported Q1’22 adj. EPS of ($2.83), well-below Consensus (Refinitiv Eikon) of ($1.39), with a comp sales decline of -23%. Adjusted gross margin of 23.8% vs 34.9%, including an inventory markdown reserve of -620 bps and -220 bps from supply chain related port fees. Inventories increased by +12.5% YoY this quarter, while total sales declined by -25.1%.
FYI, BBBY touched $54 in early 2021 when a meme stock. Closed at $5 yesterday!
- Goldman Sachs on MCK:
MKC reported adjusted FY2Q22 (May) EPS of $0.48, below our $0.63 estimate and FactSet estimate of $0.65. Sales of $1.54bn were 3.7% below our estimate, with constant currency sales growth of +0.3% below our 3.8% forecast, with weakness in Consumer unable to offset stronger Flavor Solutions performance.
Adjusted EBIT of $173.8mn was 27.2% below our forecasts (-$0.19) (…). Consumer EBIT of $124.8mn was 24.3% below our forecast on constant currency revenue growth of -6.9% (vs. GSe 2.0%) compounded by higher costs, while Flavor Solutions EBIT of $49.0mn was 33.7% below our forecast (-$0.07) on higher costs despite constant currency revenue growth 490bps above our forecast.
At the corporate level, gross margins of 34.0% were 350bps below our forecast and down 550bps Y/Y, with SG&A as a percent of sales 20bps above our forecast, and consolidated operating margins of 11.3% 360bps below our forecast (down 530bps Y/Y).
There are about another 10 companies to report their May quarter. Then we get the flood of June quarter ends, that’s April, May and June.
Home Listings Surge in Turnabout for Supply-Starved US Market
With fewer buyers competing, the number of active US listings jumped 18.7% in June from a year earlier, the largest annual increase in data going back to 2017, Realtor.com said in a report Thursday. And new sellers entered the market at an even faster rate than before the pandemic housing rally began. (…)
Active listings more than doubled from a year earlier in metro areas including Austin, Texas; Phoenix; and Raleigh, North Carolina, the data show. They climbed 86% in Nashville, Tennessee, and 72% in the Riverside, California, region.
Stellantis Warns of Car Market Collapse If EVs Don’t Get Cheaper
(…) Stellantis NV is aiming to cut the cost of making electric vehicles 40% by 2030, Chief Manufacturing Officer Arnaud Deboeuf said Wednesday. The producer of Fiats and Peugeots plans to manufacture some parts in-house and also pressure suppliers to cut the price of their products. (…)
EV prices are going up at a dizzying pace these days. Tesla Inc. raised prices by as much as $6,000 per car this month, following similar hikes earlier this year from Rivian Automotive Inc. and Ford Motor Co. Rising raw-materials costs are rendering some battery-powered models unprofitable, Ford Chief Financial Officer John Lawler said at an investor conference earlier this month. (…)
FYI:
Data: FactSet; Chart: Axios Visuals
China’s Economy Returns to Growth Mode Services and construction activity rebounded in June, while weak export orders weighed on manufacturers, surveys showed
(…) China’s official purchasing managers index for nonmanufacturing sectors posted a reading of 54.7 in June, a big jump from the previous month’s 47.8, the National Bureau of Statistics said Thursday. The surge was led by a rebound in construction and the services sector, where the lifting of Covid-19 restrictions unclogged transportation blockages and allowed people to return to stores and restaurants.
The reading was the highest since May last year, survey data shows, and follows three straight months of declines as lockdowns blanketed major cities such as Shenzhen and Shanghai. A reading above 50 indicates activity is expanding rather than shrinking.
Manufacturing activity returned to growth but the rebound was weaker than economists were anticipating. The purchasing managers index for the manufacturing sector notched up a reading of 50.2, higher than the previous month’s 49.6, but lower than the 50.5 reading expected by analysts polled by The Wall Street Journal.
Overall production rose, but new export orders were weak, the survey showed, highlighting fading global demand.
Weakening demand is the biggest problem that factories now face, said Zhao Qinghe, a senior statistician with China’s statistics bureau, who added that falling factory-gate prices are squeezing companies’ earnings. (…)
A subindex tracking service-sector activity surged to 54.3 from 47.1, while a subindex for construction activity reached 56.6 as infrastructure investment accelerated. China’s cabinet, known as the State Council, said this week that construction began on 120 new expressway and other highway projects between January and May, with overall investment in the road network during that period exceeding the equivalent of $1 trillion.
Separately on Thursday, a survey of 102 member companies by the American Chamber of Commerce in China found that 44% of respondents had reduced or delayed planned investment in China as a result of recent Covid-19 outbreaks, highlighting the strain on foreign businesses from Beijing’s zero-tolerance approach to the virus.
Forty-six percent reported lingering production difficulties even after lockdowns were eased, citing staff shortages, supply issues and other problems, according to the survey, which was conducted between June 22 and 24.
JPMorgan Says Crypto’s Deleveraging Cycle Won’t Last Much Longer
(…) “The current deleveraging cycle may not be very protracted,” the strategists said, given “the fact that crypto entities with the stronger balance sheets are currently stepping in to help contain contagion” and that venture-capital funding, “an important source of capital for the crypto ecosystem, continued at a healthy pace in May and June.” (…)
Total market cap was down to around $930 billion on Thursday, according to pricing from CoinGecko, after having surpassed $3 trillion in November. (…)
(…) Morehead, who started a Bitcoin fund when the token was still being ignored by many on Wall Street, says the “cascading collapse” of major digital-asset projects has helped expose the leverage in the system. At the center of the maelstrom are a number of hedge funds and lenders who have found themselves in hot water amid a digital-asset price slump this year. (…)
“There are probably a few more to come in the next month or two,” he wrote. “Each bankrupt leveraged entity leaves a string of problems for their counterparties.” (…)
Data: CoinGecko; Chart: Axios Visuals