Wentz Weekly Insights
Economy Grew Faster in Q2 & Fed Raises Rates to New 22 Year High (ADV)
Recent Economic Data
- Home prices appear they may have bottomed, according to the S&P Case Shiller home price index. The index reported a 1.2% increase in May (0.7% increase after seasonal adjustments) which follows a 0.5% monthly increase in April and is now the fourth consecutive monthly increase, after falling for seven consecutive months. Home prices are now just 1.0% below the peak from June 2022. The recovery in home prices is broad based with increases in all 20 cities tracked (similar to March and April). Over the past year home prices are still down 0.5%. Believe it or not, the rust belt is seeing the greatest year-over-year increase in home prices with Chicago (+4.6%) and Cleveland (+3.9%) topping the list! While the Pacific rim area is seeing the largest y/y declines led by Seattle (-11.3%), San Francisco (-11.0%) and Phoenix (-7.6%).
- The pending home sales rose 0.3% for the first increase in four months, (pending home sales is based on signed contract not closings, so this reflects people shopping in June). New listings were down 26% from last year with total inventory down 14%. Sales were the strongest in the Midwest (also where home prices are rising the strongest), rising 4.3% with the Northeast flat and West and South regions seeing slight declines. The forecast from the National Association of Realtors sees home sales to be 13% lower in 2023 than in 2022. Sales of newly built single family homes fell 2.5% in June for the first decline in four months to a seasonally adjusted annualized rate of 697,000. May saw a surge in new home sales to 763k but this was revised down to 715k. Despite the decline and breaking the upward trend, the June sales pace is still 23.8% above the rate from June 2022. Keep in mind new home sales are based on signed contracts, not closings like the existing home sales report so this data was taken when rates jumped in June. Supply of new homes is no better, relatively unchanged in the month and unchanged for all of 2023. Meanwhile, home builders look like they may be getting more behind as the number of new homes sold where construction has yet started jumped 50% to 164k.
- In the first estimate of Q2 GDP, the economy grew at a much better than expected seasonally adjusted annualized rate of 2.4% in the second quarter which is above the high end of the consensus range. Growth was driven by consumer spending (albeit a slower rate than Q1), business investment, government spending, inventory growth, and offset by weaker net exports and housing. The components of GDP (numbers are q/q and annualized):
- Consumer spending rose 1.6% with a 0.7% increase in goods spending and 2.1% increase in services spending. Consumer spending contributed 1.1% to GDP
- Fixed investment by businesses grew 4.9% driven by a 10.8% increase in investments of equipment. Business investment contributed 1.0% to GDP
- Residential investment (new housing) declined 4.2% as the housing market continued to be weaker. Housing contributed -0.2% to GDP.
- Government spending increased 2.6% which contributed 0.5% to GDP.
- The change in inventory investment grew, which contributed 0.1% to GDP.
- Exports declined 10.8% while imports declined a lesser 7.8%. This contributed a net -0.1% to GDP.
- Durable goods orders in June rose a much higher than expected 4.7%. However, as is typical when you see a large increase in durable goods orders, this is all due to transportation orders, more specifically aircraft (non-defense) orders which spike 69% (due to the large cost of aircraft). New orders for durable goods, excluding aircraft, were still solid, rising 0.6% in the month with increases broad-based. Shipments of durable goods rose 0.3% with the only weakness in electronics. The input to GDP, shipments of nondefense capital goods excluding aircraft, was flat in the month, with new orders up 0.2%.
- The number of unemployment claims filed to states for the week ended July 22 was 221,000, a decline of 7k from the week prior, matching the lowest level since February. The four week average was down another 4k to 233,750. The number of continuing claims was 1.690 million, down 59k from the prior week for the lowest level since January, with the four-week average at 1.719 million. Jobless claims have steadily trended lower after their short-term peak at the beginning of June.
- Compensation costs for workers, measure by the Employment cost index and data the FOMC follows closely, increased 1.0% in the second quarter compared to the first quarter which was in line with expectations. Wages and salaries increased 1.0% while benefit costs increases 0.9%. For the 12 month period ended in the second quarter, compensation costs increased 4.5%, down slightly from the 4.8% annual rate in Q1 (wages/salaries up 4.6% while benefit costs up 4.2%). With data here in line with expectations Powell and the Fed will likely focus more on upcoming inflation data prior to the September meeting in making the policy decision.
- The final July consumer sentiment reading, a survey compiled by the University of Michigan, index level was 71.6, down from the mid-month reading and consensus of 72.6, although down still a solid number and better than where it stood most of the past year. The current conditions index was 76.6, down from the mid-month read but up from 69.0 in June, while expectations index was 68.3, also down from the mid-month read, but higher than the 61.5 from June. The one-year ahead inflation expectation was unchanged at 3.1%, up from June’s 3.0%.
- The Consumer Confidence index by the Conference Board was 117.0 for July for the highest level since July 2021, and is up from 112 last month which was a 18 month high. The present situations index rose to 160, up from 155.3, for the best level since March 2020 while the expectations index rose to 88.3 for the best since January 2022. Importantly, the reading is above the key level of 80 – a level that historically signals a recession over the next year. A lot of the improvement in present and expectations is due to better employment conditions.
- Data on money supply released for June show the money supply increased 0.2% in the month for the second consecutive increase and comes after nine consecutive monthly declines. A bounce back in money supply is not a positive sign for bringing inflation down. The money supply is still down 3.8% from the peak in July 2022, which beside April and May’s 4.6% and 4.0% decline from peak, is the largest decline in the money supply since the Great Depression.
- Personal income & outlays data showed incomes and spending continuing to grow with wages and salaries accelerating and consumer spending still strong with a shift toward goods for the first month in almost two years.
- Personal income rose 0.3% in June, slightly lower than the 0.4% increase that was expected, but net in line after accounting for May’s upward revision to a 0.5% increase. Wages and salaries will raise some attention with its 0.6% monthly increase (equivalent to a 7.2% annualized rate). Compared to a year ago incomes are up 5.0% with wages/salaries up 5.3%
- Consumer spending was up a better than expected 0.5% and includes a slight upward revision in May to a 0.2% increase. Spending on goods actually increased at the fastest rate in months, rising 0.8%, while spending on services was one of the lowest monthly increases in months, rising 0.4%. Compared to a year earlier, spending is up 5.4%, slowing from May’s year-over-year increase of 6.1% with spending on goods up 1.5% and spending on services up 7.5%.
- The savings rate fell slightly to 4.3%, still at historically low levels compared to the 20-year average of 7.5%.
- Apple has asked its suppliers to produce 83-85 million iPhone 15s models in 2023, below its initial production target of 90 million, according to sources and reported by Bloomberg. This would put the production of the newest 15s models in line with the previous iPhone 14 product line. Apple is trying to keep shipments of the new iPhone steady amid worries about the global economy and weakening smartphone market. It was days prior to this that another report said Apple and its suppliers were having trouble manufacturing the screens for the iPhone 15 Pro and Pro Max.
- With the release of its earnings, regional bank PacWest Bancorp said it will merge with rival Banc of California in an all-stock transaction and will operate under the Banc of California name with approximately $36.1 billion in assets. With the deal, private equity firms will invest $400 million in newly issued securities of the combine company. PacWest shareholders will receive .6569 shares of Banc of California for each share owned and will represent 47% of the combined company, 19% will be owned by the capital raise from PE groups, and 34% will be owned by Banc of California shareholders.
- The Justice Department and EPA are now investigating the possible health and environmental issues from lead covered cables (from telecoms like AT&T and Verizon) after last weekend’s WSJ article on its own investigation that revealed the telecoms still had the lead cables in their networks. The DoJ and EPA are requesting inspections and sampling data from AT&T/Verizon within 10 days. They will also be investigating whether the companies knew of the potential risks to workers and the environment.
- The WSJ reported Netflix is restructuring its advertising deal with Microsoft to reduce the guarantee of its revenue share. It was a year ago Netflix made an agreement with Microsoft to use its service to provide technology for the service and have it sell ads on Netflix’s behalf, offering Microsoft a “revenue guarantee.” In addition, it is lowering ad prices in effort to boost growth in that segment of its business.
- Reuters is reporting, citing an internal company town hall, that Meta is working on retaining its users of its new Thread platform (a platform similar to Twitter and seen as a rival platform) after it has lost more than half its users in recent days following what was seen as a successful launch. CEO Zuckerberg told employees it will focus on user retention because “we’re not there yet,” and will focus on things that drive retention, followed by a focus on monetization.
- The International Monetary Fund raised its global growth forecast last week, now forecasting the global economy to grow 3.0%, up from its April forecast of 2.8%. Meanwhile, it kept its 2024 growth forecast unchanged, despite its concerns for tighter credit conditions, dwindling household savings in the U.S., and a slower than expected economic recovery in China. For the US, the IMF sees GDP growing 1.8% this year and 1.0% in 2024 and forecasts Chinese growth of 5.2% this year and 4.5% for 2.24.
- Last week UPS and the Teamsters union reached a tentative deal that averted a strike in what is the largest contract in the US. The union represents about 340,000 workers and those workers walking out of the job would have caused a massive disruption to the US economy. The deal raises wages for all workers, bringing the average top rate to $49/hour, with part-time workers starting at $21/hour which is a $6/hour increase. Importantly for workers, it ends a two-tier classification system which some workers were being paid less for doing the same work, and they also get paid overtime now.
- Chinese officials met early last week to discuss current economic conditions and policy but refrained from providing detail on a shift in policy despite what they called a “tortuous” economic recovery and recent weakening of economic data. They discussed a number of challenges the economy faces including demand domestically and the external environment. To boost demand and confidence they talked about supporting growth of the middle income households and providing support for the property market where they saw heightened risk.
- Global Central bank meetings:
- The European Central Bank raised interest rates last week for the ninth consecutive meeting, bringing its deposit rate to 3.75% and main refinancing rate to 4.25% for the highest levels since 2000. ECB President Lagarde had a slight shift in tone, somewhat similar to Powell, in avoiding giving guidance on what the central bank will do at its next meeting in September, instead saying all options remain on the table and the decision would depend on the data between now and then. Markets took the ECB meeting and Lagarde’s comments as more dovish, sending the euro lower.
- The Bank of Japan made one of its biggest policy announcements in years, saying it will add flexibility to its yield curve control – this was where the Central Bank would target the Japanese 10-year government bond yield at 0% in effort to keep market rates low to spur demand by buying an unlimited amount of those bonds (buying bonds equals higher demand and pushes prices higher and yields lower to spur borrowing and demand). The BoJ was one of the very few central banks around the world that still had very accommodative policy, while the rest of the world has engaged in rate hikes and tighter monetary policy. This may have pressured the BoJ to at least do something. It said it will allow yields to fluctuate in a range of +/- 0.5% and conduct yield curve control with “greater flexibility.” At the same time, it left its policy rate unchanged. After the announcement, the yield on the Japanese 10 year government bond spiked to 0.5%, the highest in 9 years, while the yen spiked but that gain faded throughout the day.
Did You Know…?
Growing Shareholder Returns
Dividends and share buybacks end up being a large part of an investors total return, for example for the 12 months ended March 31, total shareholder returns (including dividends and share buybacks) was $1.431 trillion, according to data by S&P Dow Jones Indices. In the first quarter 2023, the data revealed companies paid out a record high amount in dividends, with a payout of $146.8 billion for a 0.5% increase in the quarter and a 6.7% increase from a year ago. Despite the record high dividend payout, the number of companies issuing dividend decreases tripled compared to last year. in addition, the size of dividend increases have declined and are expected to remain modest for at least the remainder of 2023 and potentially 2024. Share buybacks fell 23.3% from a record high of $281 billion in Q1 2022 to $215.5 billion in the first quarter this year. The amount of buybacks have been at relatively the same level since Q2 2022 The sectors seeing the highest share buybacks are financials, technology, and health care.
The Week Ahead
This week is jobs week, while second quarter earnings results continue to pour in. The economic calendar will give us an update on the labor market with the job openings and labor turnover survey on Tuesday, the ADP employment report Wednesday, jobless claims on Thursday, and the DOL employment report for July on Friday. The current consensus expectation is another 200,000 jobs were added in the month with wage growth of 0.3% (4.2% from a year ago). Also on the economic calendar updates on the manufacturing sector will come from the PMI and ISM manufacturing survey index on Tuesday and then factory orders on Thursday. Construction spending for May is released Tuesday as well, along with July vehicle sales, second quarter productivity and labor costs and the ISM services survey index on Thursday. The busiest stretch of second quarter earnings season continues with another roughly 35% of the S&P 500 index set to report this week. Some of those notable companies include Pfizer, AMD, Starbucks, Uber, Marriott, Caterpillar on Tuesday; Qualcomm, CVS, PayPal, Shopify, KraftHeinz on Wednesday; Apple, Amazon, Anheuser-Busch, Alibaba, Wayfair on Thursday; and Dominion and FuboTV on Friday. The political space is expected to be quiet with Congress on its summer recess until after Labor Day.