More than a few times, we here at Tematica have talked about the rising level of consumer debt across student and auto loans as well as credit cards. We’ve also talked about how older Americans are undersaved for retirement and how the upward trajectory in interest rates is going to make debt servicing more costly, crimping disposable income. In thematic speak that’s Middle-Class Squeeze with a helping of Aging of the Population.
But new data suggests consumers are aware of their situation and that is prompting them to cut back on their spending in order to save more. What we’ll have to see in the coming monthly Personal Income & Spending reports is to what degree they are opting to save vs. spend. In recent months, we’ve seen the personal savings rate reported by the Bureau of Economic Analysis slip to 3.6% in August from 6.9% in April, which took a minor bite out of personal spending.
If we see a more pronounced level of spending, it could be a headwind to an economy that is reliant on the consumer to open his or her wallet and spend. The silver lining if that comes about is those companies that we’ve identified as riding our Middle-Class Squeeze investing theme are likely to see a more favorable tailwind.
A new Bankrate survey finds that 66 percent of Americans are limiting their spending each month. Among those who are curbing their spending, 36 percent are doing so to save more money (24 percent of all respondents).
With more than 60 percent of Americans unable to cover a $1,000 emergency with savings, it’s good news that some are willing to sacrifice to start building cushions for the future.
Americans aren’t just limiting their spending to save: 24 percent of people who are limiting their spending are doing so because their income hasn’t changed, while 17 percent said they have too much debt. Another 11 percent are worried about the economy, and 5 percent are worried about the economy.
Households with incomes of $50,000 per year or more were more likely to say they needed to limit their spending to save. These households were also more likely to report being frugal, on a budget or having no desire to spend more money. They were less likely to cite stagnant income than households with income under $50,000 per year.
Meanwhile, households with income under $30,000 per year had the highest likelihood (13 percent) of citing their worries about the economy as the top reason for limiting spending.
… older Americans aren’t showing the same dedication to saving. Stagnant income was the top response for baby boomers (34 percent) and the Silent Generation (49 percent).
For a generation that is still working, flat-lining wages brings concern. In 2017, the labor force of Americans ages 55 and up accounted for about 23 percent of the average annual labor force. By 2024, the Bureau of Labor Statistics estimates that percentage will increase to almost 25 percent.
Tematica’s Chief Macro Strategist Lenore Hawkins has been rather vocal on the two issues hitting the domestic housing market – a lack of supply and escalating prices that are shrinking the pool of potential buyers.
While one would think homebuilders would respond with more affordable housing, they are also contending with increases to their own cost structure as commodity prices for steel, aluminum, copper and lumber rise. Some of that increase can be traced back to tariff and trade talks, but given limited supply of these materials there is also the Rise of the New Middle Class factor as well.
Usually when there is a paint point such as this, there is or tends to be an eventual solution. This has and will hold true as well, but it likely means the housing multiplier effect on the economy won’t be what it was in the past… and that’s not counting the demographic impact to be had associated with our Aging of the Population investing theme.
Lest I forget, prospects for continued housing price increases will add wood to the inflation hawk fire. Team Tematica will be looking for signs of this not only in the regular data we watch, but also in the Fed’s comments.
After losing over a third of their value a decade ago, which led to the financial crisis and a deep recession, U.S. house prices have regained those losses.
But supply has not been able to keep up with rising demand, making homeownership less affordable.
Annual average earnings growth has remained below 3 percent even as house price rises have averaged more than 5 percent over the last few years.
The latest poll of nearly 45 analysts taken May 16-June 5 showed the S&P/Case Shiller composite index of home prices in 20 cities is expected to gain a further 5.7 percent this year.
That compared to predictions for average earnings growth of 2.8 percent and inflation of 2.5 percent 2018, according to a separate Reuters poll of economists. [ECILT/US]U.S. house prices are then forecast to rise 4.3 percent next year and 3.6 percent in 2020.
A further breakdown of the April data showed the inventory of existing homes had declined for 35 straight months on an annual basis while the median house price was up for a 74th consecutive month.
As we all know by now, the Fed exited its September monetary policy meeting yesterday. Chairwoman Janet Yellen said that in the Fed’s view, the domestic economy is on solid enough footing to handle another Fed rate increase before the end of the year as well as the initiation of the Fed’s plan to unwind its $4.5 trillion balance sheet. This view effectively brushes aside the fact that the Fed’s inflation target has yet to be realized, despite its herculean monetary policy efforts, and in the near-term, the economy is headed for a tumble following hurricanes Harvey and Irma, and maybe more depending on how Hurricane Maria develops.
In recent days, we’ve seen several cuts to GDP expectations for the current quarter, including from the Atlanta Federal Reserve as well as several investment bank economists. The general thinking is that Hurricanes Harvey and Irma trimmed roughly 1% off of economic activity. With the bulk of the damage coming in September, including what we have yet to experience with Maria, we’ll have a fuller sense of the trifecta’s extent in October when we get the September data.
The market reaction to the FOMC statement is that it was more hawkish than what had already been priced in. While the market was priced at a 50/50 chance for a rate hike before the end of the year, the now infamous dot-plot shows that 12 of the 16 members expect one more hike this year, with one expecting two. In sharing the committee’s view Chairwoman Yellen remarked, “The median projection for the federal funds rate is 1.4 percent at the end of this year, 2.1 percent at the end of next year, 2.7 percent at the end of 2019, and 2.9 percent in 2020.”
This means the next rate hike, which is now likely to occur in December, will be a quarter point in nature, and based on the Fed’s forecast the three targeted rate hikes in 2018 are likely to be of the same magnitude. As Yellen shared this, she once again cautioned the Fed will remain “data dependent” in its thinking. As the markets recalibrate from a 50% likelihood to the new 70% that we will see another hike in 2017, gold lost $10 per ounce, the dollar gained some strength and the yield on the 2-year rose 4 basis points while the long bond has barely moved, flattening the yield curve.
From our perspective, with a recovery that is increasingly long in the tooth (something that is not likely lost on Yellen and the Fed heads), we see the Fed looking to regain monetary stimulus firepower ahead of the next eventual recession. To be clear, we’re not calling for one, just recognizing that at some point one will happen – it’s the nature of the business cycle. As we share that reality, we’d also note that historically the Fed has a very good track record of boosting rates as the economy heads into a recession.
We’d like to point out that while most are viewing these minutes as more hawkish than expected, the phrasing of their economic analysis has become more sedate. Oh for the days when we didn’t need to analyze every little word out of the Fed like a bunch of teenagers assessing the meaning of their crush’s every utterance! The Fed’s assessment of unemployment has dropped the reference to “has declined,” leaving just “unemployment rate has stayed low.” With respect to spending, the wording has gone from “continued to expand” in July to “expanding at a moderate rate.” As for the dot plots, of the four FOMC members who expected two more hikes in 2017, only one remains.
As much as the Fed will likely try to avoid that and preserve Yellen’s time as chairwoman, it’s different this time. Next month, the Fed will begin unwinding its balance sheet that bulked as a result of its quantitative easing measures. The Fed admits to “months of careful preparation,” but let’s be real here, this is unlike anything we have seen before as the Fed expects to boost interest rates further. Yes, the Fed will baby step with its balance sheet as its targets selling no more than “$6 billion per month in Treasuries and $4 billion per month for agencies” in 2017. In 2018, however, those caps will rise to “maximums of $30 billion per month for treasuries and $20 billion per month for agency securities.” Given the Fed’s balance sheet weighs in at a hefty $4.5 trillion, this is poised to be a lengthy process and we suspect that as well intended as the Fed’s thinking on this is, odds are there are likely to be some unintended consequences.
The question we continue to ponder is whether the economy is strong enough to not falter as the Fed ramps its selling while boosting rates. Even the Fed sees GPD falling from its 2.4% forecast this year to “about 2 percent in 2018 and 2019. By 2020, the median growth projection moderates to 1.8 percent.” To get to that 2.4%, we need the Atlanta Fed’s GDPNow forecast for 2.2% in Q3 to materialize, which we think is going to be tough given the impact of this season of insane storms, as well as at least a 3% bump in Q4. Our bets are that’s about as likely as either of us giving up chocolate.
As we mull this forecast vs. the business cycle, we must keep in mind the Fed is ever the cheerleader for the economy and tends to be optimistic with its GDP forecasts. We prefer to be Rhonda Realist vs. Debbie Downer or Cheery Charles, and when we triangulate the Fed’s comments, we continue to think it’s underlying strategy is to re-arm itself for the next downturn.
Despite yesterday’s move higher in the stock market, March to date has seen the Dow Jones Industrial Average move modestly lower with a larger decline in the Russell 2000. Only the Nasdaq Composite Index has climbed higher in March, bringing its year to date return to more than 9 percent, making it the best performing index thus far in 2017. By comparison, the Dow is up 4.75 percent, the S&P 500 up 5.35 percent and the small-cap heavy Russell 2000 up just 0.75 percent year to date.
So what’s caused the move lower in the stock market during March, bucking the upward trend the market enjoyed since Election Day 2016?
Despite the favorable soft data like consumer confidence and sentiment readings, investors are waking to the growing disconnect between post-election expectations and the likely reality between domestic economic growth and earnings prospects. Fueling the realization is the move lower in 1Q 2017 earnings expectations for the S&P 500, per data from FactSet, as well as several snafus in Washington, including the pulling of the vote for the GOP healthcare plan. These have raised questions about the timing and impact of President Trump’s stimulative policies that include infrastructure spending and tax reform.
We’ve been steadfast in our view that the earliest Trump’s policies could possibly impact the US economy was late 2017, with a more dramatic impact in 2018. On a side note, we agree with others that would have preferred to have team Trump focus on infrastructure spending and tax reform ahead of the Affordable Care Act. As we see it, focusing on infrastructure spending combined with corporate tax reform first would have boosted confidence and sentiment while potentially waking the economy from its 1.6 to 2.6 percent annual real GDP range over the last five years sooner. We’d argue too that that would have likely added to Trump’s political war chest for when it came time to tackle the Affordable Care Act. Oh well.
So here we are and the enthusiasm for the Trump Trade is being unraveled as growth slows once again. As depicted above, the most recent forecast for 1Q 2017 GDP from the AtlantaFed’s GDPNow sits at 1.0 percent compared to 1.9 percent for 4Q 2016 and 3.5 percent in 3Q 2016. Even a grade school student understands the slowing nature of that GDP trajectory. Despite all the upbeat confidence and sentiment indicators, the vector and velocity of GDP forecast revisions and push outs in the team Trump timing has led to to the downward move in S&P 500 EPS expectations for the current quarter and 2017 in full.
With Americans missing bank cards payments at the highest levels since July 2013, the delinquency rate for subprime auto loans hitting the highest level in at least seven years and real wage growth continuing to be elusive, the outlook for consumer spending looks questionable. Factor in the aging of the population, which will have additional implications, and it looks like the consumer-led US economy is facing more than a few headwinds to growth in the coming quarters. These same factors don’t bode very well for the already struggling brick & mortar retailers like Macy’s, Sears, JC Penney, Payless and others.
Now here’s the thing, currently, the S&P 500 is trading at 18x 2017 expectations —expectations that are more than likely to be revised down than up as the outlook for U.S. economic growth in the coming quarters is revisited. In three days, we close the books on 1Q 2017 and before too long it means we’ll be hip deep in corporate earnings reports. If what we’ve seen recently from Nike, FedEx, General Mills, Kroger and Target is the norm in the coming weeks, it means we’re more likely to see earnings expectations revised even lower for the coming year.
While it’s too early to say 2017 expectations will be revised as steeply as they were in 2016, (which started the year off with the expectation of a 7.6 percent increase year over year but ended with only a 0.5 percent increase following 4Q 2016 reporting), but any additional downward revisions will either serve to make the market even more expensive than it currently is or lead to a resumption of the recent downward move in the market. Either way, odds are there is a greater risk to the downside than the upside for the market in the coming weeks.
Buckle up; it’s bound to get a little bouncy.
This morning’s January Employment Report showed the economy added 227K jobs in January, beating consensus expectations for 170K jobs. This comes after the surge in January private sector jobs to 246K vs. the expected 165K reported by ADP earlier this week. Great to see some data to back up the uber-optimistic market these days, but there is a bit more to this story.
While the headline number looked great, digging beneath the headline and into the details the report wasn’t as rosy. If we take into account that revisions to the prior two months reduced jobs by 39k, the average is closer to expectations and the 3 month moving average is less impressive.
We also saw a decline in employment in the key working age group of 25-54-year-olds of 305k, which was partially offset by a 195k increase in 55+ employment – more near retirement working and fewer in prime working years isn’t a positive sign. Looking at the bigger picture, job growth averaged 239k in 2014, falling to 213k in 2015 and this report brings the recent 12-month average to 182k. The pace of job growth continues to slow, total payrolls rose now up 1.6 percent year over year versus 1.9 percent in the first quarter of 2016, which is typical with an economic recovery that is rather long in the tooth.
We also saw an increase in those working part-time because they cannot find full-time work by 232k – we’d obviously prefer to see that decline. Those expecting a Fed rate hike soon should note that this is one of Fed Chair Yellen’s favorite metrics.
Along these lines, we saw the underemployment rate (as measured by the U6) rise to a three-month high of 9.4 percent from December’s 9.2 percent.
Along with that increase in part-time workers, we saw the change in weekly hours worked drop to a rate not seen since the recession, which indicates that future strong job growth is less likely.
More frustrating is the lack of meaningful wage growth, rising just 0.1 percent month over month and 2.5 percent year over year, the weakest year over year gain since last March. Average weekly earnings saw the weakest gain in six months at 1.9 percent.
One of the biggest challenges facing the employment situation is the mismatch between available labor and business needs. Small businesses are finding it increasingly more difficult to find qualified talent for the position they are looking to fill, which clearly negatively impacts their ability to grow – another headwind to the economy. This is also reflected in the record level spread between job openings and hirings we see every month in the JOLTS report. Our next take on that data comes next week with the December report.
All this those doesn’t address the much bigger issue the country is facing and this is what investors need to understand far more than the monthly fluctuations.
The growth of an economy is dependent on just two things: the size of the available workforce and productivity levels. For an economy to grow one or ideally both of those need to be rising.
It has become a popular refrain to refer to President Trump as the next Ronald Reagan, implying that his policies will lead to the type of economic boom that the country experience during and after Reagan’s presidency. We’d love nothing more than for the country to see that kind of growth again, but the fundamentals today are very different from those in the 1980s.
When Reagan took office median baby boomers were moving into their prime working age and the percent of women in the workforce was rising significantly.
When Reagan took office, less than 50 percent of women were employed. That number peaked in 2000 at 58 percent but has declined to just 54.1 percent in January.
The weak employment relative to total population though isn’t all about the baby boomers retiring as the percent of those in the prime working age cohort ages 25 to 54 years rose dramatically from the early 1980s to just over 72 percent to a peak of over 81 percent in 2000. As of January, 78.2 percent are employed, a level we haven’t seen, outside of a recession, since the late 1980s.
You might have heard as well that fertility rates in developed economies have been slowing dramatically. In many European nations the rate has dropped below replacement levels, which means that without immigration, the total population of those countries would be declining. In the U.S. the rate of growth of the working population, either through immigration or native births has been slowing significantly.
The potential growth rate of the U.S. economy is materially different today than during Reagan’s era because of significant changes in the dynamics of the labor pool. Today the percent of people choosing to be in the workforce is lower than it has been in decades. Compounding this problem, the growth rate in the working age population has slowed dramatically from where it was in the 1980s.
To increase the potential growth rate for the economy, outside of any handicaps placed on it through legislation, regulation or taxation, the population of those in the workforce needs to increase and/or productivity needs to rise.
When it comes to productivity, it is all about capital investment and for years we’ve seen companies choosing to buy back shares rather than reinvest in their own productive capacity… but that’s a topic for next time!