This doesn't look very recessionary 🧐
Economic data hasn't just been strong — they're exceeding expectations 📈
People have been concerned about the possibility that the economy could soon go into recession. Indeed, “recession” has been a trending topic, according to Google Search data, peaking during the week ending April 16.
On Monday, I wrote a piece for TKer’s paid subscribers explaining how the economy’s massive tailwinds were more than enough to offset the shedding of some demand.
And throughout the week, we got a slew of data and anecdotes confirming as much.
According to the Federal Reserve’s Beige Book — a collection of anecdotes from the Fed’s business contacts across the country — the economy continues to grow despite challenges related to labor shortages and supply chain issues. (Emphasis ours):
“Economic activity expanded at a moderate pace since mid-February. Several Districts reported moderate employment gains despite hiring and retention challenges in the labor market. Consumer spending accelerated among retail and non-financial service firms, as COVID-19 cases tapered across the country. Manufacturing activity was solid overall across most Districts, but supply chain backlogs, labor market tightness, and elevated input costs continued to pose challenges on firms' abilities to meet demand. Vehicle sales remained largely constrained by low inventories. Commercial real estate activity accelerated modestly as office occupancy and retail activity increased. Districts' contacts reported continued strong demand for residential real estate but limited supply. Agricultural conditions were mixed across regions. Farmers were supported by surging crop prices, but drought conditions were a challenge in some Districts and increasing input costs were squeezing producer margins across the nation…”
“This broad-based improvement signals economic growth is likely to continue through 2022 despite volatile stock prices and weakening business and consumer expectations,” The Conference Board’s Ataman Ozyildirim said.
From a labor market standpoint, there’s no sign that layoffs are picking up.
Quite the opposite. In the week ending April 16, initial claims for unemployment insurance benefits declined to just 184,000, the ninth straight week this measure was below 200,000.
As for a key driving force for stocks over time: First quarter corporate earnings have been exceeding estimates made by Wall Street analysts.
From FactSet: “For Q1 2022 (with 20% of S&P 500 companies reporting actual results), 79% of S&P 500 companies have reported a positive EPS surprise and 69% of S&P 500 companies have reported a positive revenue surprise.“
Anecdotes coming from corporations have generally been positive as well.
“From our card spend to data, we have seen a strong recovery in travel, entertainment, restaurant spending… Even with the fuel costs up 40%... Importantly, despite March of last year including stimulus bonus, we saw the spending in the month of March 2022 on a comparable basis to 2021 13% higher by dollar volume and we saw a 7.4% increase in the number of transactions. So, both dollar volumes and numbers of transactions rose nicely… Our data showed continued growth in the average deposit balance across all customer levels, which suggests capacity for strong spending continue.”
Economists from Bank of America’s Global Research team shared this chart of checking and savings account balances, which shows households at all ends of the income spectrum have extra cash in their bank accounts.
“I’ve never seen in my career, and I’ve been in this industry a long time... such a hockey stick increase of demand.“
American Airlines echoed that sentiment, forecasting a big second quarter. From the company’s earnings announcement:
“American will continue to match its forward capacity with observed bookings trends. Based on current trends, the company expects its second-quarter capacity to be approximately 92% to 94% of what it was in the second quarter of 2019. American expects its second-quarter total revenue to be 6% to 8% higher than the second quarter of 2019.”
All that said, we can’t talk about the past week without discussing Netflix. Shares plummeted 35% after the company revealed it had lost 200,000 subscribers during the first quarter despite previously telling shareholders that it expected to add 2.5 million subscribers during the period. Additionally, management said it expected the company to lose another 2 million subscribers in the second quarter.
But don’t take Netflix’s disappointing developments as a sign that consumers are broadly canceling their streaming subscriptions. In fact, AT&T said its subsidiaries HBO and HBO Max added 3 million subscribers in the first quarter.
On a slightly more wonky note, the Citi U.S. Economic Surprise Index continues to trend higher, which means actual economic data has been exceeding estimates made by professional economic forecasters.
Big picture: Unfortunately, none of this may be what policymakers like the Federal Reserve want to hear right now as they fight inflation. That’s because as long as economic growth is outstripping the economy’s capacity to supply goods and services, there’ll continue to be inflationary pressure on prices.
More from TKer:
📉 Stocks fall: The S&P 500 fell 2.7% last week. It’s now up 3.8% from its February 24 low of 4,114, but still down 11.3% from its January 4 high of 4,818. For more on market volatility, read this and this.
🦅 Fed warns of aggressive rate hikes: On Thursday, Fed Chair Jerome Powell reiterated the central bank’s commitment to fight inflation, saying that they could hike interest rates by an aggressive 50 basis points at its May monetary policy meeting.
🤔 Putting things together: The Fed is trying to slow the economy because that’s what has to happen in for inflation to cool. When you consider all of the stronger-than-expected economic data we discussed above, it would make sense for Powell and his colleagues to take on an increasingly aggressive tone. And a more hawkish Fed is the kind of thing that could cause some volatility in the markets in the near term.
🏘 Mortgage rates continue to surge: From Freddie Mac: “Mortgage rates increased for the seventh consecutive week, as Treasury yields continued to rise. While springtime is typically the busiest homebuying season, the upswing in rates has caused some volatility in demand. It continues to be a seller’s market, but buyers who remain interested in purchasing a home may find that competition has moderately softened.“
🏘 Home sales slump: Sales of previously-owned homes fell 2.7% in March to an annualized rate of 5.77 million units, according to the National Association of Realtors (NAR). “The housing market is starting to feel the impact of sharply rising mortgage rates and higher inflation taking a hit on purchasing power,” NAR Chief Economist Lawrence Yun said on Wednesday "Still, homes are selling rapidly, and home price gains remain in the double-digits."
The median existing-home sales price climbed to $375,300 in March, up 15% from a year ago.
🔨 America is a massive housing construction site: New home construction (aka housing starts) jumped to its highest level since 2006. But due to persistent supply chain issues and labor shortages, completions of those homes are lagging. Bill McBride of the fabulous Calculated Risk newsletter notes there are 1.622 million housing units under construction in the U.S., the most since February 1973. In other words, America is a massive housing construction site.
Up the road 🛣
It’s the busiest week of earnings season with Apple, Microsoft, Alphabet, Amazon, Meta, and Intel among the big companies to announce quarterly financial results.
Here’s more detail from the Philly Fed: “The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing by production workers, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index matches long-term growth in its GDP.“
Here’s more detail from the Conference Board: “The LEI is a predictive variable that anticipates (or “leads”) turning points in the business cycle by around 7 months… The ten components of The Conference Board Leading Economic Index® for the U.S. include: Average weekly hours in manufacturing; Average weekly initial claims for unemployment insurance; Manufacturers’ new orders for consumer goods and materials; ISM® Index of New Orders; Manufacturers’ new orders for nondefense capital goods excluding aircraft orders; Building permits for new private housing units; S&P 500® Index of Stock Prices; Leading Credit Index™; Interest rate spread (10-year Treasury bonds less federal funds rate); Average consumer expectations for business conditions.”