At a Pivotal Moment, U.S. Economic Data Will Be a Mess Days before the election and a Fed meeting, the employment report and other indicators will be distorted by hurricanes and a strike

Hurricanes Helene and Milton are likely to wreak havoc on economic indicators at a particularly delicate time. The employment report for October comes out Friday, four days before the election. It will bear the hurricanes’ marks, which could make it especially susceptible to being spun for political advantage in the final stretch of the presidential campaign.

The Federal Reserve’s next decision on rates comes just two days after Election Day. Hurricane effects on the data will make it harder for the Fed to decide how much—or whether—to cut interest rates to keep the economy solid and inflation headed down. (…)

The storms temporarily put people out of work and shut stores, factories and construction sites. Eventually, the economy will bounce back, but these effects make it harder to understand how things are faring now. (…)

Initial claims for unemployment insurance in Florida, Georgia, South Carolina, North Carolina and Tennessee all rose in early October in response to Helene, as did claims in Florida after Milton. 

Federal Reserve governor Christopher Waller in a mid-October speech said he expected the hurricanes and Boeing strike to reduce employment growth by more than 100,000 jobs. Based on jobless claims, damage estimates and past hurricanes, economists at Goldman Sachs calculate the hurricanes alone will cut employment growth by 40,000 to 50,000 jobs. JPMorgan Chase estimates about 50,000, while Barclays has 50,000 to 60,000.  

Wages could be distorted upward. That is because hourly workers are more likely to lose their paycheck when a storm hits than salaried workers who tend to earn more. That skews average pay higher. 

Unlike payroll job growth, which is based on a survey of employers, the storms may not have much effect on the unemployment rate, which is based on a separate survey of households. Respondents who say they had jobs but weren’t at work because of bad weather are still counted as employed. There can still be some effect on the unemployment rate, but it tends to be modest. Striking workers are also counted as employed. (…)

The weeks that follow could also be challenging. The Commerce Department’s retail sales report for October will be weighed down by hurricanes, which closed many stores and restaurants. Industrial production, construction and home sales activity will also likely take a dip.

Inflation, meanwhile, could be slightly warmer than otherwise as a result of shortages caused by the storms. In addition to halting production at some auto plants, the storms destroyed a lot of vehicles, with Moody’s estimating insured auto losses at $3 billion to $5 billion. Demand for replacement cars could arrest the downward drift in new and used vehicle prices over the past year. Car insurance rates in hurricane-hit states are also due to rise. (…)

Indeed, in GDP terms, the economy might look a bit better off than if the hurricanes hadn’t happened. People will go back to work, and lost sales will end up merely delayed instead of canceled. Meanwhile, rebuilding efforts will add to GDP and could exceed activity that was permanently lost. (…)

Volkswagen plans to close at least 3 German plants and cut thousands of jobs Europe’s largest carmaker tells works council it would slash pay by 10%

• Mercedes-Benz and Porsche look for cost cuts after China slump hits profits

EARNINGS WATCH

S&P 500 Profit Beats Disappoint as Season Kicks Into High Gear

Nearly a third of the way through the reporting season, about 75% of firms have posted profits for July to September that exceeded analysts’ expectations, according to data compiled by Bloomberg Intelligence. That’s the weakest showing since the fourth quarter of 2022 and comes even as estimates were lowered ahead of the season. (…)

This week is the busiest for company reports. Investors are awaiting results from firms accounting for nearly 42% of the S&P 500’s market capitalization, including from Microsoft Corp., Starbucks Corp. and Meta Platforms Inc. (…)

LSEG IBES numbers are somewhat different than Bloomberg’s:

181 companies in the S&P 500 Index have reported earnings for Q3 2024. Of these companies, 79.0% reported earnings above analyst expectations and 18.8% reported earnings below analyst expectations. In a typical quarter (since 1994), 67% of companies beat estimates and 20% miss estimates. Over the past four quarters, 79% of companies beat the estimates and 16% missed estimates.

In aggregate, companies are reporting earnings that are 6.1% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.2% and the average surprise factor over the prior four quarters of 6.5%.

Of these companies, 59.4% reported revenue above analyst expectations and 40.6% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 62% of companies beat the estimates and 39% missed estimates.

In aggregate, companies are reporting revenues that are 1.6% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 1.1%.

The estimated earnings growth rate for the S&P 500 for 24Q3 is 4.4% [it was +5.0% on Oct. 4]. If the energy sector is excluded, the growth rate improves to 7.0% [7.1%].

The estimated revenue growth rate for the S&P 500 for 24Q3 is 4.4% [4.0%]. If the energy sector is excluded, the growth rate improves to 5.3% [4.8%].

The estimated earnings growth rate for the S&P 500 for 24Q4 is 11.2% [12.5%]. If the energy sector is excluded, the growth rate improves to 13.7% [14.8%].

Energy, Industrials and Health Care are coming in much weaker than expected. Financials are much better. Tech and Comm Services are in line.

• As S&P Rally Broadens Beyond Tech, Profit Growth Remains Elusive Once struggling stock sectors jump despite muted results

The seemingly unstoppable US stock market continues to rise despite Big Tech’s slump, as the gains diversify to industry groups like real estate that struggled through the first half of the year.

The same, however, cannot be said for corporate profits. And that raises a question about how long the breadth of the rally can stay strong.

“The rally might be broadening out in terms of the action in the stocks,” said Matt Maley, chief market strategist at Miller Tabak + Co. “But it’s not broadening out in the overall earnings picture.”

Earnings for companies in the S&P 500 Index are expected to climb 4.3% from a year ago. But strip out the so-called Magnificent Seven mega tech companies — Alphabet Inc., Amazon.com Inc., Apple Inc., Meta Platforms Inc., Microsoft Corp., Nvidia Corp. and Tesla Inc. — and the anticipated profit expansion nearly disappears, according to data compiled by Bloomberg Intelligence. Take out tech and communications more broadly, and the growth turns negative. (…)

In the third quarter, the Bloomberg Magnificent 7 Index trailed the equal-weight version of S&P, in which the weighting of each stock is the same regardless of the company’s market capitalization, for the first time since 2022. Within the S&P 500, utilities, real estate and financials have been the dominant sectors since the start of July, while information technology and communications services are barely in the green. (…)

Wall Street analysts anticipate the Magnificent Seven’s third-quarter profits will be up more than 18% from a year ago. That’s a sizable drop from 37% year-on-year growth in the second quarter but still leading the S&P 500, where the remainder of the index is expected to be about flat. Indeed, without the tech and telecom sectors, S&P 500 companies are projected to post a decline in earnings growth, according to data compiled by Bloomberg Intelligence. (…)

Indeed, information technology and communications services are the only S&P 500 sectors expected to deliver double-digit earnings-per-share growth in the third quarter. The index as a whole is projected post 4.3% EPS growth, data from Bloomberg Intelligence shows. Of the S&P 500’s anticipated EPS of $60.26 in the third quarter, more than half is seen coming from the info tech sector.

It’s the same with revenues. In this case, information technology is the lone sector with an anticipated double-digit rise in the third quarter, according to Bloomberg Intelligence data. The S&P 500’s revenue growth is seen at 5.1%, and without technology it’s expected to be 4.4%, according to data compiled by BI. (…)

It was Bloomberg itself that ran S&P 500 Is Surviving Big Tech’s Slide as ‘Other 493’ Catch Up on September 15, seeking to justify tech’s underperformance since July 16.

“Investors love to look at companies that are going from earnings declines to earnings gains,” Michael Casper, an equity strategist at Bloomberg Intelligence, said in an interview. “That’s kind of leading them away from tech and to the other 493 stocks that were cast aside.”

The problem was, as I warned on September 16, and again in October 7, that the so called broadening of earnings would only really start in Q4 if analysts proved right as only 3 sectors were expected to report above average earnings growth in Q3 per LSEG’s tally, and only one outside tech. In fact, IT and Communication Services companies, which contributed 37% of the S&P 500 earnings growth in Q2, were forecast to contribute 74% of the growth in Q3.

The most recent estimates narrowed that broadening from 7 to 5 sectors in Q4, 4 in Q1’25 and 5 in each of the following quarters. IT and Communication Services are seen rising their earnings 19.1% in 2025 to account for 34.4% of S&P 500 earnings, up from 33.1% in 2024.

In terms of revenues, Q2’25 looks like broadly strong, but not for long:

For all of 2025, only 5 sectors are expected to beat the S&P 500 earnings growth rate:

If there is but one observation from the above, it’s the expected consistency in IT/Tech earnings outperformance.

We need to keep in mind that 5 of the S&P 500 eleven sectors are primarily goods-sensitive in an economy primarily services-sensitive. The Consumer Discretionary and Staples sectors include distributors (services) which sell goods that are largely imported. The U.S. industrial base remains weak, reflective of the ongoing “goods-recession” as illustrated by

     1- S&P Global’s PMI manufacturing surveys over the past 24 months:

     2- and by the Conference Board’s goods-biased LEI:

A true, sustainable “broadening” will only occur when the two above indicators turn clearly positive. Much lower interest rates are needed for this revival which also needs housing to participate.

“The Federal Reserve’s recent actions are a good start, but it will likely take more time, more rate relief, and looser lending conditions before we start to see the flow-through effect in the construction, industrial, and consumer durables market that are so impactful to steel demand.” – Nucor CEO Leon Topalian

The earnings facts are that trailing 12-m EPS are now $234.47, up 7.2% YoY and forward EPS are $265.03, +11.1% YoY.

Full year EPS are seen reaching $242.33 in 2024 ($241.28 on Oct. 4) and $275.44 in 2025 ($276.45 on Oct. 4).

Japan’s Stability Gets a Monster October Surprise Weakened leader Ishiba may struggle to form a majority outside the LDP’s usual comfort zone.

Other countries have elections too. And sometimes, voters make decisions that politicians and markets didn’t expect. Exhibit A for this is Japan, where the Liberal Democratic Party has just been deprived of a governing majority for the first time since 2009. It doesn’t matter as much to the rest of the world as next week’s US election probably will, but there will be consequences. (…)

Shigeru Ishiba took over as prime minister at the beginning of this month, following the resignation of Fumio Kishida, and called the vote to strengthen his position. It has done the opposite. Gearoid Reidy explains elsewhere in Opinion just how badly Ishiba, one of Japan’s most experienced and respected politicians, has bungled his first month in charge of Japan’s hegemonic party that has governed with only two interruptions since 1955. (…)

The yen remains important to the global system, and Japan’s descent into uncertainty might even prompt a return for the carry trade — borrowing in countries with low interest rates, such as the yen, and parking elsewhere to pocket the profit. The currency has now given up all its gains since the Bank of Japan hiked rates in late July. (…)

Now, the initial reaction is that the political mess will make it harder for the Bank of Japan to be restrictive, even though part of the LDP’s problem was dissatisfaction with rising prices, which a generation of Japanese hasn’t known. That might provide more easy money for the rest of the world. The initial reaction in Tokyo suggests that the weak yen is as ever strengthening Japanese stocks. But the convulsions of early August as the carry trade unwound is a reminder than an unstable Japan is not good news for anyone.

Oil Is Calm

Another big event since markets last traded: Israel’s missile attacks on Iran. It wasn’t unexpected, but the reaction of the oil market in Asian trading has been a little counterintuitive. Crude prices dropped more than 5%. Israel opted not to attack the oil industry directly, a possibility once widely canvassed, and Iran swiftly confirmed that its production was unaffected. (…)

Despite initial appearances, the short-term move downward makes sense. Not only was oil production unaffected, but both sides seem to lack appetite for another round of escalation. (…)

U.S. Flash PMI: Robust output and sales growth reported in October as selling prices rise at slowest rate since May 2020

The headline S&P Global Flash US PMI Composite Output Index registered 54.3 in October, up from 54.0 in September, to signal a sustained solid expansion of business activity at the start of the fourth quarter. The latest reading was only marginally below the average recorded over the latest six months, which has witnessed a sustained period of steady robust growth. New orders for goods and services also rose at the sharpest rate for 17 months, reflecting higher sales and stronger demand.

By sector, growth remained uneven in October, characterised by strong service sector growth contrasting with falling manufacturing output.

Service sector activity (output) grew at a marginally increased pace at the start of the fourth quarter, the latest expansion having been exceeded only once over the past two-and-a-half years by that recorded in August. The improvement was driven by the largest rise in new business into the service sector since April 2022, in turn fueled by rising domestic demand, which offset a marginal fall in export orders for services.

Manufacturing output meanwhile fell for a third successive month in October, albeit the rate of decline moderating to the slowest recorded over this period. However, while new orders also fell at a reduced rate, the rate of loss of orders remained steep, with weaker than anticipated sales also often having caused an unplanned rise in unsold stock levels. Inventories of finished goods consequently rose for a fourth successive month, keeping the forward-looking orders-to-inventory ratio at one of the lowest levels seen since the global financial crisis to signal further near-term production weakness.

Looking further ahead, having slumped to a 23-month low in September, optimism about output in the coming year rebounded sharply in October, hitting a 29-month high. The shift in sentiment underscores the unusual volatility of the current business and political environment as the US Presidential Election nears. The boost to confidence in October was often a reflection of hopes that paused spending and deferred decisions ahead of the election will lift once the political situation is clarified. Prospects of lower inflation, lower interest rates and stronger economic growth in 2025 also helped instil greater confidence.

Future optimism struck a 16-month high in the service sector and a nine-month high in manufacturing.

Employment fell for a third straight month in October, though the decline was again only very modest and less than reported in August and September. The drop in payrolls was more pronounced in the manufacturing sector, though even here the drop in headcounts was smaller than reported in September. The decline in service jobs was meanwhile only very modest, and often linked to the non-replacement of leavers rather than layoffs.

October saw average prices charged for goods and services rise at a sharply reduced rate, registering the smallest monthly increase since May 2020. The moderation represented a contrast to the uptick seen in September and pushed the rate of inflation below the pre-pandemic long-run average.

The rate of selling price inflation cooled especially sharply in the service sector, down to its lowest for almost four-and-a-half years, but also fell in manufacturing.

Input cost inflation also slowed, though remained elevated by historical standards, notably in the service sector. Although service sector input cost inflation waned slightly, generally linked to lower wage pressures, it remained the third-highest recorded over the past year and well above the pre-pandemic average.

Manufacturing input cost growth fell to a seven-month low, attributed to lower fuel prices, reduced buying and competition among suppliers.

The S&P Global Flash US Manufacturing PMI rose from 47.3 in September to 47.8 in October, signaling a deterioration in business conditions within the goods-producing sector for a fourth successive month but with the rate of deterioration moderating to the slowest since August.

All five PMI components exerted negative drags on the index bar suppliers’ delivery times, with longer lead-times reported for the first time in three months amid freight-related congestion and weather-related disruptions to supply chains.

The largest negative contribution to the PMI again came from new orders, which fell for a fourth straight month, albeit with the rate of decline easing from September’s 15-month peak, followed by stocks (inventories) of purchases, which fell at the sharpest rate for 14 months to be the only component exerting a more powerful negative drag in the PMI than in September. Production and employment fell at reduced rates.

Commenting on the data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:
“October saw business activity continue to grow at an encouragingly solid pace, sustaining the economic upturn that has been recorded in the year to date into the fourth quarter. The October flash PMI is consistent with GDP growing at an annualized rate of around 2.5%. (…)

Goldman Sachs’Jan Hatzius wore rose colored glasses when reading the flash manufacturing PMI: “The underlying composition was strong, as the output (+0.9pt to 48.8), new orders (+0.6pt to 45.3), and employment (+0.2pt to 48.6) components all increased. The new export orders component increased by 1.5pt to 48.7.”

All of these components actually declined but at a slightly slower rate.

The only positive in manufacturing was that, amid “deteriorating business conditions”, “future optimism struck a nine-month high in manufacturing”, potentially reflecting optimism that things would get better after the elections.

Yet,

• “the rate of loss of orders remained steep”
• “the forward-looking orders-to-inventory ratio at one of the lowest levels seen since the global financial crisis to signal further near-term production weakness.”
• “stocks (inventories) of purchases fell at the sharpest rate for 14 months”

But services are booming (“largest rise in new business into the service sector since April 2022 fueled by rising domestic demand”).

Importantly: “The rate of selling price inflation cooled especially sharply in the service sector, down to its lowest for almost four-and-a-half years.”

And if I am not mistaken, it is the first time in a long, long time that the U.S. PMIs reveal “lower wage pressures”. The September Beige Book also noted “a slowdown in the pace of wage increases”.

Wednesday:

• Eurozone manufacturing production remained in a sustained downturn, falling for the nineteenth month running in October and at a marked pace.
• New orders contracted at a sharper pace.
• New export orders decreased at the joint-fastest pace so far this year, equal with that recorded in September.
• Japan’s manufacturing output and new orders contracted with new orders from abroad falling at the quickest pace since February 2023.

Hint: Chinese demand remains soft.

U.S. Consumers Plan Generous Holiday Spending

Gallup’s initial measure of Americans’ 2024 holiday spending intentions finds consumers planning to spend an average of $1,014 on Christmas or other holiday gifts. This is substantially more than their forecast of $923 at the same time last year, signaling that the 2024 holiday shopping season could be a bit kinder to U.S. retailers. (…)

The majority of Americans almost always say they will spend the same amount as the prior year, and that’s the case in the latest poll. However, today’s 52% saying their spending will be the same is below the long-term average of 60%, while the 20% saying they will spend more is significantly higher than the average of 14%. Meanwhile, the 25% saying they will spend less is on par with prior years. (…)

“A bit kinder”? That would be a 9.9% jump in average holiday spending!