Note: I am travelling (Pacific time zone) until August 10. Posting will be irregular and possibly limited by time and equipment constraints.

US Economy Accelerated by More Than Forecast Last Quarter Data signals demand is holding up under the weight of higher borrowing costs.

Gross domestic product increased at a 2.8% annualized rate after rising 1.4% in the previous period, the government’s initial estimate showed. The economy’s main growth engine — personal spending — rose 2.3%, also more than forecast.

A closely watched measure of underlying inflation rose 2.9%, easing from the first quarter but still above forecast, the Bureau of Economic Analysis report showed Thursday. (…)

Consumer spending was driven mostly by a rebound in durable goods like cars and furnishings as well as a more moderate advance in services outlays compared to the first quarter, according to the GDP report. (…)

Government spending contributed more to GDP compared to the first three months of the year, boosted by defense spending. Residential investment subtracted  from growth for the first time in a year as high mortgage rates kept a lid on sales activity and new construction.

Business investment grew at the fastest pace in almost a year, led by the strongest advance in equipment since the start of 2022. A separate report Thursday showed orders placed with US factories for business equipment, excluding aircraft and defense, increased in June by the most since early last year. It’s a sign such spending will keep adding to growth in coming months.

A few charts from Wells Fargo:

  

Cost-of-Living Crisis Takes Toll on Sales of Food, Cars, Luxury Shoppers are tapped out after years of inflation, higher rates

A global consumer backtrack from post-pandemic revenge spending is starting to hit companies’ top and bottom lines.

From food producers to airlines, automakers to luxury houses, evidence of the impact is piling up. Whether it’s US grocery shoppers tapped out after a period of punishing inflation or wealthy Chinese customers postponing their next splurge, the effects are rippling across the corporate landscape.

Nestle SA, the world’s biggest food company, cut its revenue outlook for the year on Thursday, while Unilever Plc reported sales that missed estimates and Jeep-owner Stellantis NV posted a plunge in profit. A day before, US appliance maker Whirlpool Corp. lowered its earnings forecast. (…)

A cost-of-living crisis has taken its toll on shoppers who’ve traded down to cheaper brands, and consumer giants have struggled to coax them back. Around 80% of US shoppers are reducing grocery spending, according to a recent poll of 1,000 people who broadly represent the US demographic by Savings.com, a website that offers coupons. (…)

“The cost of living is just astronomical, which I’ve been feeling, especially with groceries,” Kotowski said.

US consumers have generally been resilient against the backdrop of years of inflation and rising interest rates, though are selective in how they are spending and searching for value. Walmart Inc., Target Corp. and other retailers have said in recent months that consumers’ wallets are still stretched and that the broader environment remains challenging. (…)

The pullback hasn’t been confined to budget-conscious shoppers.

LVMH, whose luxury brands include Louis Vuitton and Christian Dior, posted disappointing results in part because of China, where the wealthy have cooled on its high-end fashions.

Other purveyors of luxury goods, from Germany’s Hugo Boss AG to Britain’s Burberry Group Plc, also blamed Chinese consumers for weaker sales that prompted them to slash profit guidance. Burberry went so far as to oust its CEO, Jonathan Akeroyd, and warn of a possible loss for the first half.

“The whole luxury segment is under pressure,” Porsche CEO Oliver Blume said during Wednesday’s earnings, adding the company doesn’t plan to cut prices. The carmaker’s dealer partners in China say the luxury segment “could come back, but nobody knows when and how,” Blume said.

As they say in politics, perception is the reality, as Mr. Trump as amply demonstrated.

The economic reality is that the pressure from inflation on essentials (food, energy and shelter) has peaked and labor income is now rising faster than most prices.

On a YoY basis, inflation on essentials peaked at double digit rates in mid-2022 (CPI-Food at home at +13.5%) but it is now down to 4.0% (1.1% on food) while labor income is still growing above 5.0%.

It’s not because the more affluent segment is biasing the data. Real wages for the rank and file employees are 3.6% above their pre-pandemic level and still positive on a YoY basis.

I Changed My Mind. The Fed Needs to Cut Rates Now. Waiting until September unnecessarily increases the risk of a recession.

By Bill Dudley, a Bloomberg Opinion columnist, who served as president of the Federal Reserve Bank of New York from 2009 to 2018.

I’ve long been in the “higher for longer” camp, insisting that the US Federal Reserve must hold short-term interest rates at the current level or higher to get inflation under control.

The facts have changed, so I’ve changed my mind. The Fed should cut, preferably at next week’s policy-making meeting. (…)

Now, the Fed’s efforts to cool the economy are having a visible effect. Granted, wealthy households are still consuming, thanks to buoyant asset prices and mortgages refinanced at historically low long-term rates. But the rest have generally depleted what they managed to save from the government’s huge fiscal transfers, and they’re feeling the impact of higher rates on their credit cards and auto loans. Housing construction has faltered, as elevated borrowing costs undermine the economics of building new apartment complexes. The momentum generated by Biden’s investment initiatives appears to be fading.

Slower growth, in turn, means fewer jobs. The household employment survey shows just 195,000 added over the past 12 months. The ratio of unfilled jobs to unemployed workers, at 1.2, is back where it was before the pandemic.

Most troubling, the three-month average unemployment rate is up 0.43 percentage point from its low point in the prior 12 months — very close to the 0.5 threshold that, as identified by the Sahm Rule, has invariably signaled a US recession.

Meanwhile, inflation pressures have abated significantly after a series of upside surprises earlier this year. The Fed’s favorite consumer-price indicator — the core deflator for personal consumption expenditures — was up 2.6% in May from a year earlier, not far above the central bank’s 2% objective. The June reading, coming next week, is likely to reinforce this trend, judging from already reported data that feed into the core PCE calculation. On the wage front, average hourly earnings were up 3.9% in June from a year earlier, compared with a peak of nearly 6% in March 2022.

Why, then, are Fed officials strongly hinting that there will be no rate cut at next week’s meeting?

I see three reasons. First, the Fed doesn’t want to be fooled again. Late last year, a moderation in inflation turned out to be temporary. This time around, further progress in reducing year-over-year inflation will be difficult, due to low readings in the second half of last year. So officials might be hesitant to declare victory.

Second, Chair Jerome Powell might be waiting in order to build the broadest possible consensus. With markets already fully expecting a cut in September, he can argue to doves that delay will have little consequence, while building more support among hawks for the September move.

Third, Fed officials don’t seem particularly troubled by the risk that the unemployment rate could soon breach the Sahm Rule threshold. The logic is that rapid labor force growth, rather than a rise in layoffs, is driving the increase in the unemployment rate. This isn’t compelling: The Sahm Rule accurately predicted recessions in the 1970s, when the labor force was also growing rapidly.

Historically, deteriorating labor markets generate a self-reinforcing feedback loop. When jobs are harder to find, households trim spending, the economy weakens and businesses reduce investment, which leads to layoffs and further spending cuts. This is why unemployment, having breached the 0.5-percentage-point threshold, has always increased a lot more — the smallest rise was nearly 2 percentage points, trough to peak.

Although it might already be too late to fend off a recession by cutting rates, dawdling now unnecessarily increases the risk.

We will know more tomorrow after the employment report but Indeed Job Postings perked up since the end of June (through July 19)

China Unexpectedly Cuts One-Year Policy Rate by Most Since 2020

Note: I am travelling (Pacific time zone) until August 10. Posting will be irregular and possibly limited by time and equipment constraints.

FLASH PMIs

USA: Output growth accelerates in July, prices rise at slower rate

The headline S&P Global Flash US PMI Composite Output Index rose from 54.8 in June to 55.0 in July, its highest since April 2022. Output has now risen continually over the past one-and-a-half-years, with the pace of expansion having improved markedly in recent months after slowing in April.

The service sector outperformed manufacturing for a fourth straight month, with the sectoral divergence widening to the greatest since June of last year. While the service sector expanded in July at the strongest rate since March 2022, manufacturing output fell into decline for the first time since January.

Sector variances were also marked in terms of order book growth. Measured overall, inflows of new work rose at a slightly reduced rate, caused by a renewed fall in new orders at manufacturers. However, the overall rise was the second largest seen over the past 13 months thanks to faster inflows of new business placed at service providers, which rose at the sharpest rate for just over a year.

Optimism about output in the year ahead slipped to a three-month low in July, dropping further below the survey’s long-run average. Sentiment was adversely affected by uncertainty regarding the Presidential Election and resulting policies, though companies also cited concerns over the persistent high cost of living in relation to both inflation and interest rates. These concerns were more evident in the service sector than manufacturing, with the latter in fact reporting a pick-up in sentiment from June’s 19-month low, often linked to the expansion of capacity and the anticipation of demand improving over the coming year, especially after the election.

Employment rose for a second successive month, pointing to a further modest labor market improvement after headcounts fell briefly in the two months to May. Manufacturers reported the stronger rate of increase, though both sectors reported weaker payroll gains than in June.

The rise in employment helped firms reduce their backlogs of work marginally, notably in manufacturing.

Average prices charged for goods and services rose at the slowest rate since January, and the second-slowest rate since October 2020. While some stubbornness of inflation was still evident in the service sector, prices charged for services rose on average at the slowest rate for almost four years barring only January’s brief dip in the rate of inflation. Prices charged for goods leaving the factory gate meanwhile rose only very modestly, increasing at the slowest rate for a year, adding to the disinflationary trend.
The slower rise in charges occurred despite upward pressure on input price inflation. Average costs across manufacturing and services rose at the sharpest rate for four months, rising in both sectors at increased rates.

Firms reported higher prices for a wide variety of raw materials, with energy and logistics prices also on the rise, the latter caused in part by increased freight and shipping rates. However, higher wage pressures also remained a dominant factor behind price hikes, especially in the service sector.

The S&P Global Flash US Manufacturing PMI fell from 51.6 in June to 49.5 in July, signaling a deterioration in business conditions within the goods-producing sector for the first time since December.
Falls in new orders, production and inventories contributed to the decline in the PMI, the former dropping especially sharply. A reduced rate of employment growth also acted as a drag on the PMI. Suppliers’ delivery times meanwhile lengthened marginally, acting as a positive influence on the PMI for a second month running, though the lengthening was only very marginal.

Manufacturing a bit softer in July but services more than offsetting.

Eurozone economic recovery fades further in July

Provisional PMI® survey data signalled a near-stagnation of the eurozone private sector during July as the currency bloc’s economic recovery continued to wane. New orders fell for the second month running and business confidence dropped to a six-month low, leading firms to halt a spell of hiring which began at the start of 2024. Meanwhile, the rate of input cost inflation quickened, but demand weakness meant that companies raised their selling prices at a softer pace. In fact, the pace of charge inflation was the slowest since last October.

The eurozone manufacturing sector was again a key source of weakness. Production was down markedly in July, and to the largest extent in the year-to-date. As such, a rise in services activity stopped the overall private sector from falling into contraction. That said, the expansion in the service sector was only modest and the weakest since March.

The two largest euro area economies continued to underperform the wider region. Output in Germany decreased for the first time in four months, while France posted a third consecutive monthly reduction in business activity. This performance contrasted with continued growth across the rest of the euro area, albeit the latest increase in output was the least marked since January.

The seasonally adjusted HCOB Flash Eurozone Composite PMI Output Index, based on approximately 85% of usual survey responses and compiled by S&P Global, fell to 50.1 in July from 50.9 in June, posting only fractionally above the no-change mark and thus pointing to a near-stagnation of private sector activity. Output has now risen in each of the past five months, but the latest expansion was the softest in this sequence and thus represents a weak start to the third quarter of the year. (…)

The near-stagnation of business activity reflected further signs of weakness in demand. New orders decreased for the second month running in July. The pace of reduction quickened slightly from that seen in June, but remained only modest nonetheless. As was the case with output, growth in services new business contrasted with a fall in manufacturing new business, but here the modest expansion in services was insufficient to offset the steepest fall in manufacturing new orders since December.

New export orders (which include intra-eurozone trade) fell more quickly than total new business as firms in the eurozone continued to struggle to secure sales from international clients. New export orders decreased for the twenty-ninth successive month, and at a solid pace that was fractionally quicker than that registered in the previous survey period.

Input prices increased sharply again in July, with the pace of inflation ticking up to a three-month high. The latest rise was also sharper than the series average. Cost pressures continued to be more pronounced in the service sector than in manufacturing, with services input prices up substantially in the latest survey period. That said, manufacturing cost inflation also picked up and was the fastest for a year-and-a-half.

While the pace of cost inflation quickened in July, output prices increased at a softer pace as falling demand limited company pricing power. Charges rose at a modest pace that was the slowest since last October. Selling prices increased in the service sector, but continued to fall modestly in manufacturing. Rates of charge inflation were broadly similar across Germany, France and the rest of the eurozone.

JAPAN: Business Activity returns to growth in July