Manufacturing Surprise
Manufacturing activity expanded in New York State for the first time since November of last year, according to the September survey. The general business conditions index rose sixteen points to 11.5. The new orders index climbed seventeen points to 9.4, a multi-year high, pointing to a modest increase in orders, while the shipments index rose eighteen points to 17.9, its highest level in about a year and a half, signaling strong growth in shipments. (…)
The index for number of employees came in at -5.7, pointing to another month of modest employment reductions. After a steep drop last month, the average workweek index recovered to 2.9, signaling a slight increase in hours worked.
Price indexes were little changed: the prices paid index was 23.2, and the prices received index remained low at 7.4.
Firms grew more optimistic that conditions would improve in the months ahead. The index for future business activity moved up eight points to 30.6, with 45 percent of respondents expecting conditions to improve over the next six months. However, the capital spending index fell eleven points to -2.1, dipping below zero for the first time since 2020.
This snapshot shows the rare uptick:
@ceteraIM
New orders also ticked up:
Another flash in the pan? The next two charts show expectations six months ahead. Note how rising expectations for new orders in 2021-22 faded rapidly. 
Record US household wealth may increase chance of soft landing
By some financial measures, U.S. consumers are better off than they’ve been in decades.
This financial cushion could increase the likelihood that the economy’s descent will be more glide than crash. And it suggests that the take-off in the economy and markets that follows could be quicker and steeper than in previous cycles.
Federal Reserve figures last week showed that increases in home prices and the stock market lifted households’ net worth in the second quarter by $2.8 trillion to a record $163.8 trillion. Overall, household net worth soared by nearly $47.0 trillion from the pre-pandemic peak less than five years ago.
A closer analysis of the numbers behind the latest headline figures points to even stronger underlying foundations.
Net wealth as a share of disposable personal income – a broad, relative measure of the household sector’s financial wellbeing – has climbed to 785%, the highest point in two years, while household debt as a share of GDP has fallen to 71%, the lowest level in 23 years.
Even though credit card and other forms of delinquencies are on the rise, most households aren’t struggling with large debt burdens.
In short, U.S. households as a whole have generally had little trouble withstanding the 525 basis points of Fed rate hikes between March 2022 and July 2023. (…)
In the U.S., 25% of assets are held by 1% of the population and almost 80% is held by 20%, meaning rising house and stock prices have benefited a relatively small cohort of the population.
The lagged impact of multiple years of negative real wage growth and the running down of pandemic-related stimulus is starting to show. The national saving rate fell to 2.9% in July, approaching the historical lows recorded in the 2005-2007 run-up to the Great Financial Crisis.
Many households can no longer rely on excess savings and may be reluctant to borrow to fund future expenditures. Does that mean consumption will soon crater?
Probably not. For better or worse, the consumer spending engine driving the U.S. economy is fueled by the well-off. Economists at BNP Paribas estimate that the top 20% of income earners account for nearly 40% of total spending, and the richest 40% account for more than 60% of all spending.
In fact, rising stock and house prices – which, again, only benefit a sliver of the population – are expected to lift consumer spending this year by $246 billion, according to BNP Paribas economists’ estimates earlier this year. That would be the third-largest boost to U.S. consumer demand in 25 years, adding roughly 1 percentage point to 2024 GDP growth.
“Ultimately it is the labor market that will matter much more for a larger slice of households, and in aggregate, there are no significant signs of stress,” says BNP Paribas’ senior U.S. economist Andrew Husby.
Economists at Goldman Sachs reckon that consumers’ disposable personal income is actually being understated by nearly $400 billion. If so, the saving rate is an estimated 5.2%, suggesting downside risks to spending are more limited than perhaps thought. (…)
History shows that, unsurprisingly, Wall Street tends to do well after the Fed starts cutting rates. While the record is slightly mixed, U.S. stocks on average drift higher in the year after the Fed’s easing cycle ends and typically rise by as much as 20% if there is no recession, according to analysts at Raymond James.
Spending – and thus corporate earnings – could obviously slow sharply if the labor market were to crater. But that’s not most people’s base case. Even if that were to occur, the response by the Fed would likely be a reasonably solid shield for financial markets.
Consider that markets are currently pricing in 250 basis points of rate cuts between now and the end of next year – and that’s with the expectation that there won’t be a severe recession. If there is, markets could get even more help from the Fed.
So even if economic turbulence puts consumers under stress, households appear to be in as strong a position as they could hope, meaning they – and markets – are relatively well positioned to face these potential headwinds.
The “wealth defect” as I dubbed it in September 2023, continues to sustain consumer spending in spite of the “unmistakable slowing in the labor market”.
Not only are real wages unwavering, household wealth keeps climbing well above trend, allowing the savings rate to stay historically low. The cushion is not in the savings account, it’s in housing and equities.
Importantly, the Pew Research Center found that “the wealth of lower-income households increased at a faster rate during the pandemic – 101% vs. 15% for upper-income households. Middle-income households saw their net worth increase by 29% from 2019 to 2021.
- In 2021, 62% of U.S. households lived in homes they owned as their primary residence. In 2021, homeowners typically had $174,000 in equity in their homes.
- Ownership of retirement accounts, such as individual retirement accounts (IRAs) and 401(k) accounts, is about as prevalent as homeownership. Overall, 60% of U.S. households had at least one person with a retirement account in 2021. The typical retirement account was valued at $76,000 in 2021.
- 44% of households possessed both assets.
These relative trends have likely persisted post pandemic.
Bank of America data reveal that “after-tax wage growth remains highest for lower-income households in August 2024” …
… and that households’ savings and checking balances remain well above inflation adjusted 2019 level for all income groups:
As Reuters notes, Goldman Sachs economists find that the savings rate is understated:
On the surface, a very low savings rate raises concerns around the sustainability of consumer spending, but we see several reasons why the saving rate level is probably not really as low as currently measured.
First, we estimate that two measurement biases are understating disposable personal income (DPI) by 1.7%. Interest income is understated by around $350bn (1.5% of DPI) due to the BEA’s extrapolation method to estimate net interest payments, while the BEA’s failure to fully capture immigrants in employment statistics is lowering labor income by around $40bn (0.2% of DPI).
Second, employers’ contributions to future pension entitlements have declined by around 0.4% of DPI, thereby lowering measured income but not affecting household cashflow that is relevant for saving.
Third, election-related spending by non-profits is currently raising PCE spending by 0.2% (and lowering the saving rate by 0.2pp). While such spending is recorded appropriately under the national accounts’ framework, it is probably not affecting household saving decisions and anyways should fully reverse after November’s election.
Our estimates suggest a 4.6% saving rate currently after accounting for measurement biases and a 5.2% saving rate after also accounting for adjustments that align income and spending with cashflow relevant to households. These estimates are only slightly below the average saving rate from 1990-2019 (5.8%) and support our view that downside risk to spending is more limited than commonly feared.
Another unreliable BLS data series!!! Pithy those FOMC members deciding monetary policy almost blindly.
Ed Yardeni: “In our opinion, lowering the FFR too much too fast could trigger an economic boom, in which real GDP grows at a brisk pace but with higher inflation risks. It could also trigger a 1990s style meltup in the stock market.”
Rates Markets Are Pricing in a Recession
Despite surveys showing that the consensus is expecting a soft landing, rates markets are pricing in a full-blown recession, see chart below.
BTW:
