US Retail Sales Barely Increase In Sign of Consumer Strain Value of purchases rose 0.1% in May after downward revisions
The value of retail purchases, unadjusted for inflation, increased 0.1% after an downwardly revised 0.2% drop in the prior month, Commerce Department data showed Tuesday. Excluding gasoline, sales rose 0.3%. (…)
The figures underscore a notable downshift in consumer spending after stronger readings earlier in the year. Economists expect a moderate pace of spending going forward as Americans exercise greater prudence given persistent inflation, a gradually cooling job market and emerging signs of financial stress. (…)
The retail report showed so-called control-group sales — which are used to calculate gross domestic product — climbed 0.4% in May. It fell 0.5% in the prior month, which was the most in about a year. The measure excludes food services, auto dealers, building materials stores and gasoline stations. (…)
Spending at restaurants and bars, the only service-sector category of Tuesday’s report, declined 0.4%, the most since January.
The challenge with retail sales is to properly assess real sales because there is no official deflator for that important series. My formula is (0.35 x CPI-Durables + 0.65 x CPI-Nondurables) which roughly reflects the actual sales breakdown.
By this measure, retail prices declined 0.45% MoM in May which would mean that retail sales, up 0.09% MoM in nominal terms , were up 0.54% in real terms, a solid month after –0.36% in April.
On a YoY basis, nominal sales are up 2.3% while real sales are up 1.6%, down from 2.3% on average in the previous 12 months, but still respectable demand considering the pandemic splurge on goods.
Overall, the May retail sales data are consistent with a consumer that is only gradually losing its swagger. Broader control group sales, which excludes autos, gasoline, building material and food services store sales and feeds directly into the BEA’s calculation of real goods spending in the national accounts, rose a stronger 0.4% in May.
Volatility is now part of the retail scene. Labor income is slowing, excess savings are depleted (in real terms), the savings rate is historically low and interest rates still very high. Luckily, goods import prices are depressed by Chinese overcapacity and the strong dollar and energy prices are quiet.
The bars below show how each of the steps down in average nominal control sales growth rates since mid-2021 was also accompanied by large declines in average goods inflation (black lines), from 11.3% in the first period to 0.1% in the most recent period. Goods have deflated, but demand remains solid.
In reality, goods consumption remains strong, fueled by labor income growth above 5.0%, slowing overall inflation and the continued impact of the wealth defect. It is ironic that, attempting to undo the wealth its own policies created, the Fed keeps adding to the “problem” as Apollo’s Torsten Slok illustrates:
As Goldman Sachs illustrates, Americans are not squeezed by debt and interest rates:
Nor is the economy highly vulnerable to slower consumer demand:
US Sales Managers Survey
Next week we will get S&P Global’s Flash PMI survey results for June. This is from World Economics’ Sales Managers survey:
The US Sales Managers Survey Results for June reflect a likely acceleration of GDP growth levels seen in previous months of this year. All growth-related Indexes suggest an expectation of continuing modest-to-rapid economic expansion.
Real GDP year-on-year growth in excess of 2% is likely to continue into the second half of 2024.
The evidence presented by the June Sales Managers Survey suggests that the Federal Reserve’s interest rate hikes have had at best a very modest restraining impact on economic activity levels to date. However, the Fed’s efforts at simultaneously cutting price inflation appear to be working less well. The Sales Managers Price Index continues to register relatively high monthly readings, suggesting that the dragon of Price Inflation has not yet been slain, and big cuts in interest rates are not likely to feature in the run up to the November election.
US Homebuilder Confidence Slides to Lowest Level This Year Measures of current sales, outlook and buyer traffic retreated
A measure of the sales outlook over the next six months dropped 4 points to 47 this month. That followed a 9-point decline in May that was the largest since October 2022. The prospective-buyer traffic gauge and the NAHB index of current sales both dropped to the lowest level this year. (…)
This month, 29% of builders reported cutting home prices, the largest share since January, according to the NAHB survey. The average price reduction held steady at 6% for the 12th straight month. The share using sales incentives increased to 61% from a May reading of 59%.
CBO Jacks Up US 2024 Budget Gap Forecast by 27% to Nearly $2 Trillion
The nonpartisan Congressional Budget Office ramped up its estimate for this year’s US budget deficit by 27% to almost $2 trillion, sounding a fresh alarm about an unprecedented trajectory for federal borrowing.
The CBO sees the deficit reaching $1.92 trillion in 2024, up from $1.69 trillion in 2023, according to updated projections<?XML:NAMESPACE PREFIX = “[default] http://www.w3.org/2000/svg” NS = “http://www.w3.org/2000/svg” /> released in Washington Tuesday. The new estimate is more than $400 billion larger than what the CBO anticipated in February — in part reflecting additional spending, including aid for Ukraine, enacted since then, along with Biden administration student-loan relief measures. (…)
As a share of gross domestic product, the US deficit is now seen widening, not shrinking, for the 2024 fiscal year, which runs through September. The ratio is estimated at 6.7%, compared with the February forecast of 5.3% and the 6.3% logged for 2023.
By comparison, European Union nations have a guideline of keeping shortfalls at 3% or less. The US averaged 3.7% over the past half-century, according to the CBO.
“Total deficits equal or exceed 5.5% of GDP in every year from 2024 to 2034,” in the new forecasts, the CBO said. “Since at least 1930, deficits have not remained that large for more than five years in a row.”
Tuesday’s projections continued to show the US heading for record levels of debt relative to GDP, and escalating interest costs — which for this year will exceed defense spending. Over the coming decade, the CBO sees US deficits totalling $22.1 trillion, up more than $2 trillion from February’s report. (…)
The office now expects a 2% increase in GDP in the fourth quarter of calendar 2024 over the same period of 2023 — up from February’s 1.5%.
Inflation, as measured by the Fed’s preferred PCE price gauge, is seen at 2.7%, compared with the 2.1% forecast in February. (…)
Fed policymakers are expected to start lowering rates next year, with their benchmark falling to 3% by late 2028, holding steady from there on, the CBO said. (…)
The outsize US deficits also come despite an acceleration in immigration that has helped to boost growth and revenues. The CBO sees the surge continuing through 2026. The office estimates that this dynamic lowers total deficits by some $900 billion over a decade.
CBO projections are based on current legislation. That includes an assumption that the $95 billion foreign-aid package enacted in April will now add $95 billion, plus inflation each year, in discretionary spending going forward.
It also includes an expectation for many of former President Donald Trump’s tax cuts to expire as scheduled at the end of next year. The CBO has separately estimated that extending those provisions could add $4.6 trillion more in red ink. (…)
But nobody cares … until they do …
The WSJ:
Neither Mr. Biden nor Donald Trump talks about the national debt, perhaps because they might then have to do something about it. But a moment of tax truth at least will arrive at the end of 2025 when most of the 2017 Trump individual tax cuts expire.
Mr. Biden’s plan is to raise taxes by $5 trillion or more, which would put the overall federal tax burden above 20% of GDP, which is close to the highest in peacetime. That still won’t finance Mr. Biden’s spending ambitions, which will continue to cost trillions in future years even if he loses the election.
Mr. Trump says he wants to renew and maybe expand the Trump tax cuts, and the best way to finance that is by repealing the Biden spending blowouts in the Inflation Reduction Act, student-loan write-offs and pandemic-era welfare expansions. Failing to take on that challenge means either a monumental tax increase or a debt panic down the road.
The WSJ omits Mr. Trump’s new idea: raise tariffs on imports, potentially even replacing the entire income tax system with tariffs.
IMMIGRATION ISSUES
- The foreign-born labor force has grown 11% since February 2020, and the native-born labor force has remained unchanged over the same period. (Torsten Slok)
Rather important when scare labor pushes wage rates upwards. Wells Fargo:
- Labor force growth has strengthened considerably in the past two years, due primarily to robust immigration flows and a post-pandemic rebound in the labor force participation rate (LFPR)
- Foreign-born nationals, who currently represent about 20% of the labor force, have accounted for more than one-half of its growth over the past two years.
- Looking forward, it does not seem likely that the labor force will continue to grow at the same robust rate that it has over the past two years. Although it is difficult to predict the path of immigration in coming years—yet-to-be-determined policy choices and economic conditions in the United States as well as in foreign countries will affect immigration flows—the aging of the population and marked drop in the U.S. fertility rate in recent years means that the “natural” growth rate of the workforce will slow.
Goldman Sachs attempts to predict:
- Net US immigration averaged around 1 million per year in the two decades prior to the pandemic. We estimate it surged to roughly 2.5 million last year, boosting labor force growth and GDP growth and helping to dampen wage pressures. This year, we expect net immigration of around 2 million, twice the trend rate.
- With immigration still a key focal point heading into the election and little prospect for legislative changes this year, our 2024 net immigration estimates assumed the Biden administration would tighten policy in this area.
- Next year, we expect that a second Biden administration would leave immigration policy mostly unchanged. A second Trump administration would likely tighten policy substantially further, but there is a wide distribution of potential outcomes.
- At the high end of the range, in which courts block major asylum changes and the impact of deportation is limited, net immigration might decline to around 1.5 million in 2025, still roughly double the 2017-2019 averages reported by CBO.
- At the low end of the potential range, in which a Trump White House mostly cuts off asylum claims and humanitarian parole, and implements a more substantial deportation program, net immigration would likely fall below the 2017-2019 average of 0.7 million per year and could approach zero temporarily. That said, it seems unlikely that net immigration would be negative on an annual basis even in that scenario.
China’s key plenum aims to fix decades-old tax revenue imbalance Long-touted changes to China’s tax system will focus on allowing local governments to retain more fiscal revenues
Measures that redistribute income from central authorities to municipalities, curbing an addiction to land sales laid bare by China’s property crisis, will top the agenda of a leadership gathering in July, known as the third plenum, they said. (…)
Policy advisers said the main changes are likely to revolve around how much revenue local governments retain, rather than adding or hiking taxes.
Municipalities currently get half of value-added tax revenue and 40% of personal income tax, while the central government gets most corporate income tax and all of what China calls a consumption tax, currently levied on producers and importers.
The advisers did not give figures on the future division of tax income between central and local governments.
But they said local governments may be allowed to keep most of the consumption tax – which accounts for almost a tenth of China’s total tax revenues – and more of the value-added tax – which accounts for more than a third.
Proposals also include Beijing taking over growing commitments on pensions and healthcare as the population ages.
The aim is to stop municipal debt accumulation by balancing revenues with expenditure, the advisers said.
“Local governments’ spending should be based on their fiscal capacity,” said a second adviser. “A mature society no longer needs to find special ways to build more infrastructure.” (…)
The International Monetary Fund calculates China’s tax-to-GDP ratio at 14%, versus a 23% average for the Group of Seven developed economies.
This makes social spending difficult to fund without raising taxes on capital or businesses. Taxing households more is a difficult proposition as China’s upper personal income tax band is among the world’s steepest, at 45%. (…)
Chinese media said policymakers may shift the point of charging the consumption tax to wholesalers and retailers.
This tax currently only applies to 15 types of goods, from alcohol and tobacco, to luxury cars, jewellery and yachts. Domestic demand for these items has limited impact on China’s productivity.
Goldman Sachs analysts say charging consumers shifts incentives for local officials from growing their manufacturing base to growing their consumer base. (…)
EARNINGS VS VALUATIONS
The rally in the S&P 500 Semiconductor industry has been both earnings-led and valuation-led. Its forward P/E is currently 35.5. During the previous decade, its multiple was always below 20.0 and usually around 15.0. Since early 2023, the industry’s forward earnings rose more than 100% as analysts turned more bullish on the prospects for this industry.
Earnings-led meltups should be more sustainable than valuation-led ones. The current meltup is a combination of both. Will that make it more sustainable than the meltup at the end of the 1990s? Not necessarily since the tech rally of the second half of the 1990s was also led by both rising earnings expectations and valuations. Back then, the Tech Bubble was followed by a Tech Wreck as both earnings expectations and forward P/Es dropped sharply.
That could happen again this time. However, we are counting on the stock market rally to broaden as the customers of tech companies use technology to boost their productivity. We also believe that the earnings expectations for tech are more realizable than they were in the late 1990s. That’s especially so since we aren’t expecting a recession any time soon.
Goldman Sachs also sees profit growth broadening amid “reasonable” equal-weight P/E multiples:
In Q2’24, only 3 sectors had better earnings growth than the S&P 500 ex-Energy. This is expected to rise to 4 in Q3, 6 in Q4, 5 in Q1’25 and all of 2025.
CHARGE!
From Fortune:
TDK Corporation’s new solid-state battery, with an energy density that’s 100 times greater than what now powers everything from hearing aids to smartwatches, is further proof that battery makers are on the front lines of innovation. Breakthroughs in one category often spur new developments in another, and the Japanese Apple supplier’s new all-ceramic product could spur innovation in other areas.
Batteries are the workhorse of the energy transformation. The speed of innovation reflects how much energy they can store, how quickly they charge, how much they cost to produce, their environmental impact, and how easily we can access the raw materials to make them. Where they are located also matters, of course, as the world’s biggest battery manufacturers, BYD and CATL, happen to be based in China. Both are expected to ship lithium-iron-phosphate (LFP) battery cells that charge from zero to 100% in 10 minutes this year, with CATL’s Shenxing Plus boasting it will give electric vehicles a range of more than 620 miles on a single charge.
In addition to being on the front lines of innovation, Chinese battery makers are also on the front lines of politics. Republicans in Congress have urged Biden to ban CATL imports, for example, arguing that it uses forced labor—a charge CATL denies. (CATL is working with automakers like Tesla and Ford.)