Consumer Spending Strengthens as Year Winds Down
Personal-consumption expenditures, or household spending, rose a seasonally adjusted 0.4% in November from October, the Commerce Department reported Friday. The increase came alongside a rise in personal income, which was up 0.5%. Spending in November was up 2.4% from a year earlier. (…)
Households spent 0.5% more on goods last month, helping drive the overall rise in spending. Spending on vehicles contributed strongly to the 1% increase in spending on long-lasting goods, according to the Commerce Department.
Spending on services in November rose 0.4% from the prior month, with health-care spending contributing most to the increase, the Commerce Department said.
Household income rose strongly in November, following a 0.1% increase in October, with wages and salaries up at a seasonally adjusted 0.4% rate. (…)
The price index for personal consumption expenditures, the Federal Reserve’s preferred gauge for inflation, rose 1.5% in November from the same month last year, versus a 1.4% year-over-year rise in October. The core PCE index—a closely watched measure because it excludes often volatile food and energy prices—advanced 1.6% in November from the same month in 2018. The Fed targets inflation at 2%.
Wage growth is accelerating, inflation, total and core, is decelerating and spending is rising around 2.5% annualized allowing for some increased savings.
(Haver Analytics)Americans spent merrily between April and July with real expenditures on Goods rising 0.5% monthly on average, more than 6% annualized. Spending slowed sharply during the following 3 months but November’s rebound could save the important holidays season, even if real spending growth on Goods is only averaging 0.2% monthly, or 2.5% annualized, roughly the same as the steady Services.
But the sequential trend is nonetheless slow, in spite of good employment and wage data. Much like in 2015-16, Americans are not spending all their labor income growth…
Another way to illustrate Americans’ recent propensity to save (or reduce debt) is the large gap between the growth in spending and growth in savings. Since mid-2017, growth in savings averaged 13%, nearly 3 time that of expenditures (4.6%).
The last 30 years in $:
U.S. GDP Growth Is Unchanged but Corporate Profits Are Weakened
Estimated real growth in the economy during Q3’19 was unrevised in the third estimate at 2.1% (2.1% y/y) and remained better than the advance estimate of 1.9%. The figure was as expected in the Action Economics Forecast Survey. Growth in consumer spending, business investment and government spending was revised up but residential investment was lowered.
Corporate profits after tax fell 1.2% (-1.1% y/y, revised from -0.6%, following a 3.3% Q2 increase. It was the third decline in the last four quarters. Before-tax profits with CCA and IVA eased 0.2% (-1.2% y/y). Domestic nonfinancial profits fell 0.7% (-2.1% y/y), revised from +0.7%, while financial sector earnings fell a lessened 1.1% (+5.1% y/y). Foreign sector profits increased a little-changed 1.0% (6.3% y/y).
Domestic final sales growth was revised up to 2.2% (2.2% y/y) from 2.0%, after a 3.6% Q2 gain. Growth in personal spending was raised to 3.1% (2.6% y/y) and remained roughly steady with growth during the last three years. Spending on services improved 2.2% (1.8% y/y), revised from 1.7%, following a 2.8% Q2 rise. Durable goods spending growth was little changed at 8.1% (5.5% y/y) after strengthening 13.0% in the second quarter. Growth in purchases of nondurable goods was revised down slightly to 3.9% (3.5% y/y) after a 6.5% jump.
The decline in business fixed investment was lessened to 2.3% (+1.4% y/y), from -2.7%. Spending on structures fell 9.9% (-6.7% y/y), revised from -12.0% (-7.3% y/y) which followed an 11.1% drop. Equipment investment declined an unrevised 3.8% (+1.0% y/y), the first material quarterly decline in three years. It was prompted by a 6.4% weakening (+1.8% y/y) in information processing equipment investment. Intellectual property product investment rose 4.6% (7.6% y/y) as software spending rose by a raised 42.8% (10.2% y/y).
Growth in residential investment was lessened to 4.6% (-1.1% y/y) from 5.1% but remained the first increase since Q4’17.
Government spending growth was raised slightly to 1.7% (2.2% y/y) and remained less than half the prior quarter’s increase. Federal government spending rose 3.3% (3.7% y/y) following an 8.3% improvement. Nondefense outlays strengthened 5.0% (2.4% y/y) last quarter after a 16.1% jump. Defense spending rose 2.2% (4.6% y/y), the weakest increase since Q1’18. Spending by state & local governments improved 0.7% (1.4% y/y) following a 2.7% rise.
Total pretax corporate profits (blue line) are essentially unchanged since 2012 and are 5% lower than their Q3’14 peak. Profits of nonfinancial corporations have been on a steady decline in the last 5 years and are now 24.6% lower than in Q3’14 and 14% below their Q3’06 level!
Now compare the performances of the Nasdaq 100, the S&P 500 and the Value Line indices. Next time you get into a conversation about income and wealth inequality, you will likely surprise your friends revealing the fate of ordinary biz people…
EARNINGS WATCH
Through Dec. 20, 499 companies in the S&P 500 Index have reported earnings for Q3 2019. Of these companies, 75.2% reported earnings above analyst expectations and 18.0% reported earnings below analyst expectations. In a typical quarter (since 1994), 65% of companies beat estimates and 20% miss estimates. Over the past four quarters, 74% of companies beat the estimates and 18% missed estimates.
In aggregate, companies are reporting earnings that are 4.5% above estimates, which compares to a long-term (since 1994) average surprise factor of 3.3% and the average surprise factor over the prior four quarters of 5.3%.
Of these companies, 57.7% reported revenue above analyst expectations and 42.3% reported revenue below analyst expectations. In a typical quarter (since 2002), 60% of companies beat estimates and 40% miss estimates. Over the past four quarters, 59% of companies beat the estimates and 41% missed estimates.
In aggregate, companies are reporting revenue that are 0.9% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.5% and the average surprise factor over the prior four quarters of 0.9%.
The estimated earnings growth rate for the S&P 500 for 19Q3 is -0.4%. If the energy sector is excluded, the growth rate improves to 2.2%. The estimated revenue growth rate for the S&P 500 for 19Q3 is 3.8%. If the energy sector is excluded, the growth rate improves to 5.2%.
The estimated earnings growth rate for the S&P 500 for 19Q4 is -0.2% [from +4.1% on Oct. 1]. If the energy sector is excluded, the growth rate improves to 2%.
Analysts revisions are about 50/50 on large caps…but not so on smaller caps.
S&P 500 companies preannouncement are somewhat better than at the same time during Q3’19 but worse than during Q4’18.
Trailing EPS are $163.87, down 0.3% from their level after Q2 and up 2.1% YoY.
At 3207, the S&P 500 Index is selling at 21.9x on the Rule of 20 scale while the conventional P/E is 19.6x trailing EPS.
FYI:
Since 1927, at various Rule of 20 P/E ranges, the subsequent 6-month returns gradually decline from +6.5% between 14 and 17.9 to –3.7% above 25.
The 1927-2016 period includes 3 years between 1962 and 1965 when the Rule of 20 hovered closely around the 20 level and equities rose continuously as the earnings and inflation trends were very favourable. These 3 years account for 16% of the data between 19.0 and 20.9 and therefore are somewhat boosting the results in this particular range.
I ran the data since 1966 to exclude the 1962-65 period:
Since nothing is perfect in this world, the 1966-2016 period somewhat overweighs the extraordinary 1998-2002 bubble years, which also distorts the data particularly above 22.
Nonetheless, the record is pretty compelling and useful, even more so when compared with that of a straight P/E strategy:
The Rule of 20 is particularly useful on risk/reward analysis. The following charts provide the probability of losing money over 6 and 12 months at select Rule of 20 P/E ranges during both periods reviewed here (the same caveats mentioned earlier apply):
Investing is not a forecasting game, rather a game of probabilities and risk management. These tables allow us to better appreciate the risk we are each willing to take at any point in time in relation to the potential reward and our own risk tolerance. To illustrate, the current reading is 21.9 on the Rule of 20. History tells us that we have a 40% probability of losing money over the next 6 and 12 months with a potential return of between 0% and 1% (on average). So, unless the earnings and/or inflation environment change for the better, the current risk/reward profile of U.S. equities is not favourable to investors.
One can say that there remains a 60% probability of making money. True, but with a meagre 0-1% historical average return (the median is 3.3%). How lucky do you feel? How unlucky can you afford to be?
This ain’t an easy straightforward game. You must decide whether you want to play it rationally … or simply play and hope for the best which most talking heads and investment advisors “professionally†recommend. Remember that the dealer has a vested interest in keeping you at the table.
FYI:
TECHNICALS WATCH
Lowry’s Research, which has been spot on all year long, says “evidence of internal
market weakness continues to recede†and that “robust trends in the balance of
Supply and Demand, market breadth, stock
participation, and price reflect the still-growing
strength of a healthy bull market, not the
spreading weakness of a fading uptrend.â€
Nord Stream 2 to press on with Europe gas pipe, despite U.S. sanctions The group behind Nord Stream 2 said on Saturday it aimed to complete a pipeline to boost Russian gas supplies to Europe as soon as possible, after U.S. sanctions prompted a major contractor to suspend pipe-laying activities.
U.S. President Donald Trump signed a bill on Friday that included legislation imposing sanctions on firms laying pipe for Nord Stream 2, which seeks to double gas capacity along the northern Nord Stream pipeline route to Germany.
Washington, which has been seeking to sell more of its own liquefied natural gas (LNG) to European states, has said Nord Stream 2 will make Europe too reliant on Russian supplies.
Gazprom, Russia’s state-controlled gas giant and a major backer of Nord Stream 2, already supplies more than a third of Europe’s gas needs. (…)
German Finance Minister Olaf Scholz said Berlin “firmly rejects†U.S. sanctions but would not retaliate. (…)