July 5, 2024
Belated happy Independence Day to all!
Not a lot of “boom” in Laborland this month per Washington’s BLS. June jobs tallied 206,000 as May’s jump in payrolls was revised significantly lower to 218,000-- the initial reading was 272,000. Wages ticked up by 0.3% MoM and the official unemployment rate rose to 4.1% in the final month of Q2 (U6 remains at 7.4%). June saw an increase in government hiring (70,000) while the private sector made up the balance at 136,000. It is worth mentioning that American manufacturers shed 8,000 jobs last month corroborating some softness that we have been monitoring in the PMI’s (more on that below). In our view this is a very “steady” report and taken in concert with other data likely doesn’t move the needle in favor of a summer rate cut, though the case for cuts is building. Of course, there is always the possibility (however remote) that the Powell Fed has some fireworks in store for its July session—please keep in mind easing is already underway north of the border and across the pond.
The US economy lost a significant amount of steam at the close of Q2. Let’s begin with a couple of venerable measures of domestic economic activity courtesy of the Institute of Supply Management (ISM). ISM’s stateside manufacturing and services indices both contracted in June (US Manufacturing PMI 48.5, US Non-Manufacturing PMI 48.8). Though pricing in general is holding up remarkably well in our economy, both new orders and employment softened notably last month. In fact, the price index is the only PMI component within ISM’s dataset that continues to expand (readings >50 indicate expansion, reading <50 indicate contraction). Overall, this is indicative of a slowing economy; we expect this period of “cooling” to continue through the summer and into the fall. Last month we mentioned that many macro data points are returning to pre-pandemic norms-- June was more of the same. While this is undoubtedly a positive sign for the Federal Reserve and other central banks around the world, we’re hesitant to call it a trend without more downward pressure on prices.
TWP has been keenly interested in consumer and business behavior since the beginning of this cycle. Though the labor market is normalizing and unemployment hovering around 4%, the American consumer is decidedly more downbeat today than before the onslaught of Covid-19. Surveys of expectations, sentiment, and current conditions, a la the University of Michigan, suggest an environment at the household level that is both fraught and uncertain—sure, incomes have increased markedly, BUT they have failed to keep pace with the price of essentials (food, shelter, healthcare, etc…). Moreover, inflation expectations among US households over the next 12 months and beyond have settled at 3.0%, which is well above the Fed’s 2% target. Inflation entrenchment within the American psyche? Perhaps and perhaps not-- this is not a 70’s or 80’s style inflationary backdrop. To be sure, we saw some terrific CPI and PCE numbers last month, which calmed markets after a string of hotter than expected inflation readings in Q1, BUT cash inflows and outflows for the average American household are still a difficult balancing act. Meanwhile, businesses have curbed capital spending in an effort to return more capital to shareholders. It’s hard to blame them in light of changing economic dynamics. Finding and maintaining the right balance is essential for consumers and businesses alike. We are still very much in an environment that prioritizes and rewards profit, operating efficiencies, free cash flow, and capital discipline.
It's that time again as we ready our pencils (and erasers) for another round of corporate earnings. Some of you might recall our initial estimate for 2024 SPX earnings-- we were in the camp of $242/ share to start the year. After a rather strong Q1, there were some profitability questions in Q2, but we continue to see earnings growth of ~10% in ’24. This translates to $245/ share at the operating level. Again, these are record levels of profitability on a per share basis! Let the good times roll in corporate America! Of course, we will also be paying A LOT of attention to Mr. Powell at the July FOMC meeting. Will he decide to kick off the US easing cycle then or will he wait until the fall? Stay tuned…
News Release: Bureau of Labor Statistics (The Employment Situation- June 2024)