Data Divergences

The establishment survey reported May net new jobs of 272,000, way more than expected, and wages up 0.4% M-o-M and 4.1% Y-o-Y, both slightly hot. However, the household survey showed the labor force participation rate falling to 62.5%, the unemployment rate rising to 4%, and the number of jobs declining by 408,000. During turning points, the household survey tends to be superior. This report clarifies nothing and freezes the Fed.

Inflation Improves

Inflation eased slightly in April. The CPI rose 3.4% Y-o-Y, down from 3.5% in March. Similarly, core-CPI rose 3.6% Y-o-Y, the lowest rate since 4/21 and down 3.8% M-o-M. However, both the CPI and core-CPI rose 0.3% M-o-M, much too high if 2% Y-o-Y inflation is the goal. This report isn’t enough for the Fed to cut rates soon but certainly preserves the possibility of rate cuts later this year.

Withering Withdrawals

During the run up to the Housing Bust, home prices surged and the value of revolving home equity loans rose dramatically from $185 billion in 2002 to $603 billion in 2009 as households tapped into their home equity and supercharged the economy. Now, despite large home price increases, the value of revolving home equity loans has been stagnant at $250 billion/year since 2021Q3, and thus no assist to household spending.

Constricted Consumption

The April personal savings rate was just 3.6%, a level seen only in 2022 following repeated Covid stimulus and in 2005/06 in the run up to the Housing Bust. Moreover, excess Covid savings have been depleted, and the labor market is slowing. This matters because real disposable income growth, the primary driver of consumer spending and 70% of GDP, has sunk from 5.3% Y-o-Y in 6/23 to 1% in 4/24!

Superb Supply

In another sign that inflation should soften, the NY Fed’s Global Supply Chain Pressure Index declined from -0.30 in March to -0.85 in April. It’s been below zero each of the last five months and 12 of the last 13 months, which is very much how the index behaved since the late 1990s. This means global production bottlenecks continue to recede and are like how they were pre-Covid.

Stock Splits

In theory, stock splits boost the number of shares and reduce the price/share, leaving shareholders financially no better off. But reality is different. Since record keeping began, stocks that split have, on average, risen 25.4% during the first 12 months after the split versus 11.9% for other stocks. More recently, stocks that split have handily outperformed other stocks during the 1980s, 1990s, 2000s, and 2010-2013. Better management is undoubtedly why.

Insurance Increase

Despite higher premiums, reduced coverage, higher deductibles, and leaving entire states, over the last decade insurers paid more in homeowners insurance claims than they collected in premiums. Recently, this has been meaningfully exacerbated by rising reinsurance rates that insurers pay for insurance. To wit, in 2023 insurers lost money on homeowners’ coverage in 18 states, well up from eight states in 2013 and 2014 and 12 in 2017 and 2018.

Price Pressures

In 2019, the number of S&P 500 firms mentioning inflation during their earnings calls averaged 129/quarter. In 20Q1, it collapsed to 58, but then steadily rose through 22Q2 when it reached 412. Since, it’s steadily declined and in 24Q1 is likely to be 230. While that’s above the 10-year inflation-mention average of 180, it will likely go below that by year end. Inflation is a fading phenomenon.

Slow Sales

April real retail sales were flat M-o-M and Y-o-Y, extending a trend of mildly slowing sales. After jumping 15% due to Covid, retail sales remained strong through 1/23 but have weakened slightly as post-Covid services spending has, unsurprisingly, risen. Additionally, excess Covid savings are exhausted, wage growth is cooling, and the credit card boom is over. Despite slowing, retail sales remain slightly above their pre-Covid trend. The weakening is unsurprising.

Maniacal Memes

In what can only be described as insanity, meme stocks such as GameStop, AMC, Blackberry, and Beyond Meat, are once again making headlines with their sudden rapid price appreciation. Monday, GameStop rose 74%, and AMC 78%. Since 5/1/24, GameStop is up a stunning 175%. This is probably a short squeeze as meme stock market fundamentals rarely change this fast. I’m watching from a distance but simultaneously recalling the 2021 carnage.

Automobile Activity

After peaking in CY2016 at 17.5 million, sales of cars and light trucks steadily slid and by CY2019 were 17 million. Between 2020-2022, sales were dismal and peaked in CY2021 at 15 million. While sales rose to 15.5 million units in CY2023, since 4/23 sales have been flat and seasonally adjusted/annualized have averaged 15.6 million units/month, 1.5 million units, or 8%, below their 2019 level. A new normal?

Deflating Data

The Fed is calling for real GDP growth of 2.1% in 2024 and 2% in 2025. Simultaneously, the nonpartisan Congressional Budget Office estimates that potential GDP, that is the increase in the labor force plus the impact of rising productivity, will be 3.5% in both 2024 and 2025. This means there will be growing excess capacity which is deflationary and should result in higher unemployment and further slowing in inflation.

Lotsa Lock

Recent research shows that for every percentage point that mortgage market rates exceed the rate currently enjoyed by the homeowner, the probability of sale is reduced 18.1%. This led to a 57% reduction in home sales with fixed-rate mortgages in 23Q4, and a reduction of 1.33 million sales between 22Q2 and 23Q4. The supply reduction boosted home prices 5.7%, outweighing the impact of higher rates, which reduced prices by 3.3%.

Costly Cancellation

President Biden’s student debt cancellation plans will cost between $870 billion and $1.4 trillion. $620 billion has already been spent, and the latest plan will cost between $250-$750 billion more. That’s more than will be spent on universal pre-K and childcare through 2034, about equal to all projected education appropriations through 2034, and costs more than tripling the Pell Grant program. Worse, the plan raises education costs and is regressive.

Chicken Chains

The Friday File: Between 19Q1-24Q1 the market share of fast casual and quick service restaurants (QSR) that primarily sell chicken rose from 13.4% to 15.3%. Conversely, those selling primarily burgers declined from 61.3% to 60%, and the percentage specializing in sandwiches fell from 8.3% to 7.4%. Sales for Mexican-inspired chains were flat at 9.5% while sales at chains selling pizza and other foods were stable at about 7.5%.

Everest Excellence

The Friday File: On 5/12/24, Kami Rita Sherpa, Sherpa is a last name, age 54, scaled Mt. Everest for the 29th time. He has been regularly climbing Sagarmatha since 1994. Lhakpa Sherpa holds the record for the most ascents by a woman at 10. The same weekend, Kenton Cool (also a mountaineering guide) of Britain broke the record for the most Everest climes by a foreigner at 18.