The S&P 500 hit an all-time high on Thursday (January 25) on the heels of an unexpectedly robust +3.3% annualized growth rate of real GDP for Q4. Market expectations had been for a +2.0% print, and even the normally optimistic Atlanta Fed GDP Now model was only calling for +2.3%

The chart shows the sources of GDP growth. Note how consumption and government expenditures were large contributors to real GDP growth in both Q3 and Q4. As we’ve noted in past blogs, the “excess savings” (from past government largesse) looks like it has been exhausted as seen by the low level of Q4 savings (under 4%, half of “normal”). In addition, credit card balances are at an all-time high, and delinquencies (both credit card and auto) are high and rising.

Some economists, including David Rosenberg, have indicated that the seasonal adjustment process led to an upward bias in Q4’s GDP growth rate. Last month was the warmest December on record. Seasonal factors try to normalize data for such things as holiday shopping, but they don’t deal with weather related issues. As a result, if warm weather allowed consumers to shop more than they ordinarily would have, the seasonal factor likely upwardly biased the seasonally adjusted data.

Corporate Health

A closer look at the popular stock indexes reveals that, so far in 2024, tech is the only sector making new highs. Perhaps the markets like the cost-cutting there (-23,670 layoffs at 85 tech companies YTD through January 25) leading to enhanced profit margins, but rising layoffs are not a sign of a vibrant economy, nor do they give one much confidence in future profitability. It appears that the emerging issue for corporations will be just that, top and bottom lines.

Nevertheless, the current Wall Street mantra is that we have entered a “Goldilocks” economy (not too hot, not too cold – just right!). However, it is our view that this economy hasn’t magically glided to a “soft landing,” but is on a downtrend as the economy transitions from growth to Recession. The downtrend began when growth was positive, and it must pass through “neutral,” (i.e., the “soft landing” spot on the downtrend). But downtrends just don’t magically stop at that “neutral” point.

Recent corporate reports have been anything but upbeat:

· Intel
INTC
missed on both top and bottom lines;

· Levi Strauss also missed on both its top and bottom lines and has announced a -15% workforce reduction program;

· Lowe’s announced job cuts;

· Salesforce
CRM
revealed another -700 job reduction initiative after laying off -8000 last year;

· Southwest and Alaska Airlines
ALK
warned of lower domestic tourism; (on the other hand, American Airlines
AAL
said international bookings are up);

· As noted above, Layoffs.fyi counted -23,670 layoffs at 85 tech companies YTD:

  • SAP: -8000
  • Microsoft
    MSFT
    : -1900
  • Brex: -20% of staff
  • eBay: -1000 (-9% of staff)
  • Google: “several hundred”
  • Amazon
    AMZN
    : “hundreds”
  • Unity: -25% of staff
  • Discord: -17% of staff

· Challenger, Gray and Christmas noted that job cuts in 2023 were 98% higher than those of 2022.

Employment

In the face of these rising layoffs, Jeffrey Gundlach, the founder of Doubleline Capital, also known as the “Bond King,” in an interview on Fox News on Thursday (January 25), questioned the reliability of the unemployment rate (U3). “If 88% of the states are reporting rising unemployment,” he said, “how can it be that national unemployment remains stable at a very, very low level?”

We agree with that sentiment. We’ve also seen anomalies in Initial Unemployment Claims. In December, they fell to +189K, but rose back to +214K in January. It was similar for Continuing Claims. With all of the job cut announcements, just in the tech sector, and with business bankruptcies up 33% in 2023, nearly triple those of 2022, we think we will soon be seeing a rise in the official unemployment rates (both U3 and U6).

In addition, as we’ve noted in past blogs, there are significant numbers of contradictory data points in the official employment numbers. These include the difference in the December Payroll Report between the headline Non-Farm Payrolls +216K and the -683K that showed up in the Household Survey (including the loss of -1.5 million full-time jobs). It has also been noted by economist Rosenberg that nearly half of the 2.7 million jobs created in 2023 were generated by the Birth/Death model (not counted, added by a long-term trend model) despite the rise in business bankruptcies at a pace three times those of new business formations.

Inflation

By now, most economists are convinced that inflation is under control and that the unfolding data in 2024 will continue to show it moving lower.

The chart above shows CPI for Durable Goods, Nondurable Goods, and Services. Note that Durable Goods are actually deflating (negative price growth) while Nondurable prices are flirting with the zero line. The price of services remains the issue. We’ve written extensively about the “rents” issue in the CPI calculations, a significant “services” issue. By mid-year, those lagged rents will have turned negative. And we posit that rents will continue to fall for two reasons: 1) Apartment vacancy rates have risen back to pre-pandemic levels (left side of the chart below) and look to continue to rise because 2) multi-family units under construction are at an all-time high (right side of chart).

The theory of Demand/Supply from Econ 101 tells us that when the increase in supply outpaces the rise in demand, prices, in this case rents, fall.

The Fed

The PCE Index (Personal Consumption Expenditures), the Fed’s favorite inflation gauge, showed up as +0.2% month/month in December. The same +0.2% showed up in the PCE Core
CORE
Index (ex-food, energy). On a year/year basis, apparently what the Fed looks at, the headline number was +2.6% and the Core was +2.9%. We are thankfully at “2” handles for these measures. Given the lags in the transmission of monetary policy to the economy, and given that their preferred index is now approaching their 2% target, it appears that rate cuts are in order. Unfortunately, the robust GDP print will be an issue for them in deciding when to initiate the first rate cut. At this week’s Fed meetings (January 30, 31), we are likely to see some “push back” for the first rate cut in March. As of Friday (January 26), the market odds for a March rate cut had fallen to 48%, while May now stands at 90% and June at 99%. We think a March cut is highly unlikely.

China

The world’s second largest economy appears to have fallen into a deep Recession. The real estate debacle there continues. Now we see depressed confidence both by businesses and consumers, deflation, and a pullback in foreign investment. The chart shows a spike in the number of strikes in China, an indicator of low consumer sentiment. As we’ve indicated in past blogs, because China is a manufacturing goliath, they will be exporting their deflation to the rest of the world – yet another nail in inflation’s coffin.

Manufacturing

The table shows the results of five Regional Fed Activity Indexes. Each survey is a measure of activity within their own region except for Chicago, which is a national index containing some 85 variables. Note that the latest indexes are all negative with large downward jumps in Philly, KC, and especially NY, which shows that deterioration accelerated in January. Note also that the Chicago Fed’s National Index showed a rapid month/month deterioration.

Final Thoughts

  • Q4 appears to be the “Last Hurrah” for robust growth as consumers appear tapped out with credit card debt at an all-time high and delinquencies rapidly rising.
  • While traders have placed equity markets at all-time highs, their constituent companies are singing from a different hymnal, one whose theme is a struggle on top and bottom lines.
  • Layoffs, especially in the tech (growth) sector, which has been leading the equity indexes higher, should be a wake-up call to investors. Instead, layoffs have been interpreted strictly as “cost savings,” and not as a warning sign of slowing revenues.
  • If the Fed Regional Bank surveys are to be believed, manufacturing is already in Recession.
  • We see contradictions in the employment data, especially between the Non-Farm Payroll report (NFP) and the sister Household Survey. Economist Rosenberg has noted that through November, 10 of 11 original NFP numbers were revised down, and that hours worked/week are now at levels they were in April ’20 (pandemic) and October ’07 (Great Recession).
  • The inflation war has already been won. Because they look mainly at year/year data, the Fed isn’t yet convinced. When they do see the light, they will have to ease policy much more rapidly than if they started now.
  • China is in a deep Recession and they are exporting deflation there to the rest of the world. This isn’t a short-term phenomenon.
  • Q4, we think, will turn out to be the last “robust” growth quarter for a while. We expect downward revisions to the GDP data just released. Markets generally pay little attention to those revisions – that is, until they do.

(Joshua Barone and Eugene Hoover contributed to this blog)



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