Redbook Improves Slightly
Some investors have been calling for consumer spending growth to bottom in late July which means the reports that are about to come out will still be weak. S&P retail index agrees with me as it is up 9.4% in the past month. Either it is completely detached from the fundamentals or it sees green shoots.
Back to school shopping season is hugely important since it’s not certain whether kids will actually go back to school. We can expect weaker spending if schools don’t fully reopen. Good news is its timing is solid since it’s right when most are expecting the economic rebound to start.
Two catalysts are the stimulus and the decline in COVID-19 cases. This stimulus won’t be as strong as the last one, but uncertainty will wane. Cautious people probably saved extra money in July just in case nothing was passed. Number of cases needs to peak and fall for a couple weeks before restrictions go away.
In NYC there are still restrictions on eating and drinking inside. There is still weakness in flying, sports don’t have fans in the stands, and concerts aren’t happening. However, the hotspots will start to get back to normal in August. Currently, the 7 day moving average of daily new cases has plateaued.
Redbook same store sales growth in the week of July 25th fell 7.2% which beat last week’s reading of -7.5%. It’s good to see an improvement, but this reading is still terrible. We can expect the next 1-2 weeks of jobless claims to be weak before the trend improves.
It doesn’t make sense to lower benefits. More income will be lost than people will go back to work. Some people will go back to work though. Question is how many. If there’s an upside surprise on how many people go back to work in August because of lower benefits, it will help the cyclical stocks.
The chart above shows McDonald’s same store sales growth which helps us understand the recent trend in consumer spending. As you can see, U.S. same store sales growth improved from -5.1% in May to -2.3% in June. Best part of this report is that the CEO expects U.S. same store sales growth to be slightly positive in July despite the decline in sentiment and the increase in restrictions.
Consumer Confidence Falls
It’s no surprise consumer confidence fell in the July Conference Board survey. This is old news. Specifically, the index fell from 98.3 to 92.6 which missed estimates for 95.7. We’re seeing a few economic reports miss estimates even though the Citi surprise index is high.
Present situation index fell from 94.2 to 86.7 and the expectations index fell from 106.1 to 91.5. This makes perfect sense as the labor market worsened moderately while expectations fell sharply due to the spike in COVID-19 cases. Consumers look at the news and their local economy’s restrictions. They aren’t looking at the rate of change. With more masks and better cleanliness, hotspots will be under control in the next few weeks.
As you can see from the chart below, the expectations index for Texas and Florida cratered. We don’t know the exact weighting of this survey, but if it’s similar to the population, these states had big impacts on confidence. With these sharp declines, states without big spikes in cases had smaller declines in expectations.
It’s surprising that the current sentiment on the labor market actually got better considering the tough jobless claims numbers. By the way, this Thursday’s report is expected to show initial claims falling very slightly from 1.416 million to 1.388 million. Goal should be to get below 1 million by the end of the year.
August’s numbers will be interesting because of the lower benefits. In the Conference Board report, those saying jobs are “plentiful” rose from 20.5% to 21.3% and those saying jobs are “hard to get” fell from 23.3% to 20%. That means the net percentage rose from -2.8% to 1.3%. Expectations for the labor market got much worse though as those expecting more jobs fell from 38.45 to 30.6% and those expecting fewer jobs rose from 14.4% to 20.3%.
Homeownership Rate Spikes
CoreLogic home price index for May showed yearly 20 city non-seasonally adjusted growth fell from 3.9% to 3.7% which missed estimates for 4.2%. With the very strong housing market in June and July, we can be fairly confident price growth rose even though many people are having a tough time paying their mortgage.
It’s like a combination of the housing bubble in 2005 and the housing bust in 2008. Home price growth was pushed aside in this report because of the huge jump in the homeownership rate.
It’s not surprising that the rate rose in Q2, but few were expecting by far the biggest increase ever. It rose 2.6% to 67.9% as the red dot on the right of the chart above shows. This one quarter had a larger increase than the entire recovery from Q2 2016 to Q1 2020.
Now the housing market has fully recovered the declines since the 2007-2009 recession. It started last cycle at 67.6%. Record high is 69.2%. When the NY Fed’s Q2 consumer debt report comes out, it will show a large increase in housing debt. Good news is almost none of the mortgages this year had a variable rate. These record low rates are locked in unlike during the housing bubble in the early 2000s.
We’re seeing economic reports disagree with each other as the housing market is one fire, while consumer confidence is falling. Expectations for the labor market fell sharply. I think the situation will turn around as new COVID-19 cases start falling.
We’re already seen a peak in new cases, but the number has plateaued instead of falling. It’s surprising to see McDonald’s so positive on July results. Remember, with the month basically over, they already have most of the numbers. That’s not the CEO’s opinion. They will have positive comp sales growth in July when they report next quarter.
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