Uh oh
Business activity in the US contracted for the first time in two years during the month of July as a big slowdown in our services sectors outweighed the anemic growth we’re still seeing in the manufacturing side of the economy. As measured by the S&P US Composite PMI Output Index, business activity in the services sector fell to 47 compared to the expectations for the index to come in at 52.6 (anything below a 50 here indicates a contractionary environment, while anything above a 50 would indicate growth). This pessimism was matched by the Philly Fed’s regional activity index, which fell deeper into contractionary territory.
Moral of the story: If you exclude the months of total lockdown during COVID, economic output is falling at a rate that we haven’t seen since the global financial crisis in 2009. This is just one in a string of data points we’ve been seeing surprising us to the downside and indicating we’re staring down the barrel at a recession.
Early signs
Weekly unemployment claims have increased slightly for two weeks in a row now, coming in at 251k for the last week, which is the highest level we’ve seen since last November. This reading came in 11k higher than expected. More importantly, continuing claims, which is a longer-term reading of people who have been claiming unemployment for a while, increased last week as well.
Moral of the story: Strong employment means that consumers will, although begrudgingly at this level of inflation, still continue spending money. As soon as we start getting worried about the safety of our jobs, we tighten our purse strings. Unemployment claims about 250k on a weekly basis would be the indication of slack coming into the labor market, and that’s what I’ve been watching for. This was the first week of that actually happening – let’s see where this takes us in the next few weeks.
Earnings so far
Stocks have taken quite the beating this year as we’ve repriced growth in the context of a slowing economy. Even after the declines we saw in the first half of the year, we’ve been waiting for the other shoe to drop in terms of lower earnings expectations from companies as we go through this earnings season. We’re two weeks into earnings season at this point and we’ve heard from just over 20% of the S&P 500 companies – overall the growth is the slowest we’ve seen since the end of 2020. Even though we’re still seeing positive earnings growth, a bit part of it is driven by the energy sector putting up over 200% growth while five out of the eleven sectors are actually already seeing negative earnings growth driven by expense pressures as revenues are actually positive for all eleven sectors so far.
Moral of the story: Despite the slowing growth, earnings so far haven’t actually been as bad as feared, with 68% of companies reporting earnings ahead of expectations. We’re going to have a busy two weeks of earnings coming up but it’s likely going to be more of the same – indications of a weakening economy and expense pressures driving down profit expectations. Meanwhile, we’re also trying to figure out the impacts of things happening in Europe – the European Central Bank raising interest rates for the first time in 11 years to combat inflation, the Italian Prime Minister wanting to resign, the WHO declaring a global health emergency because of the monkeypox outbreak, the energy crisis in the context of a global heat wave, the list goes on and on. Looking for a break from the seemingly never-ending chaos, lmk if you find it somewhere please and thank you.