Growth misses
We got our first read on 3rd quarter GDP this week and it came in a little weaker than expectations. The US economy grew 2% (vs expectations for a 2.8% print) with growth being slightly hampered by the slowing housing market, supply chain issues (I actually saw a Halloween costume related to this, it was hilarious), and a deceleration in consumer spending during the delta wave. The government’s COVID-related benefits also came to an end in September, decreasing the government spending component of GDP.
Moral of the story: The initial expectation for 3rd quarter economic growth was much higher this summer before some of the structural issues (delta wave, broken supply chain, etc.) became evident. Some supply chain issues (like semiconductor shortages) should start easing toward the end of this year and the labor market continues to improve as jobless claims keep creeping down (last week was another pandemic low). All put together, economists are still optimistic for a slight rebound of the economy into the last quarter of the year.
We’re just paying more
Consumer spending increased 0.6% in the month of September after increasing a healthy 1% in August. A big part of it was driven by inflation driving up prices. The Fed’s preferred inflation gauge, the core PCE Index, was up 0.2% for the month, representing a 3.6% annual increase for the fourth straight month (the Fed’s target is an average of 2% so clearly we’re well out of range). The good thing is that wages are also somewhat responding in tandem as wages increased 0.8% in the month.
Moral of the story: It seems fairly obvious at this point that there is a high level of demand out there in the economy. But the supply is significantly impaired and unlikely to be resolved well into next year. Though prices of goods could decrease as a function, it’s unlikely for wages to fall aka we’ve effectively reset labor costs to a higher level.
Earnings season is here
We’re about halfway through third quarter earnings and a few themes have emerged – inflation is real and impacting costs for companies, but demand is so strong that a lot of those costs are being passed through and companies are able to maintain profits, and I’m running on nonexistent sleep and all the coffee. Some companies like Apple are reporting that supply chain issues are costing them as much as $6b (yes, billion), so the question really is about how long the issues persist and how far can companies raise prices before consumers pull the plug on demand. Results from Amazon and Apple were actually big disappointments this past week but 80% of the S&P 500 companies that have reported results so far have exceeded expectations and the market overall continues its march upward.
Moral of the story: Even though earnings growth is still strong, earnings are not exceeding expectations as much as they were last quarter. Also, earnings expectations for the upcoming quarters aren’t being revised up as much as they had been in the last few quarters. The reason this matters: investors like to value stocks based on a multiple of their earnings – so as long as earnings keep growing, a higher stock price can be warranted. On the other hand…you get the picture.