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July Consumer Spending: Expectedly Light

Total Income - Savings = Capacity for Consumption

 

The simplicity of the above identity belies the gravity of the economic impact it holds for a domestic economy still beholden to consumption for 70% of GDP.  

 

Today’s preliminary estimates from the BEA showed Personal Income and Spending both grew 0.1% MoM in July while the Saving Rate held at 4.4%.  

 

On the income side, both personal and disposable income growth decelerated MoM but accelerated modestly on a YoY basis with Government sourced income serving as a discrete drag on DPI.  

 

On the spending side, spending growth on Non-durables accelerated on both a MoM and YoY basis while decelerating for both Services and Durables on that same basis. (see table below for a detailed breakdown).

 

We weren’t expecting upside in either metric and wouldn’t view today’s numbers as surprising nor necessarily negative. 

 

We’ve highlighted that upside in income growth, and consumer spending growth by extension, in 3Q13 would be constrained (i.e. positive, but hard to model any material incremental acceleration) primarily by negative government salary and wage growth driven by the combination of ongoing job loss at the federal level and the implementation of furloughs for some 700K+ employees which began in July. 

 

In its release of the personal income data, the BEA breaks salary & wage data down into private & government components.  The government figure is an aggregate number (Federal + State + Local) that doesn’t parse the federal component separately – complicating getting a clean read on sequestrations impacts on income in isolation.  On balance, however, growth in aggregate government sourced income is tracking in line with expectations. 

 

Previously (Consumption Check - Is Good, Good Enough?) we estimated aggregate government salary and wage income would decline 1.0% YoY in 3Q13.  The first, preliminary data point for 3Q13 shows income from government declining -54bps MoM and -41bps YoY  – accelerating -40bps sequentially from -0.0% YoY growth estimated in June.  The math underneath our baseline estimate, which we reprise below, is fairly straightforward: 

 

There are currently 2.75M federal employees, which represents 2.0% of the NFP workforce.  A continuation of current trends in Federal government employment growth alongside a 20% paycut for ~27% of the Federal workforce equates to a 7.2% decline in aggregate pre-tax income YoY.   Stated different, the collective impact of the furloughs and employment growth at the federal level should equate to a ~7% decline in income for 2% of the total workforce as we move through 3Q.

 

State & Local government employment growth went positive in May for the first time in 5 years.  Continued, positive job growth at the state/local level could serve as an offset to accelerating declines in federal employment and income growth.  Collectively, Federal, State, & Local government employment currently represents 16.1% of total payrolls.   Layering on an assumption of modest, but accelerating state & local gov’t employment growth to the furlough and employment related pressure at the Federal level, the net impact is ~1.2% negative aggregate income growth for 16% of the employment base.   

 

In short, negative income growth for 16% of the workforce will serve to constrain the potential for acceleration in personal disposable income growth, and aggregate consumption growth by extension, in 3Q13.

 

To put today’s data in slightly broader context:  The labor market data has been positive as the trajectory in the Initial Jobless claims data has been excellent and BLS reported employment gains have been moderate-to-good.  

 

Hours worked has been largely flat, nominal and real wage growth in the private sector has been muted, federal government employment growth remains in retreat (offset by state & local employment growth which has now gone positive after 5 years of negative growth) and fiscal policy will remain a discrete drag over the balance of the fiscal year.    

 

On average, the domestic macro data remains good on an absolute basis and is still better than good relative to other sovereigns – which keeps the “is good, good enough?”  question a relevant one as it relates to domestic equity exposure.

 

Alongside decent economic data and the still nascent phase shift in capital flows to equities (US equities in particular), will the market continue to look past middling consumer spending growth over the next few months with an eye towards a diminishing fiscal drag and easy compares as we annualize the sequestration and the tax law changes in early 2014?  At present, we’re still leaning towards yes. 

 

Domestic #GrowthAccelerating out of the 4Q12 trough has played out thus far in 2013 and, while we still like the intermediate term outlook for U.S. growth, the arb vs. consensus growth expectations isn’t overly asymmetric here and growth in consumption faces some constraints in the immediate term.   

 

From an investment perspective, we still like domestic, pro-growth style factor exposure, but we’re not expecting much upside in the reported consumer income/spending data in the very near term. 

 

July Consumer Spending: Expectedly Light - Income   Spending july

 

 

Christian B. Drake

Senior Analyst 


[PODCAST] KEITH TALKS MARKETS

Hedgeye Risk Management CEO Keith McCullough weighs in with his latest thoughts on the markets and why the US Dollar looms large in his notebook. 

 


Morning Reads on Our Radar Screen

Takeaway: A quick look at some stories on our radar screen.

Keith McCullough – CEO

Dollar hits three-week high (via Reuters)

U.K. Mortgage Approvals Rise to Highest Since March 2008 (via Bloomberg)

Japan seeks biggest defense budget rise in 22 years (via Reuters)

Age-Related Forgetfulness Tied to Diminished Brain Protein (via Bloomberg)

 

Morning Reads on Our Radar Screen - usd1

 

Todd Jordan – Gaming

Naming and shaming: Macau website targets deadbeat gamblers (via Reuters)

  

Jonathan Casteleyn – Financials

Treasuries Head for Fourth Monthly Loss Amid Fed Taper Prospects (JC note: The only way to stop the continued losses in the Treasury market is to close the market for Labor Day … via Bloomberg)

 

Josh Steiner – Financials

Bank of America lays off 1,000 in Beachwood; bank closes 3 mortgage offices in Ohio (via Cleveland.com)

New York to Seattle Buyers Tap Brakes After Rates Rise (via Bloomberg)

 

Howard Penney – Restaurants

Potbelly files for $75 million IPO (via NRN)

Chipotle Mexican Grill names Kimbal Musk to board (via Sacramento Bee)

Taylor Farms, Big Food Supplier, Grapples With Frequent Recalls (via NYT)


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

LONG WEEKEND READING MATERIAL: 65 CHARTS TO HELP YOU OWN THE DEBATE ON EMERGING MARKETS

On Wednesday, September 4th at 11:30am EDT, please join the Hedgeye Macro Team for a ~15min conference call titled “Paddling Upstream?: Navigating #EmergingOutflows”. On the call, Senior Analyst Darius Dale will host a live Q&A session regarding recent developments in EM financial markets and our outlook for those asset classes and the economies that underpin them.

 

THESIS:


  • We think a protracted tightening of global credit conditions driven by sustained USD appreciation and a back-up in US interest rates will weigh on growth in EM fixed investment via an inflection(s) in portfolio and FDI flows. That same tightening will also weigh on growth in EM consumption via an inflection in purchasing power as overvalued EM currencies continue to mean revert lower.
  • Moreover, we think global asset allocators in developed markets are simply running out of places to direct marginal investment flows and growth assets priced in a strengthening USD are one of the few places that remain attractive on a go-forward basis. The resurgence of European capital markets and a resumption of JPY-induced Japanese equity reflation also supports a continuation of the DM vs. EM bifurcation that we have seen accelerate in 2013. Thus, our #EmergingOutflows thesis should continue to play out in spades.
  • Lastly, we think the impact on China’s secular economic slowdown will weigh heavily upon EM economic growth, as China’s credit-fueled fixed assets investment bubble has been a primary driver of marginal demand for many/most of the larger emerging market economies’ exports. In particular, the policy-induced unwind of said bubble should sustainably slow export and FDI growth across key commodity-producing countries.

 

CLICK HERE to download today’s 80-slide presentation; we look forward to fielding any follow-up questions you might have on next week’s call.

 

 

OUR PREVIOUS DEEP DIVES ON THIS TOPIC:  


  • CONFERENCE CALL & PRESENTATION: Q2 2013 MACRO THEMES (4/16): #EmergingOutflows: Consistent with our call for continued U.S. dollar strength and commodity deflation, we think the very early innings of the next round of emerging market crises is upon us. Sustained USD appreciation exposes EMEs to a variety of economic risks that asset allocators have not had to appropriately discount for over a decade.
  • CONFERENCE CALL & PRESENTATION: EMERGING MARKET CRISES: INDENTIFYING, CONTEXTUALIZING AND NAVIGATING KEY RISKS IN THE NEXT CYCLE (4/23): We currently see a pervasive level of risk across the emerging market space at the country level and have quantified which countries are most vulnerable. As such, we find it prudent for investors to reduce their allocations to emerging market equity and currency risk in favor of US equity and US dollar exposure. #StrongDollar and commodity price deflation have been and should continue to be key catalysts for EM underperformance.
  • EXPERT CONFERENCE CALL & PRESENTATION: WILL CHINA BREAK? (4/29): We co-hosted a conference call with our Industrials Team, led by Managing Director Jay Van Sciver, featuring Carl Walter, co-author of Red Capitalism: The Fragile Financial Foundations of China's Extraordinary Rise (2012). The Party’s use of state owned banks to drive economic growth through fixed asset investment has left the financial system loaded with bad assets. The bad assets mirror bad investments in the real economy. They also can limit the ability of Chinese banks to make new loans.
  • CONFERENCE CALL & PRESENTATION: ARE YOU SHORT CHINA [AND OTHER EMERGING MARKETS] YET? (6/12): We think the outlook for Chinese credit growth is structurally impaired. Moreover, we anticipate that growth in non-performing loans will accelerate sustainably over the long term. Lastly, we believe that net interest margins across the Chinese banking industry face immense regulatory headwinds that may ultimately have dire consequences for China’s fixed assets investment bubble.
  • CONFERENCE CALL & PRESENTATION: Q2 2013 MACRO THEMES (7/15): #AsianContagion: China sneezes and the rest of Asia catches the flu. #RisingRates and #StrongDollar continue to perpetuate #EmergingOutflows across the developing Asia region while a likely resurgence of positive sentiment surrounding the Abenomics agenda and continued yen weakness should help Japanese equities continue to outperform the region.

 

DIAL-IN DETAILS: 

 

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 125514#
  • Materials: CLICK HERE

  

CONTACT 

For questions regarding this call or to schedule a 1x1 discussion with Darius directly, please email .   

 

Enjoy the long weekend with your respective families. Best regards,

 

The Hedgeye Macro Team


STRIP: TOUGH COMPS IN JULY

Tough comps suggest red ink for the Strip in July

 

 

Based on slightly lower airport traffic and taxi trips YoY, we estimate Strip gaming revenues may have declined 8-12% YoY, assuming normal hold for slots and tables.  Last July, slot hold was 7.8%, slightly higher than normal due to an accounting adjustment related to the calendar.  July 2012 also contained one extra Sunday.  Baccarat comps will be particularly difficult as July 2012 baccarat volumes rose 29% YoY on a high hold of 16.1%.  

 

We remain optimistic that normalized growth will resume.  Remember that rolling 12-month gaming revenues and slot volumes still have ample room to grow - 14% and 10% below the 2006-07 peak, respectively.  With housing continuing to improve, the macro looks better for Las Vegas. 

 

While gaming struggled in July, we're seeing good growth in room rates.  Vegas should outperform the regional gaming markets for the rest of the year with housing potentially providing an extra boost to the locals market.

  

Here are our projections for July on the Las Vegas Strip:

 

STRIP:  TOUGH COMPS IN JULY - STRIP123


Watch That Strong Dollar

Client Talking Points

USD

What's going on with the US dollar is of paramount importance. This could be the 1st, 2nd and 3rd most important thing in my notebook. It is up for the thirdconsecutive week now. It's holding its higher-lows vs June and knocking the Yen solidly back into a Bearish Formation. Here's the Hedgeye formula: #StrongDollar + #RatesRising = good things for the TREND that is growth stocks rising in the USA.

COPPER

You visit Dr. Copper lately? Because the Doctor no likey the #StrongDollar bounce. Copper is down -3.3% for the week after failing, big time at Hedgeye's TREND resistance of $3.39/lb. It banged the top of of the range and failed miserably.

KOSPI

This has to be the surprise gainer of the week. It broke out from our Hedgeye TREND resistance line of 1890 yesterday and had a full +1% of follow through again last night to 1926. South Korean economic data supported that move this week too. Look, Asia needed a bone. It's a potentially a bullish signal for tech and industrials. 

Asset Allocation

CASH 28% US EQUITIES 26%
INTL EQUITIES 24% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 22%

Top Long Ideas

Company Ticker Sector Duration
WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

MPEL

Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016.

HCA

Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road.

Three for the Road

TWEET OF THE DAY

When whining about Syria ends, what's the next End of the World #EOW bear call? @KeithMcCullough

QUOTE OF THE DAY

“Everybody has a plan until they get punched in the face.” - Mike Tyson

STAT OF THE DAY

Despite the recent rip in oil prices, Russian stocks are still getting crushed down over -12% year-to-date. Sorry Putin.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%
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