“Today is the oldest you've ever been, and the youngest you'll ever be again.”
-Eleanor Roosevelt
It’s a slow creep.
Its orchestration is stealth and singularly insidious.
The scourge of former athletes and gym class heroes the world over, its incursionary force ebbs and flows but it marches unrelenting.
The best of men have buckled and succumbed under its enduring onslaught.
It counts higher cortisol, a progressively worsening hormonal profile, subadequate sleep, and Father Time among its minions.
If you are over 30 and have kids your perennial campaign against #Dad-bod has already commenced.
Nature’s offensive against your physique is interminable until it’s terminal.
And its assault on your six-pack carries seasonality.
Winter is complacency’s nursery and, with the changing season, the siren song of the couch, the (beer) cup and caloric (holiday) gluttony becomes increasingly enchanting.
So, as Q3 ends, the temperature turns and we move towards daylight savings, the message is this:
Let the competition “fall back”. Keep “springing forward”.
If what you are doing is working (life, investment or otherwise) keep doing it. If not, everyday represents an opportunity for personal evolution.
For a few consecutive years before joining Hedgeye (& pre-marriage, pre-kids) I was just edged out of being Mr. Connecticut. Now, I’m a total has-been on the physique front.
Life is long. Get it, have it, be it. Resigning yourself to describing life’s accomplishments in the past tense is complacency’s asylum. “Had” is no way to live.
Back to Global Macro Grind…
In macro land there’s been a seemingly interminable onslaught of another sort - that of recessionary industrial data. The post-mortem on yesterday’s Durable and Capital Goods data for August looks like this:
- Headline Durable Goods orders declined -0.04% MoM against negative revised July estimates, falling sequentially for the 3rd time in 4 months. Orders were down -1.3% on a year-over-year basis and -2.2% on a 2Y basis, marking the 3rd and 7th consecutive months of negative growth, respectively.
- Durables Goods Ex-Defense & Aircraft – which is most closely aligned with typical household demand - rose +0.2% MoM, but held negative at -0.3% YoY, marking the 6th consecutive month of negative growth and 15th month of negative growth in the last 16 months.
And worst for last …
- Core Capital Goods Orders declined -3.1% year-over-year, marking the 10th consecutive month of negative year-over-year growth and the 19th month of negative growth in the last 20 months (and 2Y comps are worsening!). Together with Industrial Production growth – which has now been negative for 12 consecutive months – capex spending remains in the midst of its worst non-recession run of negative growth ever.
After 20 months of negative capital spending growth, Investment and GDP have slowed but the world has miraculously failed to end, so its easy to become comfortably numb to the macro malaise. But the second and higher order implications are not inconsequential.
To illustrate, consider this interdependent and cascading set of macro and market factors.
A meaningful reacceleration in earnings growth across the energy and industrial complex continues to backstop expectations for mid-teen’s earnings growth for the S&P500 in 1H17.
However, the longer ISM’s remain peri-contractionary and capital spending, durable goods, industrial production and commodity demand remain in contraction, the more likely it is that those estimates prove overly-optimistic and get marked progressively lower.
Separately – but not independently - the latest equity price gains have again been mostly a function of multiple expansion as forward multiples have moved back towards cycle peak valuation recorded in mid-2015. Implicit in that advance is the expectation (or hope) that those 1H17 earnings expectations are realized and equities can grow into that valuation premium.
Meanwhile, on the macro side, labor remains in a precarious catch-22.
If Labor Remains Strong: In the Chart of the Day below we show the spread between Nominal GDP growth and Nominal Wage Growth (aggregate wage income). The intuition for understanding the profitability implications comes from viewing the macroeconomy as you would a company or household. At the aggregate level, Nominal GDP equals National Income or Total Revenue. Aggregate Wages represent Costs (labor costs are typically the biggest input costs for firms). If costs are growing faster than revenue - which is the case currently and is represented by a negative spread in the chart below – margins and earnings growth becomes increasingly challenged. If labor growth continues to grow at a premium to output growth and if aggregate wages continue to grow at a positive spread to revenues (nominal GDP) then productivity will remain negative and the corporate earnings recession will remain more-or-less the prevailing reality.
If Labor Slows: Employment growth peaked in 1Q15 and has progressively slowed. Because the magnitude of acceleration in earnings growth has failed to match the deceleration in payroll growth, aggregate income growth has also slowed, dragging consumption growth down with it.
Now, if labor growth slows more precipitously, it would help alleviate some of the productivity and profitability problems associated with labor’s positive spread to output/income described above. But, to the extent that slowdown drives a further deceleration in aggregate income growth it will also drive further deceleration in consumption growth (absent a re-acceleration in credit growth, which has been slowing in recent months) and the singular expenditure bucket supporting headline GDP will start to slow at a faster rate.
Looking quickly across the balance of domestic macro before closing.
Today we’ll get the final estimate of 2Q GDP. It will have a 1-handle on it and will represent a 5th consecutive quarter of slowing growth. That’s not a narrative, it’s just the data.
Pending Home Sales data for August should show growth in signed contract activity in the existing market continues to run in the low single digits.
Tomorrow we’ll get the Income and Spending data for August. The aggregate hours and earnings growth data from the NFP release suggest we’ll see sequential deceleration in both income and consumption growth.
Tuesday’s Consumer Confidence data from the Conference Board breached a new cycle high. Perhaps the University of Michigan measure will do the same.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.54-1.65%
SPX 2128-2184
EUR/USD 1.11-1.13
Oil (WTI) 42.88-47.39
Gold 1311-1354
To growth,
Christian B. Drake
U.S. Macro analyst
