“Job applications are stupid. "Why do you want to work for us?" Oh, I've always had a passions for frozen yogurt. …. [Expletive] I’m Broke!” -Dave Chappelle, Keepin It Real
So, due to a tragicomic series of convoluted real estate transaction events, I’ve been homeless for the past week.
In a way, it’s surprisingly liberating not to be beholden to anything material.
Besides … you know …. not having a house, paying to put all your stuff in storage, potentially displacing your kids from all their friends and school district, scrambling to accomplish trivial, everyday tasks at multiples of the typical time/expense and the acute psycho-emotional fatigue … it’s uniquely cathartic.
You should try it sometime … or not
Back to the Global Macro Grind ….
Like it or not we remain beholden to the Tell-tale Heart of a ticking, real-time PnL.
And for 98 months and counting the steady pulse of central bank liquidity and the patient pursuit of trickle-down-and-around policy has manifest in an interminable march to higher lows and higher highs.
That’s simply the score … devoid of any moral protestations and discussions of merit or accumulation of latent risk inherent in that policy.
Don’t get me wrong. It’s a sandy loam on which to build a value edifice and the incestuous flimsiness isn’t lost on us:
Companies issued debt because rates were artificially low, demand for debt was high and supply inadequate. They used that debt to buy back stock and inflate earnings and then investors agreed to agree to put an ever higher multiple on those non-organic earnings.
Be that as it may, when SPX earnings growth is accelerating from deeply negative to double digit positive and the fundamental componentry underneath that advance is reflecting similar improvement, a loose top down narrative around structural vulnerability – right or wrong – isn’t an investible short thesis.
We re-highlighted that simple reality in reviewing the 2Q17 Earnings Season internals yesterday.
To wit,
- Growth, Y/Y: S&P500: Sales Growth = +5.4%, EPS Growth = +10.4%, Nasdaq: Sales Growth = +10 %, EPS Growth = +13.8%, Dow: Sales growth = 3.2%, EPS Growth = +9.7%
- With a baseline Quad1/Quad 2 outlook for the domestic economy over the balance of the year and strong/above trend sales and earnings growth, the fundamental case for more than transient, countertrend weakness is greatly diminished. Accelerating growth and strong top/bottom line trends are just not the macro factor cocktail negative equity and credit spread blowout theses are made of.
- After comping the profit recession trough in 1Q, it’s little surprise that rate-of-change trends have slowed moderately in 2Q. Importantly, however, 2Y growth comps are flat in 2Q suggesting the deceleration is almost singularly a base effect phenomenon with the underlying trend improvement persisting.
- Intra-quarter revision trends were non-negative for a 2nd quarter here in 2Q17. In other words, the progressively-and-significantly-lower-estimates-into the print- then-beat-and-everyone-cheers pattern that has characterized post-recession earnings was again absent.
- Weaker dollar impacts should provide some incremental flow through support to earnings trends as larger cap multinationals (where revenue share concentration is rising) stand to benefit disproportionately.
- Consensus expects another deceleration in Y/Y trends in 3Q followed by a subsequent reacceleration into 2018. We don’t do the perennial/perma-panglossian ‘back-end loading” of estimates but with an expectation for growth to accelerate over the coming quarters we would broadly agree with the directional trend in consensus estimates. Accelerating wage inflation alongside further soft productivity trends is an interesting combo to consider as a rising share for labor income would largely be paid for via corporate profitability but such a potentiality remains a conspicuously known unknown and a recurrent false fear for years now.
Moving On.
It is, of course, Jobs Day so I’m obliged to offer something analytically insightful.
Truth be told, I don’t really have anything particularly penetrating or profound to offer this month but the employment music is playing so let’s do the (relevant context) dance:
- Employment growth will slow for a 2nd month against another hard July comp as we need to print +296K to avoid another rate of change slowdown in payroll growth … unlikely. However, it remains probable that we continue to add jobs at a pace above that needed to absorb new labor force entrants, so the slow march towards labor market tautness will remain ongoing.
- Wage growth will remain the key focus both for policy makers and macro-ticians. That is so obvious that I didn’t even want to write it but there is some surrounding context that should remain middle-of-mind. Conditions remain increasingly favorable for an acceleration in wage growth but that’s been broadly true for a (long) while now. Will July somehow emerge as the discrete point marking a sustained positive, 2nd derivative inflection? Who knows but the need for wage inflationary mojo to pick-up is of increasing import for 2 straightforward reasons ….
- If employment growth is slowing, wage growth needs to accelerate to maintain the pace of aggregate income growth. Consumption continues to anchor both realized and forward estimates for GDP and the trend in aggregate private sector salary and wage growth continues to define the baseline expectation for consumption growth. Moreover ….
- The Savings Rate is cratering, if you’re inclined to believe the BEA. If you missed the multi-year revision to household income and spending data earlier this week the net of it was: Income ↓, Savings ↓, Consumption →.
- In other words, households took their savings rate back toward pre-recession (and all-time) lows in order to maintain consumption in the face of decelerating income growth.
- The saving rate was just +3.8% in June down from +5.1% a year ago. The decline in the savings rate over the past year has been a notable support to consumption growth but that tailwind will fade as we move into 4Q.
The whole simple point – from a growth accounting perspective - is this: consumption remains the lone GDP expenditure bucket in town. Income trends need to be strong to support a positive baseline view for consumption and there are only a few primary drivers for aggregate income growth à faster growth in the number of people working (payroll growth), faster growth in the number of hours those people work and/or faster growth in how much those people make per hour (wage growth). That’s pretty much it. The flow through to consumption is then influenced by how much of those earnings are saved and the rate of credit growth.
From an intermediate term perspective, how those few factors are trending are all that really matter.
What didn’t get revised down by the BEA this week? Well, I’m glad you asked.
Turns out, the Rich are still (increasingly) Rich and ATH’s are still a positive for high-end consumption.
Luxury Goods consumption - our PCE composite tracking spending on jewelry, watches, pleasure boats and aircraft - was +8.2% Y/Y in June and is currently tracking +6.5% Y/Y in 2017, a marked acceleration from the +2.2% growth in 2016 which followed an almost 2 years stretch of stagnant asset price inflation.
And the positive confirmation on high-ticket discretionary consumption is cumulating.
Real estate service Company Realogy (RLGY), which has been on our Best Idea list as a Long the last couple quarters, is a proxy play on resurgent high end consumption as its largest, NRT segment is levered to dollar volume (sales + price) transactions at the middle and top price tiers in generally affluent markets.
Indeed, RLGY raised guidance and beat both top and bottom line estimates for 2Q yesterday with the 12% gain in NRT leading the upside.
I, unfortunately, did not contribute to that upside.
To Keepin’ in Real(ogy) in 3Q,
Christian B. Drake
U.S. Macro Analyst
