The Incredible Shrinking Seat
The Dow Jones Industrial Average looks to close flat while both the S&P 500 and Nasdaq are poised to punch a bit higher this week. It stands to reason the Nasdaq might be doing better since it has done the worst among the three indices this year and has the most ground to recapture. All three indices are making strides toward recovery, but rather than a full recovery it is likely we’re entering a period of anticipation before the next slew of data hits later this summer. This also means that mainstream media will flail about for the next month or two grasping at headlines including the price of gas, jobs, unemployment, and possibly the next Fed rate hike. With any luck, this period of anticipation will also be accompanied by lower volatility.
After last week’s negative second quarter GDP release, you might think we’ve got it bad in the U.S. While parts of the economy do appear to be contracting, it’s not as bad as you might think. The Bureau of Labor Statistics reported today that total nonfarm employment and the unemployment rate have both returned to their February 2020 pre-pandemic levels. July nonfarm payrolls rose by 528,000 versus the expectation of 250,000. Furthermore, highlighting the tight labor market, the unemployment rate dropped from 3.6% to 3.5% which is well below the long-term average of 5.74%. In ordinary times this would be viewed as great news and we’d see the stock market go to the moon. However, these aren’t ordinary times, and considering the Federal Reserve trying to slow down the economy, this news is evidence that the Fed hasn’t done enough. While most analysts believe the Fed will slow the pace of interest rate hikes going forward, this data may indicate that the Fed hasn’t been aggressive enough. This story will play out over the next couple of months as more data is released.
In an interesting twist, the JOLTS report which shows the number of unfilled jobs fell from 11.86 million to 10.7 million in just the last couple of months. Like everything else, this could be viewed as the glass half full or half empty. If you’re a glass half full kind of person, you’ll likely see this as people returning to work, and unfilled jobs slowly being filled. However, it could also suggest that employers are no longer looking to fill jobs and job openings are evaporating due to a lack of need on the part of employers. Some evidence of this is the increased talk of hiring freezes and a slight uptick in layoffs in recent weeks. The initial unemployment claims are now topping 260,000 per week (and climbing), up from 171,000 just a few months ago. Simply put, we’re at a crossroads where parts of the economy are slowing, and other lagging parts have yet to slow. The Federal Reserve will win in the end. The question is, will they overdo it in the process?
In other news, we learned that household debt topped $16 trillion, rising $2 trillion since the pandemic. Households took on $312B in the second quarter with mortgage balances accounting for a large chunk of that increase. Credit card balances rose $46B in the quarter indicating a 13% increase y/y, which is the largest increase in more than 20 years. Auto loan balances rose $33B in the quarter, and student loan balances were roughly unchanged. Delinquency rates are slowly rising, but are far from troubling and remain at historically low levels for now. The thing to take away from this is that rising prices are to blame. It’s not that people are necessarily spending more, it’s that everything costs more. We should expect to see this trend continue in the months ahead.
As for costs increasing, there doesn’t seem to be any sign of slowing in sight. Starbucks, which is totally at the mercy of its customers, appears to be doing just fine. This week the company announced it beat on both the top and bottom lines. Revenue growth was 8.7% y/y and was driven by a 6% increase in the average ticket. In North America, the average ticket grew by 8%. This begs the question how much can companies continue to raise prices? In a similar fashion, Chipotle has also been rolling out price hikes on many of its menu items. The Fed has a tough row to hoe.
In closing, I must share a story I came across this week. It seems the Federal Aviation Administration (FAA) is asking for feedback on airplane seat sizes. More specifically, it is reviewing airplane seat sizes to assess if a minimum standard should be established. Note, this is not from a comfort perspective, but rather if minimum seat sizes are necessary for passenger safety, like in the case of an emergency evacuation. Worth mentioning is the FAA was tasked with considering four years ago as part of the FAA Reauthorization Act of 2018. If you want to make your voice heard, the public has 90 days to submit recommendations which I am assured will be taken with the utmost gravity when its findings are released. Now you know.
Bruce J. Mason, MBA