VTI - 70% Of The Economy Is In Trouble

2023-09-01 12:24:02 ET

Summary

• Equities rebounded late in the month after an early swoon in August, lead by the technology-heavy Nasdaq.
• However, prospects for the consumer, whose spending represents 70% of economic activity, appear to be deteriorating at an accelerated pace.
• Job growth is ebbing, excess savings from Covid stimulus is gone and the majority of American are living paycheck to paycheck.
• Can the markets continue to rally, and economic growth be maintained when this primary economic engine is sputtering?

Look and see which way the wind blows before you commit yourself .”? Aesop, Aesop's Fables.

Equities have had a nice little rebound over the past week as the markets ended August on a high note. Not surprisingly, the tech-heavy Nasdaq (COMP.IND) has been in the vanguard of the advance powered by great earnings from the likes of Nvidia Corporation ( NVDA ), Salesforce, Inc. ( CRM ) and Splunk ( SPLK ) , the upcoming iPhone 15 release by Apple ( AAPL ) as well as artificial intelligence ("AI") enthusiasm in general. The rest of the market has lagged behind, as it has throughout 2023.

Big Tech is powering the rally right now. However, the consumer accounts for approximately 70% of economic activity and the health of the consumer appears to be declining at a rapid clip. If this trend is not reversed, it is hard to see either the economy or equities doing well for the rest of 2023.

How bad is it for the average consumer, with inflation coming off four-decade highs? Let's start with some of the anecdotal evidence first. According to the latest LendingClub survey in July, 61% of all Americans are living paycheck to paycheck. This is up from 59% in July of last year, when inflation was much higher.

In addition, the majority of Americans now are revolving debt on their credit cards instead of paying it off in full, the first time this has ever occurred. Total credit card debt also recently crossed over the $1 trillion threshold for the first time. 401K hardship loans are also up 36% from last year according to Bank of America as well.

The average mortgage rate recently hit its highest level since 2001. Combined with a lack of inventory (as few want to give up their 3% mortgage rate), housing affordability has hit a nearly four-decade low. These headwinds for the consumer have showed up this quarter in the disappointing quarterly reports from Macy's ( M ) , Dick's Sporting Goods ( DKS ) and slew of other retailers. Thursday it was Dollar General's ( DG ) turn to be the disaster ' du jour ' in the retail sector with its own dismal second quarter report .

More importantly, the Jobs Market seems to be deteriorating in recent months. Earlier this week, the July JOLTs job report showed just 8.83 million job openings, which badly missed expectations. Previous month's job openings estimates were also significantly taken down. This was the first number south of nine million in nearly two and a half years. In addition, job openings have now fallen by 1.5 million in three months, which has only happened one time before on record, during the Covid lockdowns.

The July BLS Jobs report showed that nearly 600,000 full-time jobs were lost during the month. Job growth was only positive for the month because of a huge surge of part-time positions. A similar trend was seen in the August BLS jobs report this morning. The headline number was 187,000 jobs were created last month, slightly beating expectations. However, there were 225, 000 new net part-time positions, meaning full-time employment dropped by 38,000 during the month. In addition, the July and June jobs numbers were revised sharply lower. This is also part of a trend, as so far this year, as every initial monthly jobs reading in 2023 has been revised lower in subsequent months.

Layoffs are also increasing sharply. According to Challenger, Gray & Christmas, U.S.-based employers have announced plans to cut 557,057 jobs so far in 2023, a 210% increase from the 179,506 cuts announced in the same period last year. The deterioration in the Jobs market might be a key reason that the August Consumer Confidence came in badly under expectations on Tuesday, while the July reading was also revised down.

Nor can savings be counted on to buttress the deteriorating condition of the consumer. According to JPMorgan, the excess savings ($2.1T) from all the Covid stimulus is gone. In addition, the savings rate for July dropped to 3.5% (lower than the financial crisis) from 4.3% in June. This is down from 7.3% prior to the pandemic. Strong July retail sales were supported by aggregate personal savings dropping from $852 billion to $706 billion. Nor do the prospects for consumer spending brighten in the months ahead, as a coming $75 billion annual headwind from the resumption of student loan repayments (after a better than 3-year taxpayer financed hiatus) looms on the horizon.

In addition, manufacturing has been in contractionary territory throughout 2023 based on monthly PMI reports consistently being under the 50 level for ten months in a row now. The monthly Leading Economic Indicators has also been down for 16 straight months now.

So, can the economy continue to grow, and the markets advance, if both the consumer and manufacturing are suffering? To me, that is like asking if a car with three of its four wheels deflating can maintain its speed. This is why my portfolio is very cautiously positioned, as I recently outlined in an article called " Shades of 2007 ." Until prospects for the consumer improve, I will largely remain in safe, conservative bets like short-term treasuries, as I cannot be positive on the market when a segment that represents 70% of the economy is trending down at an accelerated pace.

Mixing old wine with new wine is stupidity, but mixing old wisdom with new wisdom is maturity .”? Amit Kalantri.

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