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Weekly Update 10/28/2022: U.S. Economy Grows at 2.6% in Third Quarter Exceeding Expectations

  • Coca-Cola releases earnings beating profit and revenue expectations and raises guidance
  • Raytheon releases earnings beating profit expectations and raises the lower end of their 2022 EPS guidelines
  • UPS releases earnings beating profit expectations and affirming full year guidance
  • Microsoft releases earnings beating profit and revenue expectations
  • Visa releases earnings beating profit and revenue expectations on strong cross border transactions
  • Boeing releases earnings showing strong free cash flow but lower than expected 737 narrowbody jet deliveries for the year
  • Otis Worldwide releases earnings beating profit forecasts but lowers guidance on foreign currency headwinds
  • Automatic Data Processing releases earnings beating profit and revenue expectations while raising guidance
  • CACI International releases earnings beating profit and revenue expectations while affirming their 2023 guidance
  • T. Rowe Price, Carrier, Check Point Technologies and BorgWarner all releases earnings beating profit and revenue expectations
  • Apple releases earnings beating on both the top and bottom line; stock rallies on the results

Domestic Economic News

The US economy rebounded following two quarterly contractions thanks in part to resilient consumers and businesses, though inflation and higher interest rates leave growth vulnerable in the coming months. Gross domestic product rose at a 2.6% annualized rate in the July to September period after falling for the first two quarters, the Commerce Department’s preliminary estimate showed Thursday. Personal consumption, the biggest part of the economy, climbed at a 1.4% pace, better than forecast but still a slowdown from the prior quarter. The median projection in a Bloomberg survey of economists called for a 2.4% rise in GDP and a 1% advance in personal consumption. That said, a key gauge of underlying demand that strips out the trade and inventories components -- inflation-adjusted final sales to domestic purchasers -- rose 0.5% in the third quarter, one of the slowest since the start of the pandemic. While the details of the report showed firm business investment and continued consumer spending on services, the biggest contributor to GDP was the volatile net exports category. Government spending also rose firmly, but the housing sector was a significant drag on growth. Though the quarterly expansion may help alleviate concerns that the US is already in a recession, the economy’s main engine -- consumer spending -- remains under pressure from the highest inflation in a generation. A strong labor market and savings amassed over the course of the pandemic have so far provided Americans the wherewithal to keep spending. It’s unclear how long households can hold up as the Federal Reserve’s efforts to tame inflation pose headwinds to growth. In the near-term, it’s driven up mortgage rates to the highest in two decades, causing a rapid deterioration of the housing market. And in the coming year, many economists expect the central bank’s actions to ultimately push the economy into recession.

The Standard & Poor’s (S&P) PMI data has trended below the ISM equivalents quite a bit recently, but Monday’s reading were pretty poor no matter how you slice it. Big misses on manufacturing and services took the composite reading to 47.3, with new orders at 49 and employment at 49.8 (the lowest since June 2020!). Output prices edged lower to 58.3, which is the lowest since the end of 2020 but higher than any reading pre-Covid (the survey started in 2009.) One of the big market themes in coming months will be just how much economic weakness the Fed is willing to stomach while inflation remains elevated. They have claimed that the answer is “quite a bit,” but that proposition will now start to get tested.

Specifically, U.S. business activity contracted in October for a fourth-straight month as concerns about inflation and sluggish demand weighed on the outlook. The S&P Global flash composite purchasing managers output index decreased 2.2 points to 47.3 as mentioned, the group reported Monday. Readings below 50 indicate contraction. Manufacturers and services providers’ views on the outlook also deteriorated in October, leading the composite future index to fall to its lowest level since September 2020. A measure of business activity at service providers slid to 46.6 in the month, marking the second-worst reading since May 2020. Firms attributed the decline to weak client demand, rising interest rates and stubborn inflation, the report showed. Meanwhile, the flash manufacturing PMI dropped to 49.9. While barely indicating contraction, the figure was the weakest since mid-2020. The group’s gauge of new orders at factories contracted for the fourth time in five months. Output expanded modestly. The surveys “present a picture of the economy at increased risk of contracting in the fourth quarter at the same time that inflationary pressures remain stubbornly high,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said in a statement. “However, there are clearly signs that weakening demand is helping to moderate the overall rate of inflation,” Williamson said. The group’s composite gauge of input prices ticked up from the lowest level since January 2021, while the prices charged measure eased to its lowest level since December 2020. However, both gauges remain elevated. In the face of softening demand, service providers reduced headcount in October. The report noted that this included layoffs and not replacing those who had voluntarily left.

Sales of new US homes fell in September, resuming a downtrend as decades-high mortgage rates push would-be buyers out of the market. Purchases of new single-family homes decreased 10.9% to a 603,000 annualized pace following an unexpected gain in August, government data showed Wednesday. The median estimate in a Bloomberg survey of economists called for a 580,000 rate. The figures reflect a slide in housing demand as the Federal Reserve aggressively boosts interest rates to combat the worst inflation in a generation. Mortgage rates rose to 7.16% last week, the highest level since 2001. That’s sapping affordability, sidelining prospective buyers and leading some measures of home prices to fall. So far, that hasn’t shown up in prices of new homes. The report, produced by the Census Bureau and the Department of Housing and Urban Development, showed the median sales price of a new home rose 13.9% from a year earlier to $470,600. There were 462,000 new homes for sale as of the end of the month, the most since 2008, though the overwhelming majority remain under construction or not yet started. At the current sales pace, it would take 9.2 months to exhaust the supply of new homes, compared with 8.1 months in August and 6.1 months a year ago.

The US merchandise-trade deficit widened in September for the first time in six months as imports grew and some exports plunged. The shortfall widened 5.7% to $92.2 billion last month, Commerce Department data showed Wednesday. The figures, which aren’t adjusted for inflation, compared with a median estimate for a gap of $87.5 billion in a Bloomberg survey of economists. Exports declined 1.5% to $177.6 billion. Imports rose to $269.8 billion. Inbound shipments of consumer goods rose 1.4% to $69 billion. While imports of consumer merchandise have fallen from a record earlier this year, they remain well higher than the pre-pandemic average. A 3.1% drop in the value of exports of industrial supplies led the overall decline. Outbound shipments of foods, feeds and beverages plummeted 14%, but account for less volume. Meantime, exports of autos jumped 5%, reversing much of the prior month’s decrease. The Federal Reserve’s most aggressive monetary tightening since the early 1980s has sent the US dollar surging, with the currency strengthening for a fourth straight month in September. While that lowers the cost of imports, it also weakens demand in international markets for US-produced goods.

Interest Rate Insight and the Fed

A core gauge of US inflation accelerated in September, while consumer spending stayed resilient, indicating price pressures and solid demand that reinforce the Federal Reserve’s case for another big interest-rate hike next week. The personal consumption expenditures price index excluding food and energy, a key measure of underlying inflation tracked by the Federal Reserve, was up 0.5% from a month earlier, Commerce Department data showed Friday. From a year ago, the gauge was up 5.1%, a pickup from the prior month, though slightly below economists’ forecasts. The overall PCE price index increased 0.3% in the month and was up 6.2% from a year ago, still well above the central bank’s 2% goal. The median estimates in a Bloomberg survey of economists were for a 0.5% monthly increase in the core PCE price index and a 0.3% advance in the overall measure.

Purchases of goods and services, adjusted for changes in prices, rose a stronger-than-expected 0.3% last month after a similar gain in August. The gain reflected increased spending on both goods and services. Similar to the consumer price index data out earlier this month, the latest figures underscore the severity and breadth of US inflation. They also show why Fed policy makers, striving to get inflation back to its 2% goal, will likely raise interest rates by yet another 75 basis points at next week’s meeting. A strong labor market, solid wage gains and savings have helped households weather higher prices for everything from groceries to rent. Yet it’s unclear just how long consumers and their finances will be able to hold up.

Impactful International News

Hopes that the euro zone can stave off a recession got a boost as Germany defied expectations by reporting another quarter of economic growth, though momentum slowed dramatically in France and Spain. Surging energy prices, record inflation and rising interest rates are weighing on output across the continent in the third quarter as a post-lockdown splurge on leisure and tourism fades. But data Friday showed Germany managed to grow by 0.3% between July and September. Consumer-price growth from the region was mixed. In Italy, Germany and France it topped estimates to reach euro-era highs, while coming in well below expectations in Spain. The slew of releases arrives just before what’s shaping up to be a challenging winter for Europe. While unseasonably warm weather is providing respite on heating bills, governments are spending hundreds of billions of euros to ease the cost-of-living crisis. The European Central Bank is racing to wrest inflation back under control but may soon add to the pain as it raises rates beyond levels that support economic growth. It hiked borrowing costs by 75 basis points for a second straight meeting on Thursday.

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