Economic Readings Conflict Heading into Historically Weak Month
Despite an upward revision to Q2 GDP, the economic tea leaves remain unclear.
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A nice rally held through most of Thursday, but faded by the close of trading on the day. The second estimate of Q2 GDP growth was revised up to 3.0% from 2.8% previously. The upward revision was driven largely by higher than previously estimated consumer spending. And yet, this week, we have seen disappointing Q2 numbers and guidance from myriad retailers like Foot Locker FL and Dollar General Corporation DG — the shares of the latter dropped by more than 30% in trading on Thursday. It was the worst one-day loss in the stock's long history.
If the second quarter GDP revision is accurate, the economy grew around 2.2% in the first half of 2024. This is a little more than half of the growth rate in the back half of 2023, it should be noted. And, taken in context, this is hardly impressive economic growth. The federal government is running a fiscal deficit of north of 6% of annualized GDP during its fiscal 2024 year, which ends at the close of the next month. The deficit in the first 10 months of this year is just over $1.5 trillion. And, the last time I checked, government spending is included in the GDP calculation.
Average mortgage rates have fallen to their lowest levels in 15 months. However, that impact has not played out across the housing sector as of yet. The U.S. pending home sales index for July unexpectedly dropped 5.5% on Thursday. Expectations were for a small gain. The average 30-year mortgage rate was 6.35% last week, down from nearly 7.2% in the same period a year ago. Maybe August metrics will show some improvement from lower rates, but housing affordability is still near historical lows and the average price of a home is still rising.
In addition, confidence to make this kind of large purchase has to be waning given the deteriorating jobs picture. The August BLS jobs report was disappointing to understate things. The unemployment rate ticked up to 4.3% from just 3.5% last summer and the recent move up in the unemployment rate has triggered the Sahm rule, which can be used to project coming recessions. This was one of many reasons the equity market took a big dive early in August, which it has fully recovered, at least for now.
One of the things I am struggling to get my head around is this: If the economy is growing at a decent clip, why are corporate profits down this year? It is not like there has been any new corporate tax rate reductions. Overall, corporate profits did gain 1.7% on a year-over-year basis in Q2. However, they fell 2.7% in Q1 and are slightly negative for 2024 year to date.
And those are some divergences in economic tea leaves I am trying to reconcile as we head into September. This is historically the weakest month for equities and the shine appears to have come off a bit from the AI revolution that has been a key driver of the stock market rally throughout 2024.
At the time of publication, Jensen had no positions in any securities mentioned.
