The Case for Stagflation Continues to Grow
It's quite apparent that demand has become quite bifurcated across the economy.
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We are largely at the end of first quarter earnings season. One key theme that has become quite apparent is that demand has become quite bifurcated across the economy. Business demand seems to be solid despite an acceleration of layoffs in 2024 to date.
Business travel remains robust, which certainly helped the likes of Delta Airlines DAL and the other majors during the first quarter. If Boeing BA could get the slightest handle on its production and quality issues, the manufacturer would likely be crushing it.
The demand for all things AI continues to be beyond impressive. Even the most diehard perma bear has to admit that the build out of the artificial intelligence complex looks like it will be the biggest paradigm shift in the economy since the birth of the internet more than a generation ago.
This is especially true after Nvidia NVDA posted almost a comically good first quarter results after the bell on Wednesday. The productivity unleashed by this revolution and massive government deficit spending were the two key reasons cited earlier this week by the CEO of Goldman Sach GS forecasting no cuts to the Fed Funds rate in 2024.
Meanwhile, those high interest rates are playing havoc in the commercial and residential real estate markets. It seems every day a different office or hotel property goes into default, special servicing, foreclosure or sells for a pittance of the value it was appraised for a few years ago.
Existing home sales hit their lowest levels since 1995 in 2023. Yesterday, April home sales numbers came in significantly below estimates Thursday with sales being down nearly 8% from the same period a year. Higher end builders like D.R. Horton DHI and Toll Brothers TOL are holding up well despite these headwinds as a decent portion of their upper income clients are paying all-cash for their new abodes. Homebuilders targeting lower income stratas are seeing more duress as housing affordability hovers near historical lows. A true "starter home" is almost as rare as a dodo bird these days.
It is the same in retail where high end retailer Williams-Sonoma WSM blew away first quarter earnings expectations on Wednesday. Meanwhile, consumer stalwarts like Home Depot HD, Starbucks SBUX, Target TGT and McDonald's MCD, that cater to lower and middle-income consumers, had tepid results, and all noted weaker consumer demand for many items.
In summary, AI demand is killing it, business demand is holding up and upper income consumers are still spending. However, lower and middle-income consumers are pulling back. Investors should factor that into their investment selection. It also invites the greater question: If the consumer is nearly 70% of U.S. economy activity and the majority of consumers are facing increasing headwinds, how long before declining consumer health starts to negative effect the economy in a major way?
I would argue that those impacts are already being felt as we have seen a couple of quarters of decelerating GDP growth and the case for Stagflation continues to grow.
A the time of publication, Bret Jensen had no position in the securities mentioned.
