Softening Demand?
There are signs that economic growth has recently slowed
Succinct Summary: There are some signs that economic growth has recently slowed. Businesses have gotten more concerned about the economic cycle. This appears to be what the Fed wants to see. They continue to signal that they are committed to fighting inflation, which is also showing some signs of moderating.
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Macro
The pace of US economic growth slowed down sharply in June
"The pace of US economic growth has slowed sharply in June, with deteriorating forward-looking indicators setting the scene for an economic contraction in the third quarter. The survey data are consistent with the economy expanding at an annualized rate of less than 1% in June, with the goods-producing sector already in decline and the vast service sector slowing sharply." - S&P Global Market Intelligence Chief Business Economist Chris Williamson
There are signs that demand is softening
"We are, again, starting to see some signs of demand softening, which is exactly what we want. We don't want it to crash. We want to bring the economy into a safe position and in balance with supply and demand." - Federal Reserve Bank of Philadelphia CEO Patrick Harker
“Our ability to pass pricing on to the market as an example, because of inflation, continues to be more challenged, obviously, with consumer demand softening significantly today versus a year ago” - Winnebago Industries (WGO) CEO Michael J. Happe
"We got sequentially better on comps throughout the quarter, which is encouraging, but that being said, I think the consumer is softer," - CarMax (KMX) CEO Bill Nash
Businesses are getting concerned
"Businesses have become much more concerned about the outlook as a result of the rising cost of living and drop in demand, as well as the increasingly aggressive interest rate path outlined by the Federal Reserve and the concomitant deterioration in broader financial conditions. Business confidence is now at a level which would typically herald an economic downturn, adding to the risk of recession" - S&P Global Market Intelligence Chief Business Economist Chris Williamson
“I choose to be intentionally paranoid when there's this much turbulence in the world but it’s not because I’m seeing data or actual demand signs that should cause me to be paranoid. We continue to see strong demand. AWS continues to hire at a rapid pace. We continue to deploy capacity at a rapid pace” - Amazon (AMZN) AWS CEO Adam Selipsky
The Fed is committed to raising rates
"At the Fed, we understand the hardship high inflation is causing. We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so." - US Federal Reserve Chair Jerome Powell
"I'm not ready to make a final decision -- exactly where I am between 50 and 75 [basis points]. If we start to see demand soften — and we are seeing some signs that demand is starting to soften in certain sectors of the economy, and if it's softening quicker than I anticipate, then it may be appropriate to go with a 50. If it's not, then it's probably appropriate to go with the 75. But let's see how the data turns out in the next few weeks." - Federal Reserve Bank of Philadelphia CEO Patrick Harker
Inflation needs to be reined in
“Over the coming months, we will be looking for compelling evidence that inflation is moving down. We can’t fail at that task.” - US Federal Reserve Chair Jerome Powell
"It's never pleasant raising prices. As consumers, we don't want prices to rise. We don't want to pay more in the gas pump. And I think it's important to note, if we don't put inflation into check as a country, as a point of policy, rampant inflation is just not healthy for economy or commerce. And so we're working hand-in-hand, encouraging policymakers to address what we see as a macroeconomic headwind for just about all businesses." - AT&T (T) COO Jeff McElfresh
There are some signs of inflation decelerating
"...inflation is not stopping. It is decelerating on our business, but it is still meaningful in terms of its quarterly rhythm of inflation increasing every quarter." - Winnebago Industries (WGO) CEO Michael Happe
“A corollary of the drop in demand was less pressure on prices, with the survey’s inflation gauges for firms’ costs and their selling prices falling sharply in June to suggest that, although still elevated, price pressures have peaked." - S&P Global Market Intelligence Chief Business Economist Chris Williamson
Labor markets are still tight
"I think the thing that's hard to handicap right now is given the labor market is substantially different than it was during the financial crisis, and there is still a shortage of talent. And the data points in '07 were significantly different. How much is that going to buffer a garden variety recession? And I do believe that it will. I'm not convinced that the great application is going to turn into the great resignation. I'm just not convinced of that yet. And so we haven't seen any signs of cracking here. And I think the labor market is substantially different." - Korn Ferry (KFY) CEO Gary Burnison
International
European recession seems inevitable
“One thing is clear: if there is a sudden stop of Russian gas, the likelihood of a recession coming sooner is obviously far higher. There is no doubt. But I would say that overall, we have such a challenging situation that the probability of a recession also in Germany, or in Europe in 2023 or the year after, is higher than we have seen it in any of the previous years, and that is not only the impact of this awful war, but look at the inflation, look at what that means for monetary policy. That is such a challenging situation that we have three, four drivers which can severely impact the economy, and all of that coming together at one and the same time means that there is enough pressure and a lot of pressure on the economy, and hence the likelihood of a recession coming into Europe, but also in the U.S., is quite high" - Deutsche Bank (DB) CEO Christian Sewing
There’s palpable fear in Europe over energy prices
"I just got back from the first shareholder marketing trip we've done to Europe in over three years. And we heard palpable concern, palpable fear throughout Europe on where commodity prices are going and more importantly, where supply is going to come from." - Chesapeake Energy (CHK) CEO Nick Dell'Osso
Covid-19 is easing off in China, but the country is still vulnerable to outbreak
"Obviously, the Shanghai lockdown has relieved itself. Beijing case numbers are now thankfully very very low. This is a country that remains highly vulnerable to the spread of Covid and so I think that while it would be lovely to be able to kind of talk confidently about the China reopening trade and the idea that COVID-19 is now something that something in China's past I think we're not quite there yet." - Citigroup (C) Head of Emerging Markets Economics David Lubin
Uptick in China auto markets
"We see China's auto markets being pretty positive right now. So again, some shutdown effects here in April and May. But there are also a lot of incentives being put out there in China because people didn't buy cars and there was a lot of pullback. So we personally are seeing some uptick." - H.B. Fuller (FUL) CEO James J . Owens
Tightening in the West might cause massive capital outflows from emerging markets
"The tightening of monetary policy in the west, particularly in the United States, is going to attract capital flows out of emerging economies in order to be able to retain those capital flows they’re going to have to increase interest rates or in fact, they may just simply see capital disappear. Emerging markets are certainly getting a double hit" - Citigroup (C) SVP for Global Energy & International Affairs at S&P Carlos Pascual
Financials & Real Estate
Housing markets are slowing
"While our second-quarter results demonstrate strength and excellent performance throughout the quarter, the weight of a rapid doubling of interest rates over six months, together with accelerated price appreciation, began to drive buyers in many markets to pause and reconsider. We began to see these effects after quarter-end. The Fed's stated determination to curtail inflation through interest rate increases and quantitative tightening has begun to have the desired effect of slowing sales in some markets and stalling price increases across the country. While we believe that there remains a significant shortage of dwellings, and especially workforce housing, in the United States, the relationship between price and interest rates is going through a rebalance." - Lennar (LEN) Executive Chairman Stuart Miller
"Order rates are moderating from the exceptional levels that the industry experienced beginning in late 2020, as higher interest rates and increased home prices along with other inflationary pressures are impacting current demand. Our net orders were 3,914, down 9% versus a year ago when we reported the highest second-quarter net orders in the prior 14 years." - KB Home (KBH) CEO Jeff Mezger
"Mortgage rates near 6% have put a big chill on demand for homes. With home prices still at record highs, the affordability crisis has been dialed up to an 11 out of 10. Home sellers are aware of this as well; a record share are dropping their asking price. Even though there are fewer home sales, prices have not declined any significant amount yet. But if the housing market continues to cool, prices could fall in 2023." - Redfin (RDFN) Chief Economist Daryl Fairweather
But it hasn’t been cataclysmic so far
"It hasn't been cataclysmic. There's a huge change when you go from 20 offers on one house to five offers to one offer. But all you need is one. And what we're seeing is that about 1 in 4 homes are now being discounted that indicates that some properties aren't getting a single offer whatsoever.” - Redfin (RDFN) CEO Glenn Kelman
"While the market has cooled, it has clearly not stopped. Demand remains reasonably strong as buyers still have down payments and have attractive credit scores and can qualify." - Lennar (LEN) Executive Chairman Stuart Miller
More office space reduction may be on its way
"One of the things that we're looking at now that offices are reopening, we're tracking attendance in offices, seeing how many people are actually coming in using the office facilities, how frequently, and so on. And I really believe that there will be a sort of a second wave, if you will, of real estate reductions. It won't be like what we did the first time. First time we took out kind of 21%, 22% of our footprint. But I think there's going to be opportunity for further reductions in our real estate footprint just based on office usage and the way that people want to work today. And our view is, you kind of have to meet them where they are and not be in a position to force anyone to come in the office if they don't want to be in and they don't have to be in." - Korn Ferry (KFY) CFO Bob Rozek
Career nomads are here to stay
"The megatrend of work anywhere anytime has only accelerated during the pandemic. And we don't really see that going away. So this idea of flexibility in a hybrid work and what I would call career nomads I think it's going to continue." - Korn Ferry (KFY) CEO Gary Burnison
Consumer
There are some signs that consumers are trading down, but only modestly
"I believe that the consumer is definitely feeling an impact. Obviously, the fixed-income consumer is the one who's going to feel it first. We do believe that that individual is already in a pretty heavy pressure point to where they're either trading out or they're reducing their visits significantly, and they're looking for necessities at this point. But there's obviously a wide range of consumer demographic profiles within our company. We have very low-income consumer, but we have a very high income consumer as well. So I do believe that the middle income will be the next that's going to have some stress coming to it, as they continue to -- each and every week, they put more gas in their car, the more they go to the grocery stores, their savings are going to continue to be depleted. And I believe that's when the trade-down effect is going to come." - Ollie's Bargain Outlet (OLLI) CEO John Swygert
"...with this, the moderation in orders that we've been seen, I think it's more of the consumer digesting these higher rates than all of these cost pressures where they can still afford it. They may not be comfortable making that kind of payment or commitment or they may just be paused because of everything going on. But so far they're picking the same homes and the same features." - KB Home (KBH) CEO Jeff Mezger
Low-income consumers are most affected
"I think that, that lower FICO customer is probably being impacted the most by vehicle affordability." - CarMax (KMX) CEO Bill Nash
“Rampant inflation is imposing significant pressure on our customers, who are feeling the pain of higher gas, food, and housing costs more significantly than those with higher incomes, as a larger portion of their paychecks is now being consumed by necessities” - PROG (PRG) Steve Michaels
High-income consumers are less affected
"...we're not seeing a lot of kind of clear change in behavior due to inflation right now. And I think that is mainly due to the income level of our customers. Now we are seeing the effects of inflation in our own expense base. There's no doubt wages have gone up. The supply chain in particular is -- continues to be challenging from a cost perspective. But from customer behavior right now, we haven't seen some explicit behavioral change" - Nordstrom (JWN) CEO Erik Nordstrom
Leisure travel demand is at record levels
"Let me say very clearly, leisure travel demand is at record levels, and we haven't even gotten into the heart of the summer season. So despite the macroeconomic news, leisure travel demand remains extremely strong." - Travel + Leisure (TNL) CEO Michael Brown
“The confluence of a rising environment of interest rates, inflation, and fuel prices would suggest that we start to see a slowdown, but we just haven’t seen it in the data yet. The summer numbers look extraordinary, both here at home and outbound into Europe. The recovery has been led by leisure, clearly. But business transient is now down only 10 to 15 percent [from pre-pandemic levels], while it was down 30 percent at the end of last year. And group has really surprised us because it has come roaring back." - Marriott (MAR) CEO Anthony Capuano
Even cruise ships are bouncing back
"It is reinforcing to see the continued strength and demand for cruise. We are aggressively, yet thoughtfully, ramping up to full operations, with over 90% of the fleet now in service. And at the same time, we are driving occupancy higher on those ships that have been sailing and we are focused on improving pricing compared to pre-COVID levels -- .we are seeing success for close-to-home cruises, with many sailings achieving occupancy at or above 100%, where guests perceive far less friction than with international embarkations. In fact, our Carnival Cruise Line brand, sailing its entire fleet, is expected to reach nearly 110% occupancy during our third quarter." - Carnival Corp & Carnival PLC (CCL) CEO Arnold Donald
Retailers are getting ready for back to school season
"We're ready for back to college. We're ready for the holiday season, which I think is going to be big across America -- And so I'm betting that we're going to have a big back-to-school season in America and back-to-college will be big, and adults will be having parties for Halloween and kids will be trick-or-treating." - Target (TGT) CEO Brian Cornell
The furniture industry is seeing a big slowdown
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Restaurants are well-staffed
"And so at the manager level, we are really well staffed. We are continuing to add new team members. But as I said, we have 180,000 team members now, which is what we had pre-COVID. So we’re back to the level of our team member staffing from pre-COVID. That said, we still have pockets of restaurants that can improve their staffing levels, just like at pre-COVID. So we still have restaurants that could have a little bit more staffing level. But in general, we’re staffed right where we were before COVID." - Darden Restaurants (DRI) CEO Rick Cardenas
Restaurant sales are showing some softening trends
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Technology
There are some signs of a slowdown in data center spending
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Facebook is shifting its focus to compete with TikTok
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Industrials and Transport
Supply chains are better but bumpy
"I mean there's no doubt there's bumpiness in the external supply chain. And it changes what the issues are. I don't think there's as many ships anchored off of ports as there used to be, but there continues to be some surprises there and some unpredictability, which is fine." - Nordstrom (JWN) CEO Erik Nordstrom
"With respect to the supply chain, we are seeing mixed dynamics with the availability of some materials such as paint, plumbing products, interior doors, and door hardware improving sequentially. Other materials such as engineered wood products, cabinets, insulation, and concrete continue to be difficult to obtain that have stabilized. And the third group of products including heating and cooling materials and electrical equipment appliances, and windows remain challenged." - KB Home (KBH) EVP & Co-COO Rob McGibney
The ports are less congested than they were but still more than pre-pandemic
"Ships have continued to drop quickly in recent months. Ships waiting outside the ports of Long Beach and Los Angeles hit a post-pandemic low of 20 on June 10. That is less than a fifth of the record high of 109 reached in early July. However, compared to the one to two ships that may be waiting to dock in the pre-pandemic era, ports are still incredibly busy." - Wells Fargo (WFC) Weekly Economic & Financial Commentary
But freight demand might drop
"Through May, industrial activity has been solid but today's June flash PMI was a sharp decline. Further, after a strong build late last year and early this year, inventory restocking is slowing. This will dampen freight demand." - FedEx (FDX) EVP & Chief Customer Officer Brie Carere
Tesla’s new factories are money furnaces
"The past two years have been an absolute nightmare of supply chain interruptions, one thing after another, and we’re not out of it yet -- Both Berlin and Austin factories are gigantic money furnaces right now. It's really like a giant roaring sound, which is the sound of money on fire." - Tesla (TSLA) CEO Elon Musk
Too few people want to drive trucks
"More people are retiring from driving a truck each year than are coming into the pipeline, such an environmental condition. I'll say the lazy way of addressing that problem would just be to pay more, pay more, pay more. We already pay a very fair and competitive market wage to drive a truck at Sysco. Over $100,000 a year in most locations, as I mentioned earlier. That's a high-quality wage for a good job. The challenge is the job itself is a physically demanding job. A Sysco driver unloads about 30,000 pounds in a given day. And yes, that's a real number, 30,000 pounds in a given day. And the wear and tear on their physical bodies is not immaterial. So again, we can describe that as an environmental condition or we could do something about both of these challenges. Too few people coming into the role and in the physicality of the role." - Sysco (SYY) CEO Kevin Hourican
Materials & Energy
Oil markets are tight
"...in terms of the oil market itself, basically demand has been in a V-shaped recovery. We're now at a level of pre-COVID demand globally of about 100 million barrels a day -- And then on the supply side, it's been more sticky. And it's more a U-shaped recovery -- The market is tight. And when you look to the second half of the year, you just heard in the last 24 hours, President Xi gave a speech that he's going to use stronger measures in China to get the economy back on its feet. There's been 1 million to 2 million barrels a day of Chinese oil demand that has been shut off because of the lockdowns. Well, that's going to come back on the market in the next 6 months." - Hess (HES) CEO John Hess
Companies are investing in more production
"So the key challenge for the industry actually to deal with the supply shock is to get more supply out there, it's investment -- the industry needs to do more. That means more investment in shale, it means more investment in the offshore and it means more investment in OPEC." - Hess (HES) CEO John Hess
"Yes. If you look at -- I think it's not only IOCs and NOCs. You have a lot of large independent operating internationally that have already seized the cycle.. that are reinvesting. The NOCs have been responding. And have been disciplined, those of -- those companies that were part of the OPEC+ agreement, but they are reinvesting now in short cycle. And some of them in the Middle East have made a commitment for capacity expansion." - Schlumberger (SLB) CEO Olivier Le Peuch
Energy prices could keep rising
"We're losing another three or three 5 million barrels a day over the coming months, if we think about China emerging out of Covid and another six months or so and returning another one to one 5 million barrels a day of demand we have a gap in the world that needs to be filled or bad. 4 million barrels a day it will not be easy to do that and we can go into reasons for that in the least and in North America if we'd like to be. But the point of this is that it is not. It should not be a surprise or shock if what we're looking at are oil prices of $140, a barrel or somewhere around that range within the next three to four months going into the future." - Citigroup (C) SVP for Global Energy & International Affairs at S&P Carlos Pascual
Nuggets of Wisdom
Jim Simons shares some principles he lives by
"I have five principles -- The first one is to be guided by beauty -- Just as a great theorem can be very beautiful, a very very well company that's really working on all things very very efficiently, that can be beautiful so be guided by beauty. Surround yourself with the smartest and best people you possibly can have and let them do their thing. Don't sit on top of them and if they're smarter than you all the better, So surround yourself with wonderful people. That’s two. Don't run with the pack. If everyone is trying to solve the same problem or a whole group of people, if that's the latest and greatest thing to do, don't do that. I'm not the fastest. I'm not the fastest runner. I'm not the fastest thinker and I'm a pretty good thinker but I'm not so fast. So do something original. Don't follow the pack. Don't give up easily. Stick with it, not forever but really give it a chance to get where you're going. And the final principle is hope for good luck. That's the most important principle." - Renaissance Technologies Founder Jim Simons