The monthly data suggest the economy is strong, but tax reciepts are down, which suggests personal incomes are not as high as they were a year ago.
Stocks continue to rise as investors appear to assume all is well. As in magic, all is not always what it appears to be.
The Week That Was
Monetary numbers continue to show an unwinding of inflation. June’s headline CPI total and core were up at only a 2 percent annual rate. The trend is clearly moving in the right direction.
Although inflation is coming down, it is not coming down quickly. Even with the modest 0.2 percent gain in June, the second quarter core CPI is still up at a 4.7 percent annual rate from the first quarter.
Consumer spending and income data through May appear to show a strong economy with real disposable incomes up at a 3 percent annual rate from the first quarter. Current dollar consumer spending appears to be up 6 percent to 8 percent above the first quarter. Total wages are up 8 percent from the first quarter.
However, third quarter federal tax receipts are down 20 percent from the third quarter a year ago. With three quarters of the fiscal year over, tax receipts through June are down 11 percent from the prior year.
That doesn’t make sense. Either corporations and individuals are significantly underestimating their taxes or the economy is not doing as well as the economic numbers suggest.
All of this can change when June consumer spending and income data get reported at the end of this month.
Things to Come
The most significant report this week will be tomorrow’s advance report on June retail sales. This is a highly volatile series. Along with tax receipts, retail sales data are one of the few series pointing to a very weak economy. May retail sales data were down slightly from the first quarter average, and data for the past six months show an increase at only a 2 percent annual rate.
Consensus estimates for retail sales call for a small gain of 0.4 percent due to strong auto sales. Based on the strength in the May consumer spending and income data, we expect June retail sales to show a gain of more than 1 percent, or at least show significant upward revisions to earlier data.
June’s Homebuilders’ Index jumped to 55 last month indicating possible strength. This was the first positive reading above 50 since July, 2022.
July’s index number is expected to be close to 55. Anecdotally, our plumber told us he’s busy with a hot remodeling market. However, the new-home market is dead. Data for home building permits (due Wednesday) will confirm the extent of to which our plumber’s observations carry over for the country as a whole.
Money, Money, Money
By many measures, the economy appears to have sufficient money to keep going.
With three-quarters of the current fiscal year ended, federal spending is up 10 percent from a year ago. One small business told me he just received a government check for $582,000 in Covid money.
Government spending can temporarily boost an economy, but that goosing comes at the expense of future performance. The current strength, if real, also will prevent inflation from moving quickly to the Fed’s target. Financial markets may have overreacted to this week’s good inflation news.
Stock prices continue moving higher, with the major indexes closing in on their all-time highs at the beginning of 2022.
These indexes are now only about 5 percent off their record highs. If we include dividends, those who stayed fully invested should have regained almost all their losses.
Small cap stocks have not done as well. They are down 15 percent to 20 percent from their peaks. Nonetheless, those of us who have been warning of the risks in stocks have been wrong—so far.
The reason stocks have surged is that there is a widespread belief that the economy is doing well. In looking at stocks going forward, the main question is, how strong is the economy? Despite many numbers indicating strength, we still see an economy with serious problems.
With the S&P500 16 percent overvalued and the Fed likely to continue selling securities, stocks are still vulnerable to the delayed impact of monetary restraint.
Economic Fundamentals: negative
Stock Valuation: S&P 500 overvalued by 16 percent
Monetary Policy: restrictive
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