The American boom

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Good morning. Janet Yellen has a plain and simple explanation for the rising 10-year yield. Asked about this yesterday, the US Treasury secretary said, “Largely, I think it’s a reflection of the resilience in the US economy,” swatting away fears that a bulge of Treasury issuance is driving up the term premium. Unhedged has an even simpler explanation: more sellers than buyers! Send us your market nostrums: robert.armstrong@ft.com and ethan.wu@ft.com.

GDP good! Earnings good!

Yesterday’s third-quarter gross domestic product report was extraordinary. Did anyone expect real growth near 5 per cent two months ago, let alone a year ago? Two themes stood out: the US consumer continuing to power on, and fiscal policy making itself felt. Real consumer spending rose 4 per cent year over year. Meanwhile government spending and investment, notably in R&D, have added to headline GDP for five quarters running. Underlying trend growth is arguably closer to 3 per cent than 2 per cent.

This third-quarter GDP reading is so strong that even if growth inexplicably collapses to zero in the fourth quarter, real GDP for the year would still be at 2.3 per cent, notes Neil Dutta of Renaissance Macro. Compare that to the Federal Reserve’s 2023 real GDP forecast of 2.1 per cent.

The emerging picture in third-quarter corporate earnings matches the strong GDP numbers. Among companies that have reported (about 40 per cent of the S&P 500), nearly four in five have beat earnings expectations, with an average beat of 7.7 per cent, compared with a one-year average of 4.4 per cent, according to FactSet.

These are high-level numbers, though. It helps to look closer. A nice way to tell the story of US consumer resilience is with Coca-Cola’s results in North America. In the third quarter, prices rose 5 per cent, and volume was flat. Not impressed? Well, a year ago the price increase was 15 per cent; a year before that, another 5 per cent. Through all of this, volumes have not fallen. Coke is something like 25 per cent more expensive than three years ago, and Americans drink just as much of it now as they did then. That is about as good a thumbnail portrait of the US economy as you are likely to get.

That sketch of consumer resilience is broadly backed by what the banks and payment companies have said about spending, though their tone was perhaps a notch more cautious than the GDP data might lead one to expect. Visa and Mastercard’s volumes on their US networks grew about 6 per cent from a year before, more or less unchanged from the last few quarters. But that seems to partly reflect the fact that cards take share from other forms of payment. Bank of America, which has data on all deposit transactions, sees growth slowing gently:

JPMorgan echoed this basic point, saying: “Consumer spend growth has now reverted to pre-pandemic trends, with nominal spend per customer stable and relatively flat year-on-year.”

Amazon’s US retail business, meanwhile, grew sales at 11 per cent in the third quarter, bang in line with the two preceding quarters. The US consumer is not backing off.

The economic landscape is not completely even. Many transport and logistics companies are not doing well, which would normally be a red flag about future growth. But a large part of this is down to the goods economy regaining its equilibrium after the pandemic shock. The president of trucker JB Hunt, Shelley Simpson, said on a quarterly call this week that:

We have been in a challenging freight environment or a freight recession, largely driven by excess inventory in the supply chain. Our customers have been working through excess inventory . . . we felt like that destocking trend started to moderate in June . . . we are not at a point yet to say we’re out of the freight recession, but we do feel like we’re coming out of it

UPS is feeling the same pain, with US package delivery revenues falling by double digits, but like Hunt, it said recently volumes are improving. And the good GDP print shows the shipping recession is probably mostly about timing and bullwhip effects rather than a lack of underlying demand.

That is not to say there is no bad news to be found. There have been small but noticeable signals of stress among lower income consumers. Subprime auto loan delinquencies have hit a multi-decade high. Citigroup’s third-quarter call mentioned “cracks” among card customers with lower credit scores. As we’ve mentioned before, the packaged food company ConAgra flagged customers trading down and economising. Dollar stores have been struggling, too. Spending in the US is so unequal, however, that trouble at the low end does not amount to a large overall drag: the bottom quintile of the income distribution only contributes about a tenth of personal consumption expenditures. That said, there is pain around the edges, and whether it spreads is a story worth watching.

If growth were peaking and starting to turn over, you might spot incipient weakness in ad spending, because marketing budgets are discretionary and can be cut quickly. The big digital ad companies are reporting just the opposite. Sales in Meta’s core business rose 24 per cent year over year in the third quarter, and Google search and YouTube ads both rose double digits. On the company’s earnings call, Alphabet CFO Ruth Porat noted a “stabilisation in spending by advertisers” after “period of historic volatility”. Omnicom, an old school ad agency, reported 6 per cent sales growth in its traditional advertising business. “Our clients,” said Omnicom’s CFO Philip Angelastro, “want to spend the rest of their budget and grow their businesses through the end of the year.”

It is the nature of financial journalists to see the dark cloud behind every silver lining. But the fact is private sector economic fundamentals — employment, wages, investment, balance sheet quality — are solid. The remarkable GDP data is backed by good earnings results. In time, higher rates will slow real growth. For now, enjoy the sunshine. (Armstrong & Wu)

One good read

Marc Andreessen is not so much a techno-optimist as a reactionary futurist.