- The S&P 500 is on the verge of a correction and the Nasdaq has already corrected, but many data points on consumer earnings paint a mostly optimistic picture.
- Home sales are boosted by mortgage buybacks, flyers are still paying for premium seats, and Amazon is hiring 250,000 seasonal workers for the holidays.
- “Where do I see softness?” [consumer] Credit?” JPMorgan Chief Financial Officer Jeremy Barnum said, repeating an analyst’s question on the bank’s earnings call. “I think the answer to that is actually nowhere to be found.”
An Amazon.com Inc. employee prepares an order requesting a buyer to gift-wrap an item at a fulfillment center in Shakopee, Minnesota, U.S., on Nov. 12, 2020.
Amazon.com Inc | Portal
The first gross domestic product report for the third quarter showed consumer spending rose 4% annually after inflation, the best increase in nearly two years. September’s retail sales report showed spending increased nearly twice as fast as last year’s average. And yet bears like hedge fund trader Bill Ackman argue that a recession is already imminent this quarter and the market has entered correction territory.
For an economy whose upward or downward trajectory depends on consumer conditions, third-quarter earnings data support what remains a largely positive view of spending. According to CFRA, S&P 500 consumer staples and consumer discretionary companies that reported through Oct. 25 posted an average profit gain of 15%, the largest increase in revenue among the stock market’s 11 sectors.
“People are kind of scratching their heads and saying, ‘The consumer is doing better than expected,'” said Sam Stovall, a strategist at CFRA Research. “Consumers are working. They continue to buy goods and have experiences. And they don’t seem to be worried about the amount of debt they have.”
How is this possible when interest rates on everything from credit cards to cars and homes are skyrocketing?
It’s the anecdotes from leading companies in key industries that tell the real story: Delta Air Lines and United Airlines tell how their most expensive seats sell the fastest. Homeowners use mortgage purchases to combat high interest rates. Amazon says it will hire 250,000 seasonal workers. A Thursday report from Deckers Outdoor stunned some – in a previously tepid apparel sales environment – when it revealed that sales of Uggs, a mature line of fuzzy boots, increased on 28 in a 79% profit surge that sent shares up 19% %.
The picture they paint is broadly consistent with the economic data – generally positive, but with some weaknesses. Here is some of the key evidence from the earnings reports of the market’s biggest companies that explains how companies and the American consumer are making the most of a challenging interest rate environment.
How home builders shop for mortgage rates
No industry is more central to the market’s perception that the consumer is falling from the sky than housing, with existing home sales down nearly 40% since Covid-era highs. But while Anywhere Real Estate, owner of Coldwell Banker, saw profits fall by half, the news from new home builders was pretty good.
Most consumers have mortgage rates below 5%, but for new home buyers, one reason rates aren’t quite as high as they should be is that builders have found ways to get around the 8% interest rates that exist House sellers burden. That explains why new home sales have increased this year. Homebuilders are drawing on money previously paid on other payment incentives to offer mortgages at 5.75%, rather than the 8% level that other mortgages have reached. At PulteGroup, the country’s third-largest home builder, that contributed to an 8% jump in third-quarter profits and a 43% jump in new home orders for delayed delivery, much better than the government-reported increase in new home sales 4.5% YoY -date.
“What we’ve done is simply reallocate the incentives we’ve offered in the past on cabinets and countertops and redirect those to interest rate incentives,” PulteGroup CEO Ryan Marshall said. “And that was the most powerful thing.”
The mechanics are complex, but it works like this: Pulte provides about $35,000 in incentives to get each home sold, or about 6% of the price, the company said in its earnings call. Part of this is paying for a mortgage buyback. About 80 to 85 percent of buyers take advantage of the buyback offer. But many split the funds, combining a smaller buyback and keeping a few extras for the home, the company said.
Jackie Benson, an economist at Wells Fargo, said in a report that developers could struggle to maintain that strategy if mortgage rates remain around 8%, but new home prices have fallen 12% in the last year. They believe incentives and larger discounts than those offered to most owners of existing homes give builders an advantage.
Price cuts are underway among car companies, with more to come
Auto sales rose significantly in September, rising 24% year-over-year, more than double the year-to-date figure. However, they fell short of expectations at electric vehicle leader Tesla, which blamed high interest rates, and at Ford.
“I just can’t emphasize it enough that for the vast majority of people who buy a car, it’s about the monthly payment,” Tesla CEO Elon Musk said in its earnings call. “And as interest rates rise, the interest portion of the monthly payment increases.”
Maybe, but that’s not the case at General Motors, although investor reaction to GM’s good numbers was muted due to the United Auto Workers strike.
GM beat earnings expectations by 40 cents per share, but shares fell 3% as investors worried about the strike, forcing GM to withdraw its fourth-quarter profit forecast on Oct. 24. Ford, which settled with the UAW on Oct. 25, said the next day it had a “mixed” quarter as profit missed Wall Street targets due to the strike. Consumers came through as unit sales rose 7.7% in the quarter, with truck and electric vehicle sales each rising 15%. GM CEO Mary Barra said on GM’s analyst conference call that the company gained market share and saw a 21% increase in unit sales, despite incentives being below the industry average.
“While we are hearing reports on a macroeconomic level that consumer sentiment, etc., may be weakening, we have not seen such developments in demand for our vehicles,” GM CFO Paul Jacobson told analysts. However, Ford CFO John Lawler said car prices would need to fall by about $1,800 to be as affordable as they were pre-Covid. “We believe it will happen within 12 to 18 months,” he said.
Tesla’s turnaround plan involves further reducing car production costs, which have fallen by about $2,000 per vehicle over the last year, the company said. With federal electric vehicle tax credits, a Model Y crossover can be had for about $36,490, or as little as $31,500 in states with local electric vehicle tax incentives. That’s well below the average for all cars, which Cox Automotive puts at over $50,000. But Musk says some consumers still aren’t convinced. .
“If you look at the price cuts we made on the Model Y, for example, and compare them to how much people’s monthly payments have increased because of interest rates, the price of the Model Y is almost unchanged,” Musk said. “They can’t afford it.”
Most banks say the consumer still has cash, but not Discover
To find out how consumers are doing, ask the banks that disclose their consumer balances quarterly. To find out if they’re confident, ask credit card companies (often the same companies) how much they spend.
In most cases, financial services providers say consumers are doing well.
At Bank of America, consumer balances are still about a third higher than they were before Covid, CEO Brian Moynihan said on the company’s conference call. At JPMorgan Chase, balances fell 3% last year, but delinquencies on consumer loans fell during the quarter, the company said.
“Where do I see softness?” [consumer] Credit?” Chief Financial Officer Jeremy Barnum said, repeating an analyst’s question on the earnings call. “I think the answer to that is actually nowhere.”
“Resilience” continues to be the main theme among credit card companies. In fact, in its Oct. 26 call, MasterCard used the word “resilience” eight times to describe U.S. consumers.
“I mean, the reality is that the unemployment rate is so high [near] “This is an all-time record low,” said Sachin Mehra, MasterCard’s chief financial officer.
At American Express, where U.S. consumer spending rose 9%, the slight surprise was the company’s announcement that young consumers were adding Amex cards faster than any other group. According to the company, U.S. spending by Millennials and Generation Z increased 18% through Amex.
“I guess they don’t mind resuming student loan payments,” Stovall said.
The biggest drag came from Discover Financial Services, one of the few banks that sharply increased its loan loss provisions for consumer debt, resulting in a 33% drop in profits as Discover’s loan charge-offs doubled.
Despite the fact that the debt burden on U.S. households is almost as high as it was at the end of 2019 and has declined over the quarter, according to government data, John Greene, chief financial officer of Discover, said in his conference call: “Our macroeconomic assumptions reflect a relatively strong labor market.” but also the headwind from consumers due to a falling savings rate and increasing debt burdens.”
There are still no signs of a travel recession among airlines
It’s good to be Delta Air Lines now, posting a 59% third-quarter profit gain driven by the most expensive products on its virtual shelves: first-class seats and international travel. Good for United, too, where higher-margin international travel grew nearly 25% and the company plans to add seven first-class seats per departure by 2027. Not so good for discount retailer Spirit, whose shares fell after a $157 million loss.
“As the market continues to be mired in a travel recession, despite evidence to the contrary from Daily [government] Data and our consumer surveys, Delta’s third-quarter success, and solid guidance and commentary for the fourth quarter should finally reassure the group in the face of a consumer ‘cliff’ and allow them to unbuckle their seatbelts and walk around the cabin,” says Ravi Shanker, an analyst at Morgan Stanley, said in a note to clients.
One noticeable impact: United is adding 20 planes this quarter but pushing back 12 more deliveries to 2024, while Spirit said it is delaying plane deliveries and focusing on its planned merger with JetBlue and cost cuts to restore competitiveness , as demand is weak The product will remain in place until the holiday season.
As was the case throughout 2023, richer consumers — who contribute the larger share of spending — fared better than middle-income families, Sundaram said.
The goods recession is real
Shares of Whirlpool, Ethan Allen and mattress maker Sleep Number all fell after reporting poor earnings, and they all experienced selling difficulties, consistent with macro data.
This follows a trend that is now firmly established in the economy: During the pandemic, when people were more often stuck at home, they stocked up on durable goods, especially for the home. All three companies saw share prices rise during the coronavirus crisis, and growth has since moderated as their markets became at least partially saturated and consumers shifted spending toward travel and other services.
“All the stimulus money went to the furniture industry,” Sundaram said, exaggerating the impact. “They’ve been falling apart for a year now.”
Ethan Allen’s sales fell 24% as the company said it was caused by a flood at a factory in Vermont and weaker demand. At Whirlpool, which said in its second-quarter results that it would offset declining sales to consumers by selling more appliances to homebuilders, “discretionary purchases are even weaker than expected due to increased mortgage rates and low consumer confidence.” said CEO Marc Bitzer during Thursday’s conference call. Its shares fell more than 20%.
Amazon’s $1.3 billion holiday hiring spree
Amazon is making its biggest commitment to holiday hiring yet, spending $1.3 billion to hire workers, mostly in fulfillment centers.
This is possible because Amazon has reorganized its warehouse network to speed up deliveries and reduce costs, driving sales up 11% in the last two quarters as consumers turn to the online giant for more frequent repeat purchases . Amazon also tends to serve a more affluent consumer who has proven more resilient in the face of interest rate hikes and inflation than the target demographic of Target or dollar stores, according to CFRA retail analyst Arun Sundaram.
“Their retail sales are doing really well,” Sundaram said. “There are still headwinds impacting consumer goods sales, but everyday essentials are doing really well.”
All of this sets the stage for an eventful Christmas season.
PNC still expects a recession to occur in early 2024, thanks in part to interest rate hikes by the Federal Reserve, and expects investors to focus on selling goods to look for further signs of weakness . “There’s a lot of strength in the late starts” of an expansion, said Amanda Agati, chief investment officer of PNC Asset Management.
Sundaram, whose firm has forecast interest rates will soon fall as inflation eases, believes retailers are in better shape and have stronger supply chains that will allow for strategic discounting deeper than last year to boost sales . Uggs’ above-average sales performance was attributed to improved supply chains and shorter delivery times as the ongoing impact of the pandemic eases.
“Although there are headwinds for the consumer, there is a chance of a decent holiday season,” he said, albeit still affected by inflation over the past two years. “The 2022 holiday season may have been the low point.”