There’s plenty to worry about, as global growth has stalled but bottlenecks keep inflation elevated. Wage pressures are building on the back of recent inflation data (eg, U.S. strikes, German union negotiations). We continue to watch for “peak bottleneck”. The Atlanta Fed’s tracking estimate for U.S. real GDP in 3Q is down to 0.5% q/q A.R. The quarter appears to have been quite weak, both in the U.S. and abroad (eg, China GDP reported at 0.2% q/q in 3Q).
U.S. industrial production plunged -1.3% m/m in September, pulling the operating rate down to 75.2%. Weather disruptions from Hurricane Ida impacted the number.
The Fed’s Beige Book reported last week: “economic activity grew at a modest to moderate rate … Several Districts noted, however, that the pace of growth slowed this period, constrained by supply chain disruptions, labor shortages, and uncertainty around the Delta variant of COVID-19 … Most Districts reported significantly elevated prices, fueled by rising demand for goods and raw materials. Reports of input cost increases were widespread across industry sectors, driven by product scarcity resulting from supply chain bottlenecks. Price pressures also arose from increased transportation and labor constraints as well as commodity shortages.” It’s tough to find much that’s encouraging in that description.
Yet the U.S. yield curve steepening & substantial consumer saving remain key positives for economic growth. Household balance sheets are in good shape overall. The NAHB homebuilders index rose to 80 in the U.S. in October.
Bottom line: solid demand has been held back by restricted supply, of product (eg, semis), transportation (ports, school buses), labor, and energy. Yet with U.S. initial jobless claims declining to 290,000 last week, it’s tough to get too negative. Time should help fix the product & transportation bottlenecks, and there’s evidence the labor market can improve (even if it is not a straight line as vaccine mandates result in layoffs). Energy remains the biggest wild card, in our opinion. Energy expenditures in the coming winter could reinforce recent price trends.
As we’ve noted previously, it isn’t “1970s bad”. But even a moderate re-anchoring of inflation higher is news. As firms change the way they do business to combat this issue, output-per-hour (productivity) gains are starting to occur. Productivity allows the opposite of stagflation: stronger growth and muted inflation, since there are more goods & services produced. Put another way, straining the economy in ways it has not been tested since the 1970s might result in different business processes now … out of necessity.
3Q Earnings Growth Approaching 35%
After week two of earnings season, both earnings and revenue growth saw further improvement. Earnings growth improved to nearly 35%, with better than expected contributions from most sectors. Revenue growth increased to 14.5%, with energy showing the most notable improvement. This comes as no surprise given the rise in oil prices seen in the 3rd quarter compared to the 3rd quarter of last year.
83% Of Companies Are Beating Earnings Estimates So Far
With 83% of companies beating earnings estimates thus far, the rate remains well above the historical average of 66%. However, this figure is down from 1Q and 2Q, where 87% and 88% beat earnings estimates, respectively.
Surprise Factor Is Double Digits For the Sixth Quarter In A Row
While still early in the reporting season, a surprise factor of 14% would mark the sixth consecutive quarter where the factor came in at double digits. This suggests analysts are consistently underestimating earnings for companies. Furthermore, this is the longest period in history, going back to 1994 where the surprise factor was this high.
Estimated Operating Margins Pausing At 17.4%
While this is not the first pause we have seen in margins over the last year, it does come in the middle of earnings season. This upcoming week will be pivotal in determining if they will once again move higher, as many of the large companies that can impact the aggregate levels are expected to report.
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