July 28, 2023
Music Groups have been packing stadiums for decades. From the Beatles farewell concert at Shea Stadium to Bruce Springsteen… well… anywhere.
But none have ever been deemed an economic force of nature.
The Federal Reserve’s Beige Book is published eight times a year — before each Fed meeting. It contains data collected from businesses, market experts etc. from all the Fed’s various districts that give the board members (and anyone who reads it) an “in the trenches” idea of what’s happening in the economy.
From the Philadelphia Fed section of the July 12 Beige Book…
Tourism contacts continued to report slight growth – noting that the recovery was slowing. Business travel continued to recover, but leisure travel was flattening. Multiple contacts reported that the amount of money guests spend at their leisure destinations declined modestly in recent months. Despite the slowing recovery in tourism in the region overall, one contact highlighted that May was the strongest month for hotel revenue in Philadelphia since the onset of the pandemic, in large part due to an influx of guests for the Taylor Swift concerts in the city.
That’s it… The Philly Fed just made Taylor Swift an economic indicator.
And the “Swift Effect” was felt in more than just the City of Brotherly Love…
Chicago’s tourism and conventions bureau announced last month the city set a record for occupied hotel rooms, thanks in part to Taylor Swift’s three sold-out nights of concerts at Soldier Field.
The weekend Swift performed, downtown Cincinnati hotels grossed $2.6 million, according to the local CBS affiliate.
Santiago Corrada, CEO of Visit Tampa Bay, told WTOG, a CBS affiliate, that Swift’s concerts had a “huge impact.” “I would say on the hotel side of things, pretty similar to a Super Bowl…“
(My wife and daughters loved her when they saw her here in Texas!)
It seems riches and prosperity follow her everywhere.
Maybe Chairman Powell should send her a thank you note. Because along with her US tour, there’s been an uptick in the “soft landing” talk.
There would seem to be a pattern… But in the off chance it isn’t Taylor Swift’s doing, what could be sparking this shift in narrative?
There Has Been a Small Wave of Good News
Let’s start by talking about the elephant that was just reported yesterday — GDP. The BEA reported a 2.4% seasonally- and inflation-adjusted annual growth rate in the second quarter which was above the first quarter’s revised 2% print and WAY above Q2’s forecasts of 1.8%.
Back in the first two quarters of 2022, GDP contracted 1.6% and 0.6% which to some indicated we were in a technical recession. Still the wise and overseeing declarers of recessions — the NBER — declined to call it one. Since then, GDP has averaged an astonishing and very healthy 2.55% growth over the last four quarters. And according to the BEA the US economy grew 2.1% overall in 2022.
We’ve warned in the past that over 60% of GDP comes from consumers consuming. And consumers have been getting squeezed pretty hard over the past two years. But for now, let’s bask in the glow of the good news.
Then there’s inflation.
That was what started this whole mess in the first place. That “transitory” inflation that began after governments around the world locked down economies and trashed the global supply chain. Not that I think the Fed’s actions have been a direct cause of the disinflation we’ve been experiencing the past 12 months, but the slowdown in the rate it’s rising is a positive. (Even if actual prices are still at all time highs.)
And that good news on the flip side of that slowdown is that, after two years of losing ground, wages are finally starting to outpace inflation.
Earlier this week I wrote about that… and explained why that might not be a pleasure workers enjoy for long. The FOMC believes that wage growth should be in line with their inflation targets. So a 4.4% year-over-year pay raise won’t stand for long if the Fed has any say in the matter. But for now, so far so good.
Consumers themselves are turning more optimistic too. This July, the University of Michigan Consumer Sentiment indicator reached its highest level since mid-2021.
The outlook was good for their Current Economic Conditions and Consumer Expectations reports as well.
But maybe the most notable (or at least talked-about) change has been the stock market.
While these days it’s not exactly an economic indicator, the stock market continues to rally in the face of
mixed economic news just about everything. In case you hadn’t noticed, the S&P 500 is a mere 5% from its previous all-time high.
We’ve just dipped into earnings season and so far, things are going pretty well for Wall Street. According to Zacks Equity Research last Wednesday, roughly 25% of S&P 500 companies have reported Q2 earnings. Of those in the books, 81.1% beat EPS estimates and 63.9% beat revenue projections.
That’s at least a glimmer of hope because overall this year earnings haven’t been spectacular.
Earnings on the S&P 500 fell about 13% during 2022’s bear market. They have been largely flat since the beginning of the year while the average has rallied back suggesting that the index is getting a little rich.
SP 500 (Blue) / Earnings (Orange)
One of the bigger threats to the economy would be a broad slowdown in these areas. In past articles, we’ve explained how an earnings recession could dramatically impact the direction of the economy.
For now, and remembering that there are still a lot of companies to report, earnings appear to be a bright spot in a sea of otherwise bad news.
Maybe even more notably, the market has continued its rally in the face of sharply higher interest rates. The Fed did its first 25 basis points raise back on March 16, 2022. From there it was pedal to the metal, raising another 400 basis points before the year was done.
But by mid-October, the stock market had become somewhat immune. The “AI” rally started and still hasn’t quit. Which means the stock market (looking at the S&P 500) has actually surpassed the level where it was when they started hiking.
For an asset class that had become so interest rate sensitive, this is actually pretty good news. Strength in the face of more normalized rates is a good sign. For the market — not necessarily the economy.
The Flip Side
Remember, the stock market isn’t the economy. And all the hopes of Wall Street won’t stop a recession if the economy is breaking down. And there are some significant lingering signs of that…
The Conference Board, a major economic think tank, publishes something it calls its Index of Leading Economic Indicators. Last week they reported the index fell 0.7% in June. Their report stated (my emphasis):
“The Leading Index has been in decline for fifteen months—the longest streak of consecutive decreases since 2007-08, during the runup to the Great Recession. Taken together, June’s data suggests economic activity will continue to decelerate in the months ahead. We forecast that the US economy is likely to be in recession from Q3 2023 to Q1 2024. Elevated prices, tighter monetary policy, harder-to-get credit, and reduced government spending are poised to dampen economic growth further.”
Plus, there are still remnants of the banking crisis from earlier this year.
PacWest, a struggling regional bank that had been under huge pressure, finally got some relief this week when it fielded a $1.1 billion buyout offer from Banc of California. (Yet another bank takeover.)
Credit since the shake up earlier this year has remained tight. The New York Fed recently reported how tight. Here are a couple points from their June Survey of Consumer Expectations, Credit Access Survey…
• The overall rejection rate for credit applicants increased to 21.8 percent, the highest level since June 2018.
• The rejection rate for auto loans increased to 14.2 percent from 9.1 percent in February, a new series high.
• It increased for credit cards, credit card limit increase requests, mortgages, and mortgage refinance applications to 21.5 percent, 30.7 percent, 13.2 percent, and 20.8 percent, respectively.
• The average reported probability that a loan application will be rejected increased sharply for all loan types. It rose to 30.7 percent for auto loans, 32.8 percent for credit cards, 42.4 percent for credit limit increase requests, 46.1 percent for mortgages, and 29.6 percent for mortgage refinance applications. The readings for auto loans, mortgages, and credit card limit increase requests are all new series highs.
Needless to say, access to capital isn’t like this when times are good.
And finally, there’s the economic elephant in the room… the yield curve.
We’ve been talking about this for well over a year. Every time the yield curve turns negative, it pretty much portends a recession. The curve crossed into negative territory over a year ago and hasn’t seen positive territory since.
So Can Taylor Save the Day?
So far, the good news appears to be tenuous at best.
The bad news, which has been slightly more deeply rooted, has been building little by little.
The talented Ms. Swift can’t stay on tour forever.
For now, maybe we should just be glad Beyoncé hasn’t brought her tour to America…
Editor, Streetlight Confidential