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GDP Falls at a 0.9 Percent Rate, Driven by Slower Inventory Growth and Falling Housing Construction

Recession-fearing households increased spending on hotels and restaurants at a 13.5 percent annual rate in Q2.
The post GDP Falls at a 0.9 Percent Rate,…



Recession-fearing households increased spending on hotels and restaurants at a 13.5 percent annual rate in Q2.

GDP declined at a 0.9 percent annual rate in the second quarter, as a slower pace of inventory accumulation subtracted 2.01 percentage points from the quarter’s growth. A 14.0 percent rate of decline in residential construction subtracted 0.71 percentage points from GDP growth. Final sales of domestic products to domestic purchasers fell at a 0.3 percent rate, after rising at a 2.0 percent rate in the first quarter.

Even with Slower Growth, Inventories Still Accumulated at a Healthy Pace

Inventories still rose at a $81.6 billion annual rate, somewhat faster than pre-pandemic normal. This was nonetheless a drag on growth, since they grew at a $188.5 billion rate in the first quarter. This healthy rate of accumulation is a positive going forward, since it means stores are, for the most part, well-stocked after the pandemic supply chain problems. This will put downward pressure on prices.

Farm inventories are an exception. They fell at a $44.6 billion annual rate, continuing a downward trend that has been in place since the third quarter of 2015.

Consumption Grew at a Modest 1.0 Percent Rate, as the Switch Back to Services Continues

Consumption of services rose at a 4.1 percent annual rate in the second quarter, while consumption of goods fell at a 4.4 percent rate. Goods consumption as a share of nominal spending is still 3.6 percent higher than its pre-pandemic share, with service spending down by the same amount. The goods share in real terms is 3.2 percentage points higher, with services down by 2.4 percentage points (real shares won’t sum to 100 percent).

Spending on a wide range of goods is still considerably higher than its pre-pandemic level. The biggest drop in nominal shares on the service side are in health care services, down 1.4 percentage points, recreational services down 0.6 percentage points, housing down 0.5 percentage points, and transportation services (much of this is commuting) down 0.4 percentage points.

The Saving Rate is Holding Up

The inflation hawks have been raising the alarm that people are spending down pandemic savings, leading to an overheated economy. They cite the reported saving rate, which was 5.2 percent in the second quarter, down from an average 7.5 percent in the three years preceding the pandemic.

This is misleading. Saving was lower in the last two quarters because tax payments have risen. Since there was not an increase in tax rates in 2022, this is presumably because people are paying capital gains taxes on recent stock sales.

The sum of savings plus taxes as a share of personal income was 18.9 percent in the second quarter. This is higher than the 18.5 percent figure in 2018 and the 18.7 percent share in 2019.

In short, there is no story of excessive levels of consumption overheating the economy. On the other side, hotel and restaurant spending rose at a 13.5 percent annual rate in the second quarter. This is not consistent with the widely expressed recession fears reported by the media.

Inflation Slows Sharply in Quarter

Inflation, as measured by the core Personal Consumption Expenditures (PCE) deflator (the Fed’s main inflation gauge), fell to a 4.4 percent annual rate in the second quarter from a 5.2 percent rate in the first quarter. This is still considerably higher than the Fed’s target of a 2.0 percent average rate, but it should help to alleviate concerns of a 1970s-type wage-price spiral. While it is just a single quarter’s data — and these numbers have been especially erratic in the pandemic — the pace of inflation looks to be slowing rather than increasing.

Investment Remains Healthy

Nonresidential investment fell at a 0.1 percent annual rate in the quarter, driven mostly by an 11.7 percent rate of decline in structure investment. Structure investment has been falling sharply throughout the pandemic and recovery as there is less need for office space and traditional retail space. It was 24.7 percent below its pre-pandemic level in the second quarter.

Investment in intellectual products remains solid, rising at 9.2 percent rate in the quarter, putting it 20.0 percent above its level in the fourth quarter of 2019. Equipment investment fell at a 2.7 percent rate, but is still 9.0 percent higher than in the fourth quarter of 2019.

Residential Investment Falls Sharply

The drop in housing was largely expected and pretty much what the Fed presumably wanted to see as a result of its interest rate hikes. The sharp rise in mortgage interest rates took the air out of an incipient housing bubble, with sales falling sharply.

The higher rates have also led to a drop in construction, which is unfortunate since the country needs more housing. However, residential construction was still 9.9 percent above its pre-pandemic level in the quarter. It is also important to remember that fees associated with mortgage issuance are included in this category of spending. Mortgage refinancing has largely disappeared in the last two months, with applications down close to 80 percent from year-ago levels.

Slowing Nondefense Federal Spending is Drag on Quarter’s Growth

Nondefense federal spending fell at a 10.5 percent annual rate in the second quarter, slowing the quarter’s growth by 0.3 percentage points. State and local government spending also declined at a 1.2 percent rate, knocking 0.13 percentage points off growth.

Net Exports Were a Big Boost to Growth in the Quarter

An 18.0 percent rise in exports, coupled with a much slower 3.1 percent rise in imports, caused trade to add 1.43 percentage points to second quarter growth. We are not likely to see similar gains in future quarters, as weaker growth in our trading partners is likely to diminish demand for US exports.

On the Whole, This is a Positive Report

The modest drop in GDP reported for the quarter is not good news, but it was hardly a surprise. It also was entirely due to inventory quirks, which will not be repeated in future quarters. Consumption is still growing at a respectable pace, as is investment. 

The Fed has been raising interest rates ostensibly out of concern that the economy was growing too fast, causing inflation. This report should help to stem those fears. While people are apparently not so concerned about a recession to keep themselves from taking trips and going to restaurants, they are still not spending down their pandemic savings. The sharp drop in the inflation rate reported in the core PCE deflator should also alleviate concerns about a wage-price spiral.

CEPR produces same-day analyses of government data on inflation, employment, GDP and other topics. Follow @DeanBaker13 on Twitter to get his quick-take analysis of government data immediately upon release.

The post GDP Falls at a 0.9 Percent Rate, Driven by Slower Inventory Growth and Falling Housing Construction appeared first on Center for Economic and Policy Research.

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Does the Alphabet share price make it a no-brainer investment?

The Alphabet share price is down 32.09% so far this year knocking around $618 billion off the Google-owner’s market capitalisation. The drop…
The post…



The Alphabet share price is down 32.09% so far this year knocking around $618 billion off the Google-owner’s market capitalisation. The drop in Alphabet’s valuation can be seen as the result of two main factors. The first is that this year’s decline is at least partly a natural correction after Big Tech valuations went into melt-up during the pandemic.

The second influence has been a slowdown in revenue growth to its slowest rate since 2013 (6%), excepting a brief period during the pandemic, and concerns over the financial impact of a global recession on digital advertising revenues.

However, at the current share price of $98.46, there is a strong feeling Alphabet has been heavily oversold despite recent gains. That also appears to be a growing feeling among fund managers, who have catalysed the recent rally by buying up swathes of Alphabet stock in recent weeks.

An article by the financial markets and funds data company Morningstar this week ranked Alphabet at the top of a table of “high conviction purchases” by tracked investment managers. Managers 17 funds tracked by Morningstar have made what the data company defines as purchases of Alphabet stock that represents a meaningful addition to their portfolios, judged by the size of the purchase in relation to the portfolio’s size.

The second most popular stock in the table for high conviction purposes was the U.S. bank and financial services company Wells Fargo, with 5 fund managers taking on significant exposure to the company. Alphabet is also currently given a rare 5-star rating by Morningstar’s inhouse analysts, indicating they see it as having limited downside and significant upside at its current valuation.


Source: Morningstar

Why is Alphabet seen by many professional stock pickers and analysts as undervalued?

Even if Alphabet is attracting investor attention at its current knock-down valuation, markets are still sceptical overall. If they weren’t, the company’s valuation would be higher. So while some fund managers have been making major recent investments in Alphabet, reflected by an 18% gain in the share price since November 3, the mainstream is yet to be fully convinced.

Is that simply because investors buying the stock now are cleverer than the wider market which is proving slow to appreciate it has oversold Alphabet? Or are those investors taking a significant risk with their glass half-full view of the company’s prospects over the near to mid-term?

Morningstar points out its analyst Ali Mogharabi estimates fair value for Alphabet shares at $160. That’s 62.5% higher than the current share price of $98, suggesting significant potential upside.

Mogharbi’s fair value estimate of an Alphabet share price of $160 is based on the strong revenue growth and cash flow generated by the company’s 80% share of the global search engine market held by Google. 85% of Alphabet’s revenue is still generated by digital advertising on Google, its associated ad platforms and YouTube.

The remaining 15% comes from a combination of sale of income generated by apps and content on Google Play, its quickly growing cloud service, licensing fees (especially for the Android mobile operating system), and hardware sales. Alphabet also has a loss-making “other bets” division that invests in future technologies and includes companies like the self-driving cars software company Waymo and life sciences company Verily.

Mogharbi expects Google’s dominant position in the search engine market to mean it will continue to see revenue and cash flow growth in future years with no obvious competition in sight. He believes future bets investments are reasonable as long as they are not to the extent they significantly compromise group-wide operating margins and profitability. Especially as there is a reasonable chance some might eventually contribute significantly to future revenues.

Waymo, which is developing an operating system for self-driving cars it hopes will mimic the success of Android for mobile devices, is expected to be a major player in a market worth tens of billions within the next ten to fifteen years.

But future bets aside, Mogharbi expects revenue growth from digital ad sales to maintain average annual double-digit growth for the next five years as mobile usage increases, even taking into consideration the potential for a slowdown next year as recession hurts global economies. He also sees video-content platform YouTube as contributing more to the top and bottom lines over the next few years despite the recent deceleration of its revenue growth.

And the Google Cloud Platform (GCP) is put forward as a strong business that will become increasingly important as it continues to grow. Revenue was up 38% year-on-year to $6.9 billion in Q3 and unlike its two larger competitors, Amazon Web Services and Microsoft’s Azure, Google Cloud is still losing money.

GCP should move into profitability in the medium term, the operating margin has recently shrunk from -14% to -10%, which would boost the group’s value. It is unlikely to ever be as big as AWS or Azure but could still be a major contributor to the bottom line within the next 5-10 years.

Alphabet is also responding to calls from activist investors to tighten its belt by reducing spend on future bets as well as staff numbers and remuneration levels. That should improve margins again and see the company emerge leaner from the current economic slowdown.

The company is also still a cash machine, which is facilitating a strong share buyback policy. Over the last year, the company has repurchased 433 million shares, spending $43.9 billion over the last nine months. Those repurchases reduced its share count by 3.2%, and with the stock price down and $116 billion in cash and equivalents on the balance sheet, the company could get more aggressive with the repurchases, which will help increase earnings per share.

That would be expected to put Alphabet in a very strong position to see its valuation rebound quickly when the cyclical market for online ads turns positive again.

The Alphabet share price also simply looks incredibly good value at its current level. On a trailing basis, it is trading at a price-to-earnings ratio of just 19.5. That’s even lower than the average 20.5 across the broad S&P 500 index which, based on Alphabet’s continued profitability, remaining growth potential, market dominance and balance sheet, just seems strange.

Risks to Alphabet share price upside

The main short term risk to the Alphabet share price is the potential depth of the global recession most economists agreed we have already entered. If the economic slowdown around the world proves more severe than expected and digital ad spend drops more as a result, markets could foreseeably punish Alphabet again and drag its value down.

Longer term, the company is still heavily reliant on digital advertising revenues and it will be a long time before that might realistically change. While some of the company’s future bets, especially Waymo, look very promising, there is still growth potential in the online marketing sector and existing businesses like Google Cloud Platform should make a much bigger contribution over future years, it is hard to deny Alphabet has a lot of its eggs in one basket. That does have to be seen as a risk.

However, overall, while the year ahead poses some downside risks, it does seem hard to imagine the Alphabet share price not rising significantly from current levels over the years ahead. At under $100, the Alphabet share price has a lot going for it.

The post Does the Alphabet share price make it a no-brainer investment? first appeared on Trading and Investment News.

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Spread & Containment

License Plates Could Be Printed On McDonald’s Bags To Stop Littering

License Plates Could Be Printed On McDonald’s Bags To Stop Littering

There’s been talk about McDonald’s in southwest Great Britain could print…



License Plates Could Be Printed On McDonald's Bags To Stop Littering

There's been talk about McDonald's in southwest Great Britain could print car license plates on drive-thru bags to prevent customers from littering. 

"It's not clear exactly how the number plate would be printed on packaging, but it could be scanned onto the brown bags that contain the food," Daily Mail noted. 

Chris Howell, Swansea Council's head of waste, parks and cleansing, told a climate change corporate delivery committee meeting: 

"The Welsh Government has explored with McDonald's, or their franchises, whether or not they could print number plates of cars collecting takeaways from their drive-throughs with a view that that would discourage people from discarding their materials (litter)."

Howell said one of the biggest hurdles with fast-food companies is that if one chain adopts the climate initiative, customers will go to competitors that don't print license plates on bags. 

"If McDonald's do it, then people will just go to Burger King instead of McDonald's, because nobody wants to have their private details printed on that packaging." He added: "I think it's a really good idea but at the minute it's fraught with some difficulties." 

The nationalist political party in Wales, Plaid Cymru, first proposed the idea more than two years ago during the pandemic lockdown when party leaders noticed a spike in fast-food trash along city streets and highways. 

Welsh Government spokesperson told MailOnline:

"There are no current plans to introduce a requirement for drive-through restaurants to add vehicle registration details to fast food drive-through packaging.

"We are continuing to support Keep Wales Tidy with other initiatives to tackle roadside litter including their No Regrets campaign and their Adopt a Highway initiative."

Now 'the cat is out of the bag'. It's only a matter of time before governments start forcing fast-food companies to print license plate numbers on drive-thru bags. The dangers of this could be more surveillance, and who knows what corporations would do with license plate data if such a system were implemented. 

Tyler Durden Sat, 11/26/2022 - 18:00

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Energy is the master resource but it could be Bitcoin that reigns supreme

Nothing shines a light on the importance of energy as much as a fast-approaching winter.
The post Energy is the master resource but it could be Bitcoin…



Nothing shines a light on the importance of energy as much as a fast-approaching winter. When the temperature drops, the scarcity of energy becomes obvious and global efforts to preserve it begin.

This year, the fight for energy is more aggressive than it’s ever been.

The fiscal and monetary policies set in place during the COVID-19 pandemic caused dangerous inflation in almost every country in the world. The quantitative easing that set out to curb the consequences of the pandemic resulted in a historically unprecedented increase in the M2 money supply. This decision diluted the purchasing power and led to an increase in energy prices, sparking a crisis that is set to culminate this winter.

CryptoSlate analysis showed that the E.U. will most likely be the one hit the hardest by the energy crisis.

The European Central Bank (ECB) has been struggling to keep core inflation down this year. The Core Consumer Price Index (CPI) began to increase substantially in 2021 due to the pandemic both in the U.S. and the E.U.

The U.S. has seen its Core CPI decrease sharply since its culmination in February and posted better-than-expected results last month. However, Core CPI in the Eurozone has continued to increase throughout the year and currently shows no sign of stopping.

Graph showing the Core CPI in the U.S. and the Eurozone from 2017 to 2022 (Source: The Daily Shot)

A similar increase in Core CPI can also be seen in Japan and the U.K. One of the factors that may have contributed to their monetary instability is a lack of investment and support for commodities like oil and gas. Widespread efforts to switch to renewable sources of energy led to a decrease in oil and gas purchases in the E.U. and the U.K.

In contrast, the U.S. and Russia have been investing heavily in oil and gas and promoting innovation in the field.

Looking at the value of fiat currencies against the U.S. dollar further confirms this impact.

The Russian Ruble and the DXY have both increased in value in the past two years, while the euro, British Pound, and Japanese Yen have all seen their Dollar value decrease.

global fiat currencies
Graph showing DXY, GBP, EUR, JPY, and RUB and their value against the U.S. dollar (Source: TradingView)

With rising inflation and a seriously weakened currency, the E.U. will have a hard time competing for oil and gas on the global market. Natural gas producers warned that almost all long-term contracts for natural gas coming out of the U.S. have been sold out until 2026. Until then, when a new wave of natural gas supply is expected to come, the E.U. will have to compete with Asia for the limited supply and swallow the high gas price.

All of this uncertainty could have a positive effect on Bitcoin. While the broader crypto market struggles to remain afloat after the FTX fallout, Bitcoin has positioned itself as a pillar of stability in a market plagued with bad actors. Devalued fiat currencies could push retail investors away from safe-haven assets like gold and commodities and towards an asset like Bitcoin.

The post Energy is the master resource but it could be Bitcoin that reigns supreme appeared first on CryptoSlate.

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