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Morgan Stanley: The US Consumer Is Headed For A Double-Dip Recession

Morgan Stanley: The US Consumer Is Headed For A Double-Dip Recession

Two weeks ago, well before most banks slashed their GDP forecasts (most notably Goldman who took a machete to its Q3 GDP estimate of 8.5% and now sees just 5.5% growth in…

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Morgan Stanley: The US Consumer Is Headed For A Double-Dip Recession

Two weeks ago, well before most banks slashed their GDP forecasts (most notably Goldman who took a machete to its Q3 GDP estimate of 8.5% and now sees just 5.5% growth in Q3), we noted that "a sudden negative change" had taken place in the economy, predicting (correctly) that retail sales would be a big miss (they were). Specifically, we looked at the latest ominous trend in consumer spending which was notably inflecting lower at a time when the latest UMich survey found that reactions to market prices on purchases for homes, vehicles, and household durables were the most negative ever recorded in the long history of the surveys, with a record number of respondents remarking on the bad buying conditions for virtually every product category.

And while most banks have been quick to attribute the sudden freeze in consumer spending to covid fears, one analyst agreed with our view that something more fundamental had changed: as Morgan Stanley's chief equity strategist Michael Wilson writes this morning, "disappointing retail sales and consumer sentiment suggest the US consumer is fading" and while Wilson shares our view that most blame Delta he, like us, thinks this is more about a payback in demand.

This is how Wilson - who just last week was tapped on the shoulder and hiked his year-end S&P price target - lays out his typically contrarian view:

There is an old adage that says never bet against the US Consumer's willingness to spend. In fact, it was one of the primary reasons we led the charge on recommending consumer cyclicals back in April 2020 at the depths of the COVID recession. Indeed, with Congress expeditiously providing record amounts of fiscal stimulus last year, the table was set for a major consumer stand against the downturn. Fast forward 16 months and it's fair to say the US consumer has not disappointed. But, after a year of remarkable resilience from the US consumer, it begs the question: "Is it sustainable?" While there is little doubt about the US consumers' willingness to spend, the other key variable to consider is their ability to spend.

To be sure, this isn't the first time Wilson has turned bearish on the US consumer: back in April, after riding one of the best periods of outperformance for consumer discretionary stocks in history, Morgan Stanley downgraded the sector given the bank's view for an eventual payback in spending during the pandemic.

The reasons were twofold:

  • first, there wasn't much of a recession at all when looking at Real Personal Consumption over the last 18 months.
  • second, It's the same story when looking at nominal retail sales which tells us we should expect a reversion to trend now that the stimulus is behind us.

These observations have not been lost on the market: since April, consumer discretionary stocks have underperformed and it's accelerated over the past few weeks as consumer confidence and retail sales numbers disappointed (Exhibit 3 and Exhibit 4).

The relative underperformance has been even worse for Amazon, the king of retail during the pandemic. With the company suggesting there will be payback on demand, Wilson warns that "this seems like a pretty good leading indicator of what to expect for consumer discretionary more broadly" adding sarcastically that last time he checked, "consumption is 70% of the economy and that's a big number to overcome, even if investment comes back strongly next year as our economists expect."

And yet, with all of this very clear writing on the wall with respect to potential payback in consumption, Wilson was surprised to see the consensus shrug off the recent collapse in the UMich consumer confidence survey. In fact, even with his increasingly bearish view on consumption, he were a bit "shocked" by just how dramatic of a fall the survey produced:

  • First, the headline plunged to new cycle lows, below the levels witnessed during the worst of the lock downs and when it really did feel like a recession.
  • Second, it's not  unprecedented for consumer sentiment to fall to new lows post a recession. In fact, we saw the same thing in the prior two recessions (red circles on Exhibit 5). In the 2001- 2009 and 1982-89 expansions, consumer sentiment never really recovered and both of those cycle proved to be less exciting for consumer oriented stocks and the economy. Contrast that with the 1990-2000 and 2009-2020 expansions where the consumer sentiment continued to climb and fueled the longest and strongest recoveries on record.

So all else equal, just looking at the chart below one would conclude that the US consumer is headed for a double-dip recession even as stocks make new all time highs.

Needless to say, it will be important to see if consumer sentiment can recover in the months ahead as it will determine what kind of economy cycle we are likely to experience both in terms of its duration and what leads.

Wilson's take of this troubling development is that this lines up with his view for "a hotter but shorter cycle" as demand was pulled forward in this cycle like never before. The problem is what happens next: payback is likely in the near term as consumption reverts back toward trend as illustrated earlier. This spells trouble for the consumer discretionary sector and any sector that is over reliant on an ebullient consumer.

Bottom line, Morgan Stanley continue to recommend long consumer staples over discretionary, preferably equal-weighted as shown in Exhibit 3but market cap weighted should work, too.

Separately, and in keeping with the bank's recent downgrade of the semiconductor sector, Wilson adds that consumer electronics is another area which looks especially vulnerable which is one reason Morgan Stanley remains cautious on semiconductors and parts of Tech hardware. Here the strategist notes that "another trade we continue to like is communication services over semiconductors which has been working this year but has been trading in a range lately and looks ready to break higher if we are right about our payback in demand thesis and a consumer that is less optimistic."

Outside of equities, Wilson also believes that the recent consumer weakness also explains why bond yields have remained so stubbornly low even in the face of high inflation readings and a Fed that is moving ever closer to tapering (aside from the fact that the bulk of the selling appears to originate during Tokyo hours suggesting that it may be far more flow based than fundamental). The fact that Morgan Stanley's  cyclicals/defensive stock ratio broke to new lows last week is a sign that yields may soon follow.

Ironically, if the Fed were to talk more aggressively about tapering at this week's Jackson Hole meeting, Wilson thinks it would lead to lower yields in the near term as the bond market may view that as a mistake as growth is decelerating and the Consumer is fading. Such a move would further support the bank's more recent defensive tilt and while it may weigh on the bank's preferred financials position, Wilson is keeping that side of the barbell in the case it is wrong about growth decelerating more than expected and rates rip to the upside.

Tyler Durden Mon, 08/23/2021 - 14:40

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International

Costco Tells Americans the Truth About Inflation and Price Increases

The warehouse club has seen some troubling trends but it’s also trumpeting something positive that most retailers wouldn’t share.

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May 28, 2023

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Costco has been a refuge for customers during both the pandemic and during the period when supply chain and inflation issues have driven prices higher. In the worst days of the covid pandemic, the membership-based warehouse club not only had the key household items people needed, it also kept selling them at fair prices.

With inflation -- no matter what the reason for it -- Costco  (COST) - Get Free Report worked aggressively to keep prices down. During that period (and really always) CFO Richard Galanti talked about how his company leaned on vendors to provide better prices while sometimes also eating some of the increase rather than passing it onto customers.

DON'T MISS: Why You May Not Want to Fly Southwest Airlines

That wasn't an altruistic move. Costco plays the long game, and it focuses on doing whatever is needed to keep its members happy in order to keep them renewing their memberships.

It's a model that has worked spectacularly well, according to Galanti.

"In terms of renewal rates, at third quarter end, our US and Canada renewal rate was 92.6%, and our worldwide rate came in at 90.5%. These figures are the same all-time high renewal rates that were achieved in the second quarter, just 12 weeks ago here," he said during the company's third-quarter earnings call.

Galanti, however, did report some news that suggests that significant problems remain in the economy.

Costco has done an incredibly good job at holding onto members.

Image source: Xinhua/Ting Shen via Getty Images

Costco Does See Some Economic Weakness

When people worry about the economy, they sometimes trade down when it comes to retailers. Walmart executives (WMT) - Get Free Report, for example, have talked about seeing more customers that earn six figures shopping in their stores.

Costco has always had a diverse customer base, but one weakness in its business may be a warning sign for its rivals like Target (TGT) - Get Free Report, Best Buy (BBY) - Get Free Report, and Amazon (AMZN) - Get Free Report. Galanti broke down some of the numbers during the call.

"Traffic or shopping frequency remains pretty good, increasing 4.8% worldwide and 3.5% in the U.S. during the quarter," he shared.

People shopped more, but they were also spending less, according to the CFO.

"Our average daily transaction or ticket was down 4.2% worldwide and down 3.5% in the U.S., impacted, in large part, from weakness in bigger-ticket nonfood discretionary items," he shared.

Now, not buying a new TV, jewelry, or other big-ticket items could just be a sign that consumers are being cautious. But, if they're not buying those items at Costco (generally the lowest-cost option) that does not bode well for other retailers.

Galanti laid out the numbers as well as how they broke down between digital and warehouse.

"You saw in the release that e-commerce was a minus 10% sales decline on a comp basis," he said. "As I discussed on our second quarter call and in our monthly sales recordings, in Q3, big-ticket discretionary departments, notably majors, home furnishings, small electrics, jewelry, and hardware, were down about 20% in e-com and made up 55% of e-com sales. These same departments were down about 17% in warehouse, but they only make up 8% in warehouse sales."

Costco's CFO Also Had Good News For Shoppers

Galanti has been very open about sharing information about the prices Costco has seen from vendors. He has shared in the past, for example, that the chain does not pass on gas price increases as fast as they happen nor does it lower prices as quick as they sometimes fall.

In the most recent call, he shared some very good news on inflation (that also puts pressure on Target, Walmart, and Amazon to lower prices).

"A few comments on inflation. Inflation continues to abate somewhat. If you go back a year ago to the fourth quarter of '22 last summer, we had estimated that year-over-year inflation at the time was up 8%. And by Q1 and Q2, it was down to 6% and 7% and then 5% and 6%," he shared. "In this quarter, we're estimating the year-over-year inflation in the 3% to 4% range."

The CFO also explained that he sees prices dropping on some very key consumer staples.

"We continue to see improvements in many items, notably food items like nuts, eggs and meat, as well as items that include, as part of their components, commodities like steel and resins on the nonfood side," he added.

  

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Government

Under Pressure From Fat Activists, NYC Bans Weight Discrimination

Under Pressure From Fat Activists, NYC Bans Weight Discrimination

Discriminating against fat people is now illegal in New York City, after…

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May 28, 2023

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Under Pressure From Fat Activists, NYC Bans Weight Discrimination

Discriminating against fat people is now illegal in New York City, after Mayor Eric Adams on Friday signed off on a ban that will affect not only employment, but also housing and access to public accommodations -- a term that encompasses most businesses. 

We're in safe company using the word "fat," as champions of the cause refer to themselves as "fat activists." With the mayor's signature, two more categories -- both weight and height -- are added to New York City's list of protected personal attributes, which already included race, gender, age, religion and sexual orientation. 

As Mayor Adams signs the law, self-described (and everyone else-described) fat activist Tigress Osborn consumes more than her share of the backdrop (James Messerschmidt for NY Post)

Embracing one of 2023's innumerable strains of Orwellian brainwashing, Adams declared, "Science has shown that body type is not a connection to if you’re healthy or unhealthy. I think that’s a misnomer that we’re really dispelling.”

Even the Centers for Disease Control and Prevention say obesity is an invitation to a host of maladies, including to high blood pressure Type 2 diabetes, coronary heart disease, stroke, gall bladder disease, many types of cancer, mental illness and difficulty with physical functioning. 

“Size discrimination is a social justice issue and a public health threat," said Councilmember Shaun Abreu, who introduced the measure. "People with different body types are denied access to job opportunities and equal wages — and they have had no legal recourse to contest it," said Abreu. "Worse yet, millions are taught to hate their bodies." 

A full 69% of American adults are overweight or obese, but our woke overlords would have us believe the real "public health threat" is a nice restaurant that doesn't want Two-Ton Tessie working the reception desk, or a landlord who's leary of a 400-pound man breaking a toilet seat or collapsing a porch.  

The enticingly-named Tigress Osborn, who chairs the National Association to Advance Fat Acceptance, said New York's ban "will ripple across the globe" -- perhaps something like what would happen if the hefty Smith College Africana Studies graduate were dropped into a swimming pool.  

Councilmember Shaun Abreu said he gained 40 pounds during the pandemic lockdowns and noticed people treated him differently

The New York Times reports that witnesses who testified as the measure was under consideration included "a student at New York University said that desks in classrooms were too small for her [and] a soprano at the Metropolitan Opera [who] said she had faced body shaming and pressure to develop an eating disorder." 

Some have dared to speak out against the measure. “This is another mandate where enforcement will be primarily through litigation, which imposes a burden on employers, regulators and the courts,” said Kathryn S. Wylde, president of the Partnership for New York City, speaking in April. 

Implicitly putting the weight ordinance in the same category as Brown vs Board of Education, Abrue said, “Today is a monumental advancement for civil rights, size freedom and body positivity and while our laws are only now catching up to our culture, it is a victory that I hope will cause more cities, states and one day the federal government to follow suit.” 

Taking effect in six months, the law has an exemption for employers "needing to consider height or weight in employment decisions" -- but "only where required by federal, state, or local laws or regulations or where the Commission on Human Rights permits such considerations because height or weight may prevent a person from performing essential requirements of a job." 

We pray there's a federal exemption for employers of strippers and lap dancers. 

Think we're joking? We remind you that the chair of the National Association to Advance Fat Acceptance is named "Tigress" -- and this is her Twitter profile banner photo:

via Tigress @iofthetigress
Tyler Durden Sun, 05/28/2023 - 15:30

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Government

‘Kevin Caved’: McCarthy Savaged Over Debt Ceiling Deal

‘Kevin Caved’: McCarthy Savaged Over Debt Ceiling Deal

Update (1345ET): The hits just keep coming for Speaker Kevin McCarthy, as angry Republicans…

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2 hours ago

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May 28, 2023

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'Kevin Caved': McCarthy Savaged Over Debt Ceiling Deal

Update (1345ET): The hits just keep coming for Speaker Kevin McCarthy, as angry Republicans have been outright rejecting the debt ceiling deal which raises it by roughly $4 trillion for two years, doesn't provide sticking points sought by the GOP.

In short, Kevin caved according to his detractors.

Some Democrats aren't exactly pleased either.

"None of the things in the bill are Democratic priorities," Rep. Jim Himes (D-CT) told Fox News Sunday. "That's not a surprise, given that we're now in the minority. But the obvious point here, and the speaker didn't say this, the reason it may have some traction with some Democrats is that it's a very small bill."

*  *  *

After President Biden and House Speaker Kevin McCarthy (R-CA) struck a Saturday night deal to raise the debt ceiling, several Republicans outright rejected it before it could even be codified into a bill.

Here's what's in it;

  • The deal raises the debt ceiling by roughly $4 trillion for two years, and is consistent with the structure of budget deals struck in 2015, 2018 and 2019 which simultaneously raised the debt limit.
  • According to a GOP one-pager on the deal, it includes a rollback of non-defense discretionary spending to FY2022 levels, while capping topline federal spending to 1% annual growth for six years.
  • After 2025 there are no budget caps, only "non-enforceable appropriations targets."
  • Defense spending would be in-line with what Biden requested in his 2024 budget proposal - roughly $900 billion.
  • The deal fully funds medical care for veterans, including the Toxic Exposure Fund through the bipartisan PACT Act.
  • The agreement increases the age for which food stamp recipients must seek work to be eligible, from 49 to 54, but also includes reforms to expand who is eligible.
  • Claws back "tens of billions" in unspent COVID-19 funds
  • Cuts IRS funding 'without nixing the full $80 billion' approved last year. According to the GOP, the deal will "nix the total FY23 staffing funding request for new IRS agents."
  • The deal includes energy permitting reform demanded by Republicans and Sen. Joe Manchin (D-WV)
  • No new taxes, according to McCarthy.

Here's McCarthy acting like it's not DOA:

Yet, Republicans who demanded deep cuts aren't having it.

"A $4 trillion debt ceiling increase?" tweeted Rep. Andrew Clyde (R-GA). "With virtually none of the key fiscally responsible policies passed in the Limit, Save, Grow Act kept intact?"

"Hard pass. Hold the line."

"Hold the line... No swamp deals," tweeted Rep. Chip Roy (R-TX)

"A $4 TRILLION debt ceiling increase?! That's what the Speaker's negotiators are going to bring back to us?" tweeted Rep. Dan Bishop (R-NC). "Moving the issue of unsustainable debt beyond the presidential election, even though 60% of Americans are with the GOP on it?"

Rep. Keith Self tweeted a letter from 34 fellow House GOP members who are committing to "#HoldTheLine for America" against the deal.

"Nothing like partying like it’s 1996. Good grief," tweeted Russ Vought, President of the Center for Renewing America and former Trump OMB director.

In short:

Tyler Durden Sun, 05/28/2023 - 11:30

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