Macro Data: Robust Economic Growth; Micro Data: Not So Much

Equity markets continue to march ever higher (up more than +1% on the week) with both the S&P500 and the DJIA closing at new record highs on Friday (on very light volume).

On the tech side of the market, five of the Magnificent 7 were up for the week, with AAPL closing at an all-time high of $237.33. Meanwhile, market favorite Nvidia and Elon Musk’s Tesla were both down more than -2%.

The Magic of Seasonal Adjustment

The macroeconomic data, like GDP and Retail Sales, tell us that the economy is still healthy. The employment data too, although October’s numbers looked soft (November’s employment data are due out next Friday – December 6^th). The weekly Initial Unemployment claims, at 213,000 for the week ending November 23^rd, appear to be the same as they were a year ago on a seasonally adjusted (SA) basis. It’s the not-seasonally adjusted (NSA) initial claims data that is of concern. According to the weekly Department of Labor’s News Release, the NSA year ago number for the week ended November 23^rd was just under 200,000. This translated into 213,000 on a SA basis. This year’s raw NSA number for the same week in November was 243,000. Yet, somehow, through the magic of seasonal adjustment, that number also translated into 213,000 on a SA basis. Was it the fact that Thanksgiving was a week later this year that caused the anomaly?

Housing in the Gutter

The overall health of the economy and that of the housing sector are intertwined, with housing often acting as a leading indicator. So, it’s of concern that within this sector both Existing Home Sales and New Home Sales continue near decade lows.

Of course, one of the reasons for the poor performance is that housing affordability is currently lower than it was even during the Great Recession. High home prices and high interest rates are the culprits.

Other Indicators Show Weakness

Other indicators we watch include the Conference Board’s Leading Economic Indicators (LEI), the Industrial Production Index, and the Chicago Fed’s National Activity Index. As shown in the charts below, all of these have been forecasting an economic slowdown/Recession for quite some time. We don’t believe that the business cycle has died. So, it appears to us that the incoming Trump Administration will have to deal with a weakening/Recessionary economy.

Bankruptcies are also rising. For the year ending September 30^th, bankruptcies totaled nearly 23,000, an increase of 74% from the same period in 2022 (two years ago). The last time bankruptcies were this severe was during the Great Recession (’08-’09).

In addition, we can tell from the Q3 corporate results and from management comments, especially from the major retailers, that the consumer is struggling.

• Best Buy’s same store sales were off -2.9% from a year ago and management guided to a number that was lower than that of 2023 (sales off -3.0% for the full year);
• Kohl’s cut their full-year guidance to -6.5%;
• Target said: “Consumers tell us their budgets remain stretched. They’re…focusing on deals and then stocking up when they find them.”
• As a sign of the times, we note that price wars have broken out in the fast-food industry, normally a sign of consumer weakness.

Along these lines, retailers do not see a strong holiday selling period. We note that Black Friday sales are no longer limited to one day (the Friday after Thanksgiving) but have been going on for several weeks. The chart shows the low expectations for Black Friday sales in the retail space.

We will know more on Monday (December 2^nd) when initial Black Friday spending is initially estimated.

Interest Rates

Rates, through September, were on a steep downward slope, as expectations were for the Fed to rapidly back off its uber-restrictive policy. Post-election, however, rates backed up nearly 80 basis points, from 3.65% on the 10-Year Treasury in mid-September to 4.45% in mid-November, as the market worried that the President-elect’s tariffs and other policy initiatives would rekindle inflation. Reinforcing the rise in yields were various FOMC voices which indicated that markets were pricing in rate reductions at a faster pace than many on the FOMC could justify.

As seen from the chart of the 10-Year Treasury Yield, those fears peaked in mid-November and 10-Year yields have fallen to just over 4.17% as of the close of business on November 29^th.

Our view is that the economy is less robust than many believe and that interest rates will be falling faster than the bond market has currently priced in.

Final thoughts

Equity markets continue to march higher with the DJIA and the S&P 500 setting new record highs on Black Friday. For the week, five of the Magnificent 7 scooted higher with market favorite Nvidia and Elon Musk’s Tesla each lower by more than -2% for the week. By all historical measures, the equity market continues to be in bubble territory.

We also find it troubling that, while most macroeconomic data tell us that the economy is strong, the micro data don’t back that up. For example, the Conference Board’s Leading Economic Indicators are warning of tough times ahead, as is the Chicago Fed’s National Activity Index, the Industrial Production Index, and the rising number of bankruptcies.

Retailers, too, don’t see a banner year and expect the slowest growth in holiday spending in six years, a growth rate only at about the rate of inflation.

For various reasons, from mid-September to mid-November, interest rates rose 80 basis points. It looks to us like they have peaked, and our view is that they will be falling faster than the bond markets have priced in. Much of the fall has to do with our view that the Fed will be moving rates down faster than is currently priced in.

(Joshua Barone and Eugene Hoover contributed to this blog.)