Weekly Brief: US Economic Indicators, FOMC Statement, and Earnings Season
- WEFF Research Team
- Aug 19, 2021
- 7 min read
Updated: Aug 29, 2021
Economics
The US GDP growth rate for the second quarter (April-to-June period) was reported at 6.5%, a 0.2% gain from the first quarter (January-to-March period). However, the actual growth rate was lower than the Dow Jones estimate of 8.4%. It is identified that the gross private domestic invest declined by 3.5% as private inventory and residential investment dampened earnings. There is a 5% decrease in the rate of federal government spending, and an increase in imports. Private consumption increased by 11.8%, it played a major role in the increase in GDP growth rate, where consumers accounted for 69% of all activity. Furthermore, nonresidential fixed investments, exports and state and local government expenditure also played roles in increasing the GDP growth rate.
Although the US economy grew to exceed the pre-pandemic size, the rising Delta coronavirus variant may be the upcoming scar to the economy again. The CDC urges people who have been vaccinated to resume wearing masks indoors in certain areas, which may lead some local governments and businesses to reestablish restrictions on their activities. It is debatable if the Delta coronavirus will truly harm the US economy again, we consider that the economy will not be as vulnerable as the start of the coronavirus pandemic. Government officials, businesses, and including consumers are more adapted to the waves of the pandemic than ever before. However, the Delta variant is spreading rapidly, even though most vaccines are effective against the Delta, the US economy can still remain vulnerable as the pandemic persists.
Unemployment Rate
As of June 2021, Japan’s unemployment rate was 2.9%. Compared to May 2021, the number of unemployed declined by 20 thousand, the labor force increased by 150 thousand. Additionally, the jobs-to-application ratio in June rose to 1.13 from 1.09 in May.
Taking in consideration how the state of emergency was lifted in some areas from June 20, we think that the decline in unemployment rate in June is seasonal and reflects the increase in the number of hiring at restaurants and retailers. However, as Tokyo was put into another state of emergency from July 12, the employment environment in these industries could continue to worsen again.
Consumer Confidence index + Consumer Inflation Expectations
The US consumer confidence index rose to 129.1 compared to 128.9 in June. July’s consumer confidence index is at the highest level since February 2020. The consumer inflation expectations grew to 4.8% in June 2021.
With higher consumer confidence, consumers will tend to spend more, which can support economic growth in the future months. However, the consumer’s inflation expectations are at a new high since the eighth straight month, these inflation concerns may induce the confidence index to fall in July. Furthermore, the Delta variant of the coronavirus is at a new surge of infections especially targeting the unvaccinated. We suggest there to be declining confidence in regions with low vaccination rates in the US, such as the West South Central and West North Central states.
Goods Trade Balance
On July 28, the U.S. Census Bureau recorded that as of June 2021, the goods trade deficit widened to USD 91.21 billion compared to May 2021 where the deficit was at US 88.16 billion. June’s exports of goods were USD 145.5 billion, USD0.5 billion more than May exports. Exports of industrial supplies, automotive vehicles, consumer goods all increased, whereas exports of foods decreased by 8.7% compared to May 2021. Imports in June were USD 236.7 billion, USD 3.5 billion more than May imports. Imports of foods, industrial supplies, capital goods increased, but the imports of automotive vehicles and consumer goods fell.
A widened trade deficit in goods will indicate that trade may still hold back growth in the second quarter for the US. Nonetheless, it is still noteworthy that the US economy has rebounded quickly from the pandemic. Moreover, during the pandemic people were kept and quarantined at home. By now, having 49.4% of the population fully vaccinated, we suggest there to be a massive increase in the demand for domestic services.This makes some economists optimistic that imports of goods will decrease in the coming months and the trade deficit will shrink. The risk would be possible consequences from the new Delta variant which may in turn limit domestic services.
Finance
The July FOMC statement, at a glance:
Acknowledged a recovering economy and employment level, but has yet to achieve the FED’s version of “substantial further progress”
Reiterated that inflation is transitory and will come down
Announced an unchanged Federal Funds Rate at 0%-0.25%
Downplayed the negative effect of the virus on the economy
In line with expectations was an unchanged Federal Funds Rate near zero.
There were a couple of mixed signals sent out by the FED with regards to tapering. On the one hand, it acknowledged that the economy has “made progress”, but on the other hand it pointed out that the labor market is “some way away” and there was “more ground to cover” before reaching its intended goals. While it is true that the economy has “made progress” - 2nd quarter GDP accelerated 6.5% on an annualized basis, it was, at the same time, short of market expectations. In the coming months, with a sluggish vaccine rollout rate and the new Delta variant posing uncertainty to recovery, growth will almost inevitably decelerate.
With all things considered, we think that by the end of this year (in the 4th quarter) the FED will officially announce a concrete taper timeline, as they signaled through affirming that overall improvements in the economy has been fulfilled. In addition, although they continue to promote the theory that inflation is transitory, the risk of permanent inflation grows ever higher with the current rate of historic money supply injections - at some point preemptive action has to be taken before inflation spirals out of control, and since the current data already indicated substantial progress, we estimate the FED to finally announce a taper timeline before 2022.
*For those unfamiliar with economics/finance jargon, the FED (Federal Reserve) is the U.S.’ central bank, which was established in 1913 under President Wilson with the goal of providing a stable monetary and financial system. The FOMC (Federal Open Markets Committee) is the FED’s monetary policymaking body, responsible for managing the U.S.’ money supply.
Earnings Season - FAANG stocks
NASDAQ: GOOG
Posting a record-breaking $61.9 billion in revenue, $17.9 billion in profit, and EPS at $27.26, Google was arguably the best performing FAANG company in 2Q21. Notably, advertising revenues grew 69% and Google cloud grew 54%.
These were impressive numbers even considering the base effect as a result of last year’s Covid-19 outbreak. We predict there to be ample room for further gains in revenue in the advertisement branch as businesses recover to catch up to the pandemic-driven increase in e-commerce penetration.
NASDAQ: APPL
Every one of Apple’s major product lines grew over 12% on an annual basis, iPhone sales increased nearly 50%, and its gross margin stood at 43.3%, just to name a few. However, the company provided limited outlook and according to CFO Luca Maestri, Apple expects the current chip shortage to constrain iPhone and iPad production.
Despite a conservative outlook, we think that it is only a matter of time before the negative influence from supply chain disruptions tames and predicts solid iPhone demand over the next few years, this will spill over to Apple services and wearables (Airpod, iWatch, etc.).
NASDAQ: FB
Facebook’s EPS of $3.61 was 20% higher than what analysts were expecting, while revenue also beat the consensus as it jumped more than 55% higher compared to the same quarter last year. The company’s operating margin came in at a solid 43% versus the 37.6% that had been expected, which helped Facebook to more than double their operating income.
The company’s conspicuous statement that revenue growth is likely to witness “significant” deceleration in the 2nd half of 2021 as compared to the most recent quarter sent stocks dropping more than 3% on Thursday July 29th. In addition, Apple’s recent IOS updates was also addressed as a concern in the earnings statement.
These in our view are very short term downfalls; investors will sink in Facebook’s full earnings report over the weekends and reaffirm that there continues to be huge potential in its core business operations. With less reliance on iPhone sales and diversification into services business as a major structural shift to the company’s earnings model.
NASDAQ: AMZN
Amazon was the only underperforming FAANG stock this earnings season. CFO Brian Olsavsky told analysts this is largely due to a $3.8 billion shortfall in online stores - consumers simply spending less time online as they gravitate back to brick-and-mortar stores. Recall that last year the company enjoyed unparalleled sales gains as the pandemic kept consumers indoors and ordering online to an extent never seen before.
The $113 billion in revenues came in lower than expected, but we should not omit that Amazon Web Services (AWS) and advertising-related growth saw a 37% and 87% YoY jump, respectively.
Looking ahead to the 3rd quarter, the company expects sales of $106 to $112.0 billion. Which is somewhat of a disappointment to the street.
NASDAQ: NFLX
Netflix disclosed a mediocre earnings report where its $7.34 billion was just slightly above the $7.32 billion estimate.
The leader in internet streaming media added 1.54 million subscribers, and expects to add about 3.5 million new subscribers in the 3rd quarter, far less than the 5.5 million subscribers investors have been anticipating. It confirmed rumours that it will add a gaming section to its package and will incur no additional cost to subscribers, we believe this will drive user engagement.
For now Netflix is still by far the most dominant player in the streaming industry, but faces fierce competition from Disney+ and other smaller, niche competitors.
References:
CNBC 7.29 8:31 AM, Wall Street Journal
Ministry of Internal Affairs & Communications, Mainichi Japan 7/30 8:30 AM
The Consumer Confidence Survey®, Reuters
U.S. Census Bureau 7/28 12:30 PM, Reuters
Facebook (NASDAQ: FB) Earnings: A Tale Of Two Cities (entrepreneur.com), Apple's iPhone expected to drive sales, but App Store faces regulatory risk | Reuters
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