Weekly Wisdom – July 20, 2023

By Gina Stahl on July 20, 2023

Consumer Confidence in Services

Recent data suggests that the economy might not be as grim as some thought earlier this year. The U.S. is a nation of spenders, and a strong job market, alongside growing real wages, continues to support that spending. The consumer represents 70% of U.S. GDP. Supply chains have improved, and companies are restocking inventory, while automobile prices moderate. The inflation trend is slowing, and company Q2 earnings are off to a positive start.  

Retail sales grew +1.5% y/y in June, still higher, yet a much slower pace compared to +9.3% y/y experienced in June 2022. The retail sales control group came in above consensus at +0.56% m/m versus the consensus of +0.50% m/m. The control group represents the total industry sales that are used to prepare the estimates of PCE for most goods.

The control group is a direct input into GDP, likely boosting the GDP estimates. This is another data point that signals we are far from a recession. Auto parts, apparel, electronics and appliances, furniture, vehicles and parts, and non-stores are the six retail industry categories that accelerated m/m in June.

We have noted several times that there is a shift from goods to services in the economy, and that trend is still present. Some of the best retail sales categories are associated with service sectors. Categories such as food services and drinking, non-store retailers, health and personal care, and motor vehicle and parts dealers all contribute to consumer services staying strong. A strong consumer is a strong economy, as we know that consumption services account for over two-thirds of U.S. GDP.

In addition to retail sales, we received a bullish report from the recent Michigan Consumer Expectation index on Friday, June 14, 2023. The report gives us insight into how consumers view the following: (1) prospects for personal financial situations; (2) the general economy over the near term; and (3) the economy over the long term.

The reading of 69.4 beat the consensus expectation of 61.5, pointing towards the consumer feeling more confident in the state of the economy. A few large banks noted that the consumer remains resilient and that there hasn’t been a meaningful change to note in consumer spending. Jamie Dimon reiterated that the consumer is in good shape during the JP Morgan earnings call.[1] Some of the banks even continue to be surprised to the upside by the consumer.

Chart 1: Consumer Sentiment Index[2]

U.S. PMIs Likely Bottoming

While June’s industrial production data points to continued contraction in manufacturing (-.50% m/m), the trend appears to be bottoming. Manufacturing has been soft; however, the Atlanta Fed raised its GDP estimate to 2.4% on July 18, largely due to the overwhelming strength in services and the rising likelihood of a soft landing.

Moreover, history offers some insight on where PMIs are likely to bottom, given a non-recession scenario. As the chart below details, PMIs have not dropped below 45 in an expanding economy dating back to 1993.

Chart 2: PMIs and Recessions[3]

Government subsidies from the Infrastructure Investment and Jobs Act provide funding toward the themes of reshoring, digitization and electrification. Signed into law in 2021, the act authorizes $550 billion in new investments and programs providing tailwinds to new project starts. Further, according to the June ISM manufacturing report, the Customers Inventories Index dropped into the ‘too low’ category, a signal that orders are set to rebound.[4]

As the macroeconomic environment continues to clear and expectations for a recession shrink, expect an increase in new project plans and manufacturing output. The automobile industry is one part of the economy going through a transition period, which may also include growing pains.

Electric Vehicle Competition Heats Up

There is no denying that electric vehicles are gaining popularity both in the U.S. and globally. In fact, electric vehicle (EV) sales exceeded 10 million units and accounted for 14% of all new cars sold in 2022, up from 9% of new vehicles sold in 2021.

So far, this momentum has continued into 2023, with 2.3 million EVs sold during the first quarter, which is a 25% increase from the first quarter of 2022. Although China is currently the largest market for EVs, accounting for 60% of global sales, the U.S. is not far behind. Last year, the U.S., with the third-largest EV market, increased sales 55%.[5]

This growth potential is causing many legacy original equipment manufacturers (OEMs) and new EV companies to throw their hats in the ring to capture market share in the space. Recently, this has caused a bit of a price war that was kicked off by Tesla (TSLA) cutting prices in January by as much as $7,500 per unit, which resulted in the company achieving record deliveries for the second quarter.[6] These price cuts caused Ford (F) to follow suit, initially cutting prices for its Mustang Mach-E  in January by as much as $5,900, or 8%.[7]

Ford continued the price cuts just this Monday, when the company slashed prices by as much as $10,000, or 17%, for their EV pickup truck, the Lightning.[8] Ford’s more recent price cut was in response to Tesla announcing that it has built its first Cybertruck, for which it is shooting for limited production and a customer delivery event in the third quarter of 2023.[9]

The Cybertruck would be a direct competitor to the Lightning, which currently faces little competition in the electric pickup segment. On top of this upcoming competition, General Motors (GM) has also started this year to build its Silverado EV, which is expected to be available by the summer of 2024.[10]

Contrary to the vehicles themselves, there hasn’t been much competitive pushback when it comes to EV charging infrastructure. Most of the major players have submitted to Tesla when it comes to electric vehicle charging stations, with Ford, Mercedes Benz (MBGYY), General Motors and Rivian (RIVN) all participating in the company’s network.[11]

Tesla’s chargers have seen continued success due to their superior charging capabilities; in just 15 minutes a supercharger can provide a Model S with enough power to travel up to 200 miles. For comparison, a normal wall connector that can be found in an owner’s home or office only provides 44 miles of range for every one hour the vehicle is on the charger.[12]

Click here to read last week’s Weekly Wisdom (7/12).

Disclosures

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This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: Yahoo Finance. As of July 18, 2023.

[2] Source: FactSet (Chart). As of July 18, 2023.

[3] Source: Bloomberg (Chart). As of July 18, 2023.

[4] ISM. As of July 12, 2023.

[5] IEA. As of March 8, 2023.

[6] The Messenger. As of July 17, 2023.

[7] Observer. As of February 1, 2023.

[8] CNBC. As of July 17, 2023.

[9] Yahoo. As of July 17, 2023.

[10] Consumer Reports. As of April 7, 2023.

[11] CBS News. As of July 7, 2023.

[12] Tesla. As of March 8, 2023.