In this week’s Steady Investor, we take a deeper dive into key factors that we believe investors should keep an eye on, such as:
• U.S. retail status
• China’s economic growth
• Weak year for U.S. home sales
U.S. Retail Sales Blow Past Expectations – A major theme of the U.S. economic growth story in 2023 has been consumers who just keep on spending. September was no different. According to the Commerce Department, U.S. consumers kept splurging last month, with spending at stores, online, and restaurants (retail sales) jumping 0.7% from August to September. This figure was more than double economists’ estimates, signaling that the U.S. economy continues to expand at a stronger pace than most expect. Nearly all retail categories posted gains last month, and when you exclude gas stations, car dealers, building-materials stores, and food services – which is known as the ‘control group’ economists use to track the underlying pace of spending – retail sales still rose 0.6%. The takeaway here is one we’ve made in previous weeks, which is that the U.S. economy likely expanded at a far faster pace than just about everyone estimated in Q3. We’ve also made the argument that long-duration interest rates rose in August and September in response to this stronger-than-expected growth, which appears to have been verified by these strong consumer spending figures. As seen in the monthly retail trade and food services spending chart below from the U.S. Census Bureau, the spending recovery in the wake of the pandemic has yet to lose any steam1.
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There is one specific area of spending, however, where Americans are starting to cut back: live entertainment. According to a survey from The Wall Street Journal and Credit Karma, nearly 60% of Americans said they have cut back on live entertainment like sporting events and concerts because of rising costs.
China’s Sputtering Economic Growth and Potential Crisis – China’s National Bureau of Statistics reported that the world’s second-largest economy grew 4.9% in the third quarter. While 4.9% GDP growth registers as consistent with China’s goal of 5% GDP growth for the year, mounting headwinds have many economists questioning China’s fundamental strengths. Let’s start with the positives. In the latest Q3 data, business surveys pointed to improving factory output, retail sales rose 5.5% in September year-over-year (compared to August’s 4.6% rate), and industrial production has been posting a strong recovery in the wake of weak export activity. Domestic travel has also picked up, as has lending to households and businesses. On the negative side, however, exports declined for the fifth straight month, and China’s real estate market is in distress. Home sales by value fell 3.2% in the first three quarters compared to a year ago, and major developers Evergrande and Country Garden have essentially collapsed. China’s government has been responding by cutting interest rates and scrapping restrictions on home purchases, but consumers are wary given real estate’s year-to-date performance.4
A Weak Year for U.S. Home Sales – If China’s real estate market can be described as battered in 2023, the U.S. might be aptly characterized as moderating. In September, existing home sales – which account for a majority of home sales each year – fell by 2% from August and 15.4% year-over-year. Meanwhile, the median existing home price increased by 2.8% year-over-year in September, to $394,400. Higher prices, combined with the highest mortgage rates in over 20 years and low inventories, are all working together to pressure sales in the market. By some estimates, total existing home sales in the U.S. could land at around 4 million in 2023, which would be the least number of existing homes sold since 2008. As Americans are reluctant to leave their homes given high mortgage rates, it has resulted in an increasing number of housing permits to build new single-family homes – which have risen for eight straight months.5
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Disclosure
2 Zacks Investment Management reserves the right to amend the terms or rescind our free The Do’s and Don’ts of Stock Market Volatility offer at any time and for any reason at its discretion.
3 Census. 2023. https://www.census.gov/econ/currentdata/?programCode=MRTS&startYear=2019&endYear=2023&categories[]=44X72&dataType=SM&geoLevel=US&adjusted=1¬Adjusted=1&errorData=0#line015
4 Wall Street Journal. October 18, 2023. https://www.wsj.com/world/china/chinas-economy-grew-4-9-in-third-quarter-3e504ab0?mod=djemRTE_h
5 Wall Street Journal. October 19, 2023. https://www.wsj.com/economy/housing/home-sales-report-to-show-how-much-high-rates-squeezed-market-54f64ea1?mod=hp_lead_pos2
6 Zacks Investment Management reserves the right to amend the terms or rescind our free The Do’s and Don’ts of Stock Market Volatility offer at any time and for any reason at its discretion.
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