Last week’s GDP report brought back to mind Eminem’s lyric: Snap back to reality, ope there goes gravity. The reality of reopening the global economy from a complete shutdown continues to bedevil forecasters’ ability to estimate the pace of the economic expansion. While consensus estimates were for 8.4% annualized GDP growth, second-quarter growth undershot at 6.5%. The miss can primarily be pinned on supply chain disruptions and less government spending. The good news is that consumer spending was better than expectations. In addition, inventories will need to be replenished, so that will give a boost to future growth.
Despite the rate of U.S. economic growth being below expectations, it was still robust and grew at a 12% year-over-year rate. Second-quarter GDP exceeded the previous peak, so U.S. economic output has fully recovered from the Covid-recession and is officially in expansion. The two-quarter GDP collapse in 2020 was the largest on record and was followed by the sharpest recovery on record. The 2020 recession is also in the record books as the shortest ever at two months. It remains highly likely that growth should continue as supply chain bottlenecks wane though the delta variant remains a downside risk.
The GDP report and underlying consumer demand are still strong enough to expect a robust July jobs report on Friday. Nonfarm payrolls are expected to grow by 900,000 after adding 850,000 jobs in June. The unemployment rate should decline to 5.7% from 5.9%. While the supply chain disruptions and the delta variant add downside risks to the jobs report, consumer demand, particularly on the service side of the economy, should have fueled further hiring. Economic output is higher than the previous peak, but there are 6.8 million fewer jobs, so hiring demand should be robust. While Covid infections have risen sharply in the U.S. thanks to the delta variant, consumer mobility has not sharply declined like it did in 2020. For example, TSA throughput is still running over two million people per day, which is essentially pre-pandemic levels.
Though past the peak for S&P 500 earnings releases, 148 companies are scheduled to report this week. Actual results have continued to be astoundingly good. Second-quarter 2021 blended, combining actual and estimated earnings, estimates reflect robust growth at 85.1% year-over-year versus 63.3% at the end of June. With 59% of companies reporting earnings, 88% beat earnings, and 88% exceeded sales forecasts. This outperformance is the highest level of companies exceeding earnings and sales estimates since FactSet began tracking the measure in 2008. In addition, every sector within the S&P 500 is delivering better-than-consensus earnings.
Since the second quarter’s strong earnings and sales results were expected, they have not been enough to propel the stock prices higher. According to J.P. Morgan, companies reporting better than expected earnings have underperformed the S&P 500 by -0.1%, while those missing estimates were punished with -2.2% underperformance. Forward guidance has been difficult to gauge with the current worries about the economic outlook due to the delta variant. In addition, the impact of supply chain disruptions and the uncertainty regarding the timing of normalization have added to concerns. Lastly, the effect of higher costs on future corporate profits has dented sentiment on some companies. The timing of price increases to protect profit margins and the ability to pass on higher costs without denting demand will continue to be closely scrutinized this week.
Interestingly, the reopening of the economy and a return to more normal pre-pandemic activities negatively affected Amazon.com’s