The Economy’s Weekly Recap

7/22/24 - 7/29/24

Raymond Lin

This Week’s Prominent Events

Impressive US GDP Growth

• According to the initial estimate for US Q2 real GDP growth, US GDP grew at an annualized rate of 2.8%, double Q1’s 1.4% and surpassing expectations of 2.1%. This means that, despite recent struggles with inflation and a weaker labor market, the economy remains stable and solid. Much of this strength can be attributed to robust consumer spending, inventory investment, and nonresidential fixed investment. 

• Along with GDP growth, the Commerce Department also reported that Q2 PCE inflation was 2.6% annually, down from 3.1% in Q1. When combining this data of strong economic growth with the declining inflation of recent months, it certainly seems that the much vaunted soft landing has been achieved. From an optimistic perspective, one could possibly hope for even greater economic growth with ordinary inflation once interest rates are cut by the Federal Reserve. 

• However, the US economy still faces some issues. The personal savings rate fell from Q1 to Q2, decreasing from 3.8% to 3.5%. Additionally, credit card delinquencies and debt have reached recent highs, potentially indicating limited future consumer spending. Additionally, the high cost of housing and the decline in residential investment in Q2 shows that some sectors of the economy are still struggling. To see this further, one only needs to look at some recent earnings reports.

Automaker Earnings

• The automotive industry, a major contributor to US GDP, seems to have struggled in Q2 based on company earnings, some of which are featured below. 

• Tesla, the highest valued car company, has been experiencing a prolonged struggle due to increased competition and slowing EV demand. Things only seem to have gotten worse this quarter as revenue was slightly above expectations at 2% growth from last year, with automotive revenue falling 7%. Declining automotive sales were countered by the growth of energy generation and regulatory credit sales. Despite these sources of growth, the meager growth and falling profit margins of Tesla’s business were extremely evident in Q2 as Tesla’s net income fell 45% from last year, far below expectations. Tesla has announced some plans to turn itself around, highlighting AI investment and robotaxis. Due to this, Tesla’s stock fell more than 8%.

• Ford faced a different situation but was similarly slammed by investors. Ford saw revenue rise 6% from last year, above expectations, but missed net income expectations as net income fell around 5%. One reason for this fall is Ford’s warranty reserves, which are used to pay for vehicle issues. In Q2, warranty reserve costs were $800 million higher than in Q1. Despite this poor performance, Ford’s CEO remained positive, remarking “We’re making real progress in raising quality, lowering costs, and reducing complexity across our entire enterprise”. Unlike the CEO though, investors remained apathetic, with Ford’s stock falling 13%

• GM fared better than its rivals this quarter, beating both revenue and earnings expectations. GM saw 7.2% revenue growth from last year and net income growth of 14.8%. However, GM also announced that it was ending production of its Cruise Origin autonomous vehicle and was trying to restructure its Chinese joint venture, both doubtless expensive efforts. Due in part to these failures, investors have begun to fear future earnings reports will be less successful, causing its stock to fall more than 6%.

• Stellantis, the last of the big 3 American automakers, struggled in Q2, with revenue falling 14% and net income falling 48% from Q2 last year. Stellantis said the drop was primarily due to losses in North America, where it has “significant work to do”. Specifically, inventory and prices were too high, and Stellantis took the longest,97 days, in the industry to sell cars on dealer lots. Due to this, US shares of Stellantis fell over 10%. 

A Simmering IPO

• The largest IPO so far this year happened last week and the company in question was a rather interesting one. Lineage, which went public at a $18 billion valuation and raised $4.4 billion, is a cold storage company. From its IPO price, the stock is up around 6%.

• Lineage operates temperature controlled warehouses that are used by companies like Kraft Heinz, Darden, Restaurants and Walmart for storage, transportation, e-commerce, etc. In total, Lineage operates 3 billion cubic feet of temperature-controlled space.

• Compared to smaller rival Americold, which was founded in 2013, Lineage is much younger and was only founded in 2008 by two Morgan Stanley investment bankers. These two founders quickly expanded the business, making 118 acquisitions since 2008 at a rate of 7 acquisitions a year.  In that short time, Lineage’s expansion and usage of data and technology has made it a crucial part of storage infrastructure, reducing waste and turnaround time. 

• So, although a storage solutions company may sound mundane, it is the largest IPO since Arm’s IPO in 2023, a surprising feat for such a young company in a seemingly stale business.

Meta’s New AI

• Meta, which has been developing the open source AI model Llama for the better part of 2 years, has released the newest version of its Llama AI Model, calling it Llama 3.1. To be more specific, Meta released 3 versions of it that have different sizes and processing power. Meta claims the largest variant, Llama 3.1 405b, outperforms OpenAI’s premiere GPT-4o and Anthropic’s 3.5 Sonnet on several benchmarks. Meta CEO Mark Zuckerberg believes Llama will surpass ChatGPT in users by 2025. 

• On top of being an important technological and economic development, Meta’s decision to keep Llama open source is especially intriguing. In essence, despite spending hundreds of millions or billions developing Llama 3.1, Meta is openly partnering with other firms like Amazon, Alphabet, and Microsoft to deliver Llama 3.1 to consumers. Zuckerberg believes open source models will overtake proprietary models like ChatGPT. As a result, Meta believes that, in the long term, an open source model will advance AI and Meta’s interests the best.

• While only time can tell if Meta’s beliefs are correct, it is clear that Llama is a major AI model that warrants attention when discussing generative AI and Meta’s future, especially if Zuckerberg’s prediction about user counts becomes true.

AI Strike

• While the fear of AI replacing people’s jobs and undermining their lives is a fear for many, most people have yet to experience it. However, the fear is much more acute for certain groups, such as performers in video games. These performers have much training data that AI can use to replicate and then exclude performers. Due to this possibility, 2,500 of these video game performers, who are a part of the SAG-AFTRA union that organized strikes against movie studios last year, have begun striking against video game studios like EA, Activision, and Disney. 

• Negotiations have been ongoing for a long time, but the strike started on Friday due to a lack of budging on AI protections. The main sticking point is who video game studios regard as a performer. While SAG-AFTRA and its members want protections for any performer, background or otherwise, the video game studios find that not everyone who does movement performance is a performer. This means that inexperienced performers may begin to be phased out of the industry, with their likeness or voice possibly being taken without their consent. 

• One will have to wait to see how this resolves, but stories like this will probably only increase in frequency as time goes on and AI begins targeting different kinds of jobs. 

Future Events

June PCE Inflation

• As covered in previous editions of Phi Fiscal, inflation has been decreasing in recent months, providing optimism toward the possibility of a September rate cut or even 2 rate cuts this year.

• June’s PCE report was no different as PCE, which is the Federal Reserve’s preferred gauge of inflation, increased just 0.1% on the month and 2.5% from last year, lower than May’s 2.6% increase. When looking at core PCE, which excludes volatile food and energy prices, inflation grew 0.2% on the month and 2.6% on the year. 

• These numbers are generally positive, providing further credence to the trend of lowering inflation. While this month’s FOMC meeting won’t result in a rate cut, the next meeting in September is likely to if inflation data continues to trend downwards. With a rate cut, the cost of borrowing would be lowered, which would assist economic growth and lower the costs of things like mortgages and car loans. 

Stubborn Home Prices

• While inflation has decreased over the last year, home prices have not. Rather, home prices hit a new high in June, reaching a median price of $426,900. Additionally, home sales decreased in June for the fourth month in a row, highlighting how unaffordable homes are. In addition to making life difficult for Americans, it also leads to higher inflation figures, preventing interest rate cuts that could help the economy. This in turn actually hurts the housing market further as higher interest rates for longer prevent people from selling their homes and contributing to housing supply, a fact evident from the 5.4% decline in existing home sales. 

• However, there is some good news for home prices. June saw 1.32 million homes for sale, 3.1% higher than May and 23.4% higher than June 2023. Another representation of this increasing supply is the 4.1 month supply of homes available right now, the highest since May 2020. These two data points suggest there is an increasing supply of homes, even if prices have not gone down in response. With greater supply and still declining sales, it is possible home prices could decline in the future though, turning the housing market into a buyer’s market. 

China’s Importance

• While it is obvious that many Western goods are produced in China along with the raw materials needed to make them, a sometimes less remembered fact is that China is a major consumer of foreign goods as well. Although China’s economy is less consumption driven than Western ones and its citizens are generally less wealthy, the Chinese middle and upper class have grown tremendously in wealth over the last few decades, forming an integral part of many Western companies’ sales and growth. In fact, Chinese consumers made up 23% of all luxury spending in 2023. 

• While this was opportune when China was growing steadily, the recent Chinese economic slowdown has resulted in declining sales for luxury companies. Some examples include 

  • Louis Vuitton and Christian Dior owner LVMH, which saw its Asia sales(primarily made up of China) drop 14% in Q2. 

  • Cartier owner Richemont seeing a 27% decline in sales in China

  • Burberry, which saw a 19% drop in sales in China

Weekly Question

The Crowdstrike IT outage last week cost Fortune 500 companies how much?

• A: $955 million

• B: $450 million

• C: $5 billion

• D: $2 billion

Answer: C. Due to paralyzing operations for many companies two weeks ago, it is projected that around $5.4 billion has been lost by Fortune 500 companies.