Weekly Review & Outlook: June 24, 2024

We reach the final week of the 2nd quarter with economic models such as the Atlanta Fed GDPNow projecting 3% annualized growth in the current period. The latest PMI data also supports good expansion in the quarter while other leading indicators signal a slowing but still expanding economy in the 2nd half of 2024.

The S&P Global Flash June PMI data (June 21) accelerated from the prior month readings. The report comments noted (my emphasis), “The early PMI data signal the fastest economic expansion for over two years in June, hinting at an encouragingly robust end to the second quarter while at the same time inflation pressures have cooled. Also noted was “a renewed appetite to hire being driven by improved business optimism about the outlook.”

The report summarized that “the PMI is running at a level broadly consistent with the economy growing at an annualized rate of just under 2.5%. The upturn is broad-based, as rising demand continues to filter through the economy. Although led by the service sector, reflecting strong domestic spending, the expansion is being supported by an ongoing recovery in manufacturing, which so far this year is enjoying its best growth spell for two years.”

The Conference Board released their May Leading Economic Index (June 21) which fell from April.  The report noted, “the U.S. LEI fell again in May, driven primarily by a decline in new orders, weak consumer sentiment about future business conditions, and lower building permits. “While the Index’s six-month growth rate remained firmly negative, the LEI doesn’t currently signal a recession. We project real GDP growth will slow further to under 1 percent (annualized) over Q2 and Q3 2024, as elevated inflation and high interest rates continue to weigh on consumer spending.”

The LEI uses the Institute of Supply Management (ISM) PMI data as a component index. As noted in my June 10 letter, ISM surveys have been generally correlating with the S&P Global surveys but at lower levels. While ISM Manufacturing PMI surveys are representative of sector contraction, the comparable S&P Global Manufacturing surveys are consistent with expansion throughout 2024.

My belief is that another quarter of economic growth in the context of stable short term interest rates is generally positive for the banking industry. The industry faces well debated headwinds related to the structural change in Office real estate demand, an increasingly stressed consumer segment and longer duration assets with discount marks from higher interest rates. Stable to declining wholesale funding combined with economic growth helps to support Commercial Real Estate segments other than Office. Consumer segments which fixed portions of their budget to low interest mortgages are navigating inflation better than renters with the added burden of housing inflation. Each quarter in this environment lowers the portion of longer duration, discounted assets that remain on banks’ balance sheets. Some point in the coming quarters, the industry is likely to inflect with average Earnings Per Share (EPS) once again growing from the sequential quarter. Negative EPS revisions in the mid-cap bank group for calendar year 2024 started back in 1Q23 when the rate hike cycle initiated. EPS cuts accelerated in 2Q23 following the high profile bank failures. Additional negative revisions have followed but at much lower scale. Revisions since early April are negligible. For 2025, consensus sell-side average EPS estimates forecast low double digit growth in the group.