A busy week of corporate earnings bolstered the U.S. growth narrative last week, with nearly 90 percent of reporting companies beating consensus expectations. On average, revenues are coming in 4.5 percent ahead of forecasts, with earnings coming in 18 percent ahead of schedule. This gap between quarterly expectations and results is near record highs.

While many companies are raising expectations and experiencing growth well above 2019 pre-pandemic levels, they are also reporting rising costs associated with supply chain bottlenecks and wages. Most companies expect to pass on higher costs to customers, but the degree of success will be dependent on the strength of their brands or market position.

Here are a few industry highlights from Jeff Nelson, Northwestern Mutual senior portfolio manager:

  • Hilton said the labor shortage is the biggest issue it is dealing with, but the company expects the problem will resolve itself over the next two quarters.

  • Apple expects the supply constraints it saw in Q2 to worsen in the next quarter.

  • Sherwin-Williams announced a 7 percent price increase effective August 1 for its retail division.

  • Intuitive Surgical said on its call that capital spending across hospitals looks healthy, with surgical systems placed up 8 percent versus last year, a strong indicator of pending surgical procedure work-through.

  • Boston Scientific said pockets of inflation are still lingering, with freight costs being one of the substantial detractors to margin expansion.

  • Mastercard and Visa both mentioned air travel is recovering faster than expected, driving year-over-year sales growth of 31 percent for Mastercard and 27 percent for Visa. 

Now, to some fresh economic data and a glimpse at the week ahead.

WALL STREET WRAP

On the Right Track: The Fed has moved from talking about when to talk about tapering to talking about when to begin tapering. Got it?

Overall, economic growth remains on a positive track. Fed Chairman Jerome Powell said the labor market still has “ground to cover” before it would consider paring back its monetary policy supports. Fed officials, for example, are having ongoing discussions about when that process might begin. We’ll likely get more details from the Fed in September, but for now bond purchases and interest rates will remain unchanged, and we expect that to be the case through 2021.

While the health implications are evident, Powell said the pandemic is having less of an economic impact (basically, what we’ve been saying all year). Still, the full recovery of the economy depends on the course of the virus. Powell still expects inflation to moderate in the months ahead.

Consumers Are Optimistic and Spending: Consumer spending bounced back 1 percent in June following a 0.1 percent decline in May, according to the U.S. Commerce Department. Consumer services spending rose 1.2 percent in June, led by restaurants and hotels, as in-person experiences grabbed a larger share of spend. In contrast, spending on long-lasting goods fell 1.5 percent due to a decline in automotive purchases.

Rising auto prices have been a key driver of headline inflation, but consumers are clearly getting more price conscious and holding back on spending. The Manheim Auctions Used Vehicle Value Index decreased 1.7 percent in the first 15 days of July following a 1.3 percent decrease in the month of June. The index is up 24.7 percent year-over-year but is down from 54.2 percent in April. Like lumber, supply and demand imbalances are getting worked out in the auto sector, and we’re beginning to see prices normalize (as the Fed expected).

Consumer confidence in June also rose to its highest level since February 2020, just before the coronavirus gained critical mass in the U.S. The Conference Board’s July index sits at 129.1, up from 128.9 in June. Over 54 percent of consumers say jobs are plentiful, while just 10 percent say a job is hard to get — a differential that’s widened over the past few months. This is the highest level since 2000 and likely points to a strong jobs number when the report hits this week — 900,000 new jobs is the estimate, per Bloomberg.

A Few More: The rate of inflation held relatively steady in June. The personal consumption expenditures price index rose 0.5 percent in June, the same as May. The core PCE price index slowed to 0.4 percent and is up 3.4 percent year-over-year. Second-quarter GDP clocked in at a seasonally adjusted, quarter-over-quarter 6.5 percent. This was below expectations of 8.4 percent but was held back by supply constraints and inventory drawdowns. However, these inventories will need to be restocked in future quarters, and economists are likely marking up their estimates for the back half of the year.

Indeed, consumer spending (the largest component) soared 11.8 percent faster, the second-largest advance since 1952. Residential construction (supply constraints) subtracted 0.5 percent, while inventory drawdowns subtracted a large 1.1 percent. Personal income rose 0.1 percent, and pending home sales declined 1.6 percent in June.

THE WEEK AHEAD

Data We’re Tracking: This week, both the services and manufacturing ISMs for July are due, and we could see what (if any) impact the delta variant is having on growth. The July jobs report will be released next week, and markets will be balancing two competing notions. On the one hand, jobs growth is indicative of a growing, strong economy. On the other, the sooner the labor market mends, the sooner the Fed will consider tapering its accommodative policies (as a reminder, tapering doesn’t mean raising rates). We’ll also get retail and industrial figures from Europe.

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