Latest Economic Review: Sunpointe Illuminations

September 2023

Labor markets are cooling, but inflation remains above target levels

The August jobs report showed some cooling, but still exceeded expectations. The U.S. economy added 187,000 new jobs last month, but the unemployment rate increased from 3.5% to 3.8%. The July estimate moved down by 30,000 to 157,000. and June was revised lower by 80,000 to 105,000, making June 2023 the smallest monthly gain for new jobs since December 2020. The increase in the unemployment rate largely resulted from workers re-entering the workforce. The labor participation rate of 62.8% was the highest since February 2020, before the start of the COVID pandemic. The broader U6 unemployment rate surged 0.4% in August to 7.1%. Average hourly earnings increased 0.2% month-over-month (M/M) or 4.3% year-over-year (Y/Y).

Personal consumption expenditures prices, the Fed’s preferred inflation gauge, rose just 0.2% in July or 3.3% over the past 12 months. Core PCE increased at an annualized rate of 4.2%. Consumer spending was strong in July, rising 0.6% when adjusted for inflation even though real disposable personal income fell 0.2%. Households have been using credit cards and savings to compensate, as the personal savings rate fell to 3.5% in July, down sharply from the 4.3% level in June.

U.S. posts healthy growth; services continues to show strength versus manufacturing

U.S. GDP growth was revised lower in Q2 to 2.1% from the initial reading of 2.4%. The economy grew at a 2.0% pace in the first quarter and continues to push ahead despite 525 basis points worth of interest rate hikes from the Federal Reserve since March 2022. Economists are expecting a surge in growth for the U.S. economy in Q3 based on current economic data. The Atlanta Fed estimates that the U.S. economy will grow 5.6% in Q3.

Based on data released by ISM, the U.S. manufacturing sector contracted for the tenth consecutive month. The ISM Manufacturing PMI increased to 47.6 in August from 46.4 in July. New orders weakened last month, but employment and production showed some strength. The ISM Services PMI rebounded in August on the heels of strength in new orders, prices, and employment. Strong new orders activity is an indication that consumer and business activity remain resilient.

Source: U.S. Bureau of Labor Statistics via FRED

Eurozone again teetering on recession w/ high inflation & more rate hikes on the horizon

Eurozone business activity contracted at an accelerating pace in August as the region’s downturn spread further from manufacturing to services. Both sectors reported falling output and new orders, albeit with the goods-producing sector registering by far the sharper rates of decline. The eurozone composite PMI fell to a 33-month low of 47.0 in August while the services PMI declined to a 30-month low of 48.3. The manufacturing PMI, which has been in contraction territory for a long time now, increased to a three-month high of 43.7. Current PMI figures suggest that eurozone GDP will shrink by 0.2% in Q3. Headline inflation in the eurozone was flat in August at 5.3%, but it came in above economist expectations of 5.1%. Core inflation also came in at an annualized rate of 5.3%. Since July 2022, the ECB has lifted rates by 4.25%. Eurozone GDP was revised down to 0.1% quarter-over-quarter (Q/Q) growth (from 0.3%) in Q2.

Non-U.S. equity market dynamics are much healthier

It is no secret that U.S. equity markets have largely been driven by a handful of mega-cap tech/growth stocks.  Through the end of Q2, 74% of the S&P 500’s YTD return came from Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta.  The remaining 493 stocks accounted for just 26% of performance. This compares to a much “healthier” market breadth within the MSCI ACWI ex-U.S. Index where 81% of YTD performance comes from 493 stocks versus just 19% coming from the 7 largest companies. Fortunately, market breadth has improved in the U.S. in Q3 with greater participation from value and small cap stocks.

China struggling with weak internal/external demand and a deteriorating property sector

While the Chinese economy has shown significant cracks and slowing in recent months, the manufacturing sector did post a modest rebound in activity in August. The Caixin/S&P Global Manufacturing PMI increased to 51.0 in August from 49.2 in the prior month. This was the highest reading since February, reflecting improvements in employment, supply, and domestic demand. China’s official state manufacturing PMI improved to 49.7 last month versus 49.3 in July.   China continues to suffer from weak external demand and slowing global growth that hurts exports. Imports dropped 12.4% in July Y/Y while exports contracted 14.5% after falling 12.4% in June. The pace of export decline was the fastest since the onset of the COVID pandemic in early 2020 and the decline in imports was the biggest since January this year, when COVID infections shut shops and factories.

Source: Source: MFS, FactSet, data as of 6/30/23

India grows 7.8%!

India’s economy grew at its quickest pace in a year in Q2, buoyed by strong services activity and robust demand, but a drier than normal monsoon season could restrain future growth. GDP expanded 7.8% on an annual basis in Q2, accelerating from 6.1% growth recorded in Q1. In Q2, private consumption, which accounts for nearly 60% of the Indian economy, grew by about 6% Y/Y, up from 2.8% in Q1.

More companies staying private for longer

There were just under 4,800 listed companies in 1976. The total rose to more than 7,300 at the peak in 1996 but has declined to just above 4,200 companies today. Wilshire Associates launched the Wilshire 5000 index in 1974 and picked the number “5000” to match the investable universe. That index had more than 7,000 constituents at one point in the 1990s but only 3,478 as of March 31, 2023. There were fewer public companies in the U.S. in 2022 than there were in 1976 notwithstanding that the population in 2022 was 1.5x that of 1976, real GDP per capita was 2.2x higher, and the number of firms was roughly 1.5x greater. These changing dynamics make the opportunity set for private markets compelling as there are more private companies and many are staying private for longer.

A day of reckoning for commercial real estate?

According to Newmark Group, about $1.2 trillion of debt on U.S. commercial real estate is “potentially troubled” because of high leverage and declining property values. Office buildings are the biggest near-term problem, accounting for more than half of the $626 billion of at-risk debt that is set to mature by the end of 2025. Based on data from Green Street, office values have tumbled 31% from a peak in March 2022, when the Federal Reserve started raising interest rates. Concerns are mounting that defaults will increase as property values fall and costs rise for landlords who need to refinance at higher interest rates. Overleveraged owners are often more motivated to stop payments than invest money into buildings with diminished prospects for returns. Blackstone, Brookfield, and Goldman Sachs are among investors that have defaulted or relinquished offices to lenders this year. Banks, which have tightened lending since this year’s collapse of Silicon Valley Bank, carry the biggest share of at-risk debt, with $303 billion of potentially troubled loans maturing through 2025.


The charts and information in this presentation are for illustrative purposes only, and are based upon sources of information that Sunpointe, LLC generally considers reliable, however we cannot guarantee, nor have we verified, the accuracy of such independent market information. The charts and information, and the sources utilized in the compilation thereof, are subjective in nature and open to interpretation. FOR USE WITH INSTITUTIONAL INVESTORS AND INVESTMENT PROFESSIONALS ONLY. NOT FOR PUBLIC DISTRIBUTION. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.