Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Snap Goes The Economy

By Michael LebowitzMarket OverviewMay 25, 2022 12:12PM ET
www.investing.com/analysis/snap-goes-the-economy-200624844
Snap Goes The Economy
By Michael Lebowitz   |  May 25, 2022 12:12PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

“…the macro environment has deteriorated further and faster than we anticipated when we issued our quarterly guidance last month.” -Snap CEO Evan Spiegel

First-quarter 2022 GDP fell by 1.4%. Many economists and Fed members foresaw the economy slowing from its robust 6.9% pace in the fourth quarter of 2021, but few predicted an economic contraction.

Despite the poor start to the year, many economists are optimistic about second-quarter growth. The graph below shows the consensus estimate for second-quarter GDP growth is 3%, and the Atlanta Fed GDPNow model expects 2.4% growth.

GDP Estimate for Q2-2022
GDP Estimate for Q2-2022

Following the first-quarter GDP, economist Ian Shepherdson, a frequent guest on CNBC, wrote, “the economy is not falling into a recession.”

We beg to differ with Ian and the “consensus.”

Recent warnings from corporate executives, like the one above, and rapidly declining regional manufacturing surveys and consumer sentiment make us wonder if a recession may have already started.

Snap Goes Advertising

In our Daily Commentary, we led with the following paragraph about Snap (NYSE:SNAP), aka Snapchat:

Snap’s stock fell over 40% in trading on Tuesday. Concerning us is not necessarily Snap stockholders or even the welfare of the company, but comments from its CEO. Snap’s CEO writes in a letter to its employees: “…the macro environment has deteriorated further and faster than we anticipated when we issued our quarterly guidance last month.”

Snap is a social media company deriving 99% of its revenue from advertising. Importantly, from a macro perspective, advertising expenditures tend to track well with the economy per the graph below.

AD Revenue GDP
AD Revenue GDP

Ad Industry Flatline Growth
Ad Industry Flatline Growth

Snap is just one company, and typically we would not read much into the warning. However, his comments about a “further and faster” decline in the economy are significant because of their timeliness and that advertising expenditures are strongly linked to economic activity.

it is becoming more evident by the day that many companies cannot entirely pass higher prices and expenses onto consumers. As such, they must cut or limit costs wherever possible. Advertising is an easy place to start, as Snap warns.

Plunging Consumer Sentiment

It is not just Snap and the advertising industry that troubles us. Personal consumption accounts for approximately two-thirds of economic activity. Accordingly, consumer sentiment, which is primarily a factor of the financial state of consumers, is an important indicator to follow.

The University of Michigan Consumer Sentiment Survey is near its all-time lows of the last 60 years, as shown below.

Michigan Consumer Sentiment Index
Michigan Consumer Sentiment Index

Walmart Inventories
Walmart Inventories

Gloomy Regional Manufacturing Surveys

Economic data from the government is often delayed by at least a month and sometimes a quarter. However, timelier data sources can help us bridge the gap until government data is released.

The prominence of manufacturing in the United States is not what it used to be, but it still strongly correlates with the economy. Helping us assess the state of manufacturing is a series of regional and national surveys.

Often the surveys are released within a week or two of when they were taken. Here are a few tidbits from our Daily Commentary on two such recent surveys.

  • The May New York Fed Empire State Manufacturing Survey fell sharply into economic contraction levels at -11.6. Last month the Empire index stood at +24.6.
  • The Philadelphia Fed Manufacturing Index, like the Empire State Index, came in well short of expectations. The index is now 2.6, down from 17.6 and expectations of 16.5. As shown below, the index still signals manufacturing expansion, but just barely so. The index fell to its lowest level in two years.

On May 24, 2022, the Richmond Fed Survey shrunk into contractionary economic territory at -9, versus a forecast of 10 and previous reading of 14. Per the report:

“Additionally, the local business conditions index continued its decline to -16 in May, from -10 in April. Firms are also less optimistic about conditions in the next six months as the index decreased to -13 in May from -1 in April.”

Many manufacturing executives surveyed already feel the brunt of weakening economic activity and pushback from retailers.

Stocks, Bonds, And The Fed

Bond yields have fallen over the last two weeks. Bond investors and traders are breathing a sigh of relief as increasing recession odds should weigh on inflation.

Weakening growth and lower inflation should result in lower bond yields. However, the risk is that inflation does not materially weaken with the economy, yet the Fed becomes less hawkish. If so, bond traders might rightfully fear the Fed is not fighting inflation enough.

Stock investors would love to see the Fed relent from its hawkish rhetoric. However, unlike bond investors, they are not enthused about a possible recession.

Pressure will likely remain on stock prices until the Fed relents. If they ease back on the hawkish rhetoric, we must wonder if stock investors will worry the Fed is being too easy on inflation.

Unless there is a steep drop in inflation in the coming months, the Fed runs the risk of reacting to weak economic growth at the expense of taming inflation.

Summary

We would not rule out an announcement later this year by the National Bureau of Economic Research (NBER) backdating an official recession start date to May or even April.

Despite the data and commentary, many economists still discount the possibility of a recession. With one month left in the quarter, there is plenty of time for a resurgence in economic activity.

That said, real-time data, including sentiment, corporate earnings, and manufacturing surveys, point to a rapidly slowing economy.

While others wait for more official government economic data, we prefer to consider how quickly weakening economic activity and possibly lower inflation will change Fed rhetoric and ultimately affect our portfolios.

Snap Goes The Economy
 

Related Articles

Snap Goes The Economy

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (1)
ECL SALES
ECL SALES May 25, 2022 5:32PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Thanks
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email