The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Invest with smart knowledge and objective odds

THE DAILY EDGE: 30 JULY 2021

Household Spending Rose in June, Before Delta Upswing U.S. households boosted spending last month, though the current increase in Covid-19 cases related to the Delta variant and higher inflation are injecting uncertainty into the economic outlook.

Personal-consumption expenditures—a measure of household spending on goods and services—increased by 1% last month, the Commerce Department reported Friday, beating economists’ expectations for a 0.7% rise. That followed a downwardly revised 0.1% drop in May, when consumers pulled back on purchases of goods but boosted spending on services.

Friday’s report also showed Americans’ personal income rose 0.1% in June. Still, rising inflation and the latest surge in virus cases could affect future spending trends.

Friday’s report showed that the core personal-consumption expenditures price index—a measure of inflation that excludes often-volatile prices for food and energy—was up 3.5% in June from a year ago, compared with a 3.4% yearly increase in May. (…)

The BEA release is here.

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Note that the personal saving rate was 9.4%, down from 10.3% in May and 12.7% in April. Americans continue to dissave. Also, Wages and Salaries rose 0.8% MoM and are up at a 9.5% a.r. in Q2 following +1.6% a.r in Q1. On  a YoY basis, Wages and Salaries are up 7.9% in Q2 after +4.0% in Q1 and +1.3% in 2020.

U.S. GDP Growth Disappoints in Q2’21; Economy Exceeds Pre-Pandemic Level

Real GDP of 6.5% (SAAR) during Q2’21 was the quickest since Q3’03, with the exception of the 33.8% Q3’20 rebound from the coronavirus recession. An 8.5% increase had been expected in the Action Economics Forecast Survey. Growth during Q1’21 was revised to 6.3% from 6.4%. Earlier numbers also were revised.

The disappointment in growth last quarter centered on a 1.1 percentage point subtraction due to inventory decumulation. Foreign trade also reduced growth by 0.4 percentage points as a 6.0% gain (18.1% y/y) in exports was outpaced by 7.8% growth (30.8% y/y) in imports. (…)

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The inventory effect will reverse in the second half as stocks get rebuilt.

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Date: Bureau of Economic Analysis; Chart: Axios Visuals

U.S. Initial Unemployment Insurance Claims Ease; Maintain Recent Range

Initial claims for unemployment insurance fell to 400,000 in the week ended July 24, down from 424,000 the prior week. That earlier number was revised from 419,000 reported last week. The Action Economics Forecast Survey consensus was 385,000 initial claims. The four-week moving average was 394,500, up from 386,500 the prior week. Initial claims are typically volatile in the summer owing to plant shutdowns and school closings.

Initial claims for the federal Pandemic Unemployment Assistance (PUA) program decreased to 95,166 in the July 24 week from 109,868 the prior week; that was revised somewhat from 110,257 reported before. The PUA program provides benefits to individuals who are not eligible for regular state unemployment insurance benefits, such as the self-employed. Given the brief history of this program, these and other COVID-related series are not seasonally adjusted.

Continuing claims for regular state unemployment insurance in the week ended July 17 rose 7,000 to 3.269 million from 3.262 million. That earlier number was revised from 3.236 million. The last three weeks have thus been very steady at 3.265 million, 3.262 million and 3.269 million. The associated rate of insured unemployment held at 2.4% for a fourth straight week, the lowest since 2.1% the week of March 21, 2020, that is, just as the magnitude of the pandemic was becoming evident.

Continued claims for PUA rose to 5.246 million in the week ended July 10; that was the first increase in seven weeks, although the immediately prior July 3 week had a sizable decline of 553,250. Continued PEUC claims also rose, these by 99,167 to 4.234 million, their first increase since June 5. The Pandemic Emergency Unemployment Compensation (PEUC) program covers people who have exhausted their state unemployment insurance benefits.

In the week ended July 10, the total number of all state, federal, PUA and PEUC continuing claims rose 582,403 to 13.156 million, the first increase since the April 24 week. This does maintain the recent lower level, which is down from a high of 33.228 million in the third week of June 2020. These figures are not seasonally adjusted.

Bespoke has the best coverage and chart on claims:

(Bespoke)

U.S. Pending Home Sales Declined in June

Pending home sales fell 1.9% m/m (-1.9% y/y) in June after an upwardly revised 8.3% m/m gain in May (originally 8.0% m/m). Sales continue to be restrained by soaring prices and a near-record low supply of homes for sale.

The June decline was concentrated in the South and West regions. Sales in the South fell 3.0% m/m (-4.7% y/y) and sales in the West slumped 3.8% m/m (-2.6% y/y). By contrast, sales in the Northeast edged up 0.5% m/m (+8.7% y/y) and sales in the Midwest rose 0.6% m/m (-2.4% y/y), their third consecutive monthly increase.

The pending home sales index measures sales at the time the contract for the purchase of an existing home is signed, analogous to the Census Bureau’s new home sales data. In contrast, the National Association of Realtors’ existing home sales data are recorded when the sale is closed, which is likely a couple of months after the sales contract has been signed. In developing the pending home sales index, the NAR found that the level of monthly sales contract activity leads the level of closed existing home sales by about two months.

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Commercial-Property Sales Volume Returns to Pre-Pandemic Levels Recovery has been fueled by low interest rates and optimism on fight against Covid-19

(…) Investors purchased $144.7 billion of U.S. commercial property in the second quarter, Real Capital said. Not surprisingly, that was close to triple what it was in the second quarter of 2020, when the pandemic was in its early months and there was widespread investor uncertainty over its economic impact.

Second-quarter sales volume this year also was above the $127.2 billion average between 2015 and 2019, according to Real Capital. This came as a surprise to many observers who had been expecting the pandemic to spark a commercial real-estate sales slump comparable to the one that followed the global financial crisis.

This time, though, commercial property didn’t run into huge liquidity issues thanks partly to the Federal Reserve’s easy-money policies and less leverage in the market, Real Capital said. “Calamity was simply not in the cards for this economic downturn,” the report said. (…)

The multifamily sector has had the largest sales volume this year at $92 billion, particularly garden apartments outside major metropolitan areas. Investors see rents and occupancy levels remaining strong thanks partly to demand from people closed out of the home sales market due to rising prices. “Buyers are saying, ‘I like the strength of tenants, I like the yield here so I am going for it,’” said Jim Costello, Real Capital senior vice president. (…)

But the rebound hasn’t been felt evenly: The pandemic shrunk tenant demand for malls and office buildings. Manhattan, which had the second-highest volume in the first half of 2019, fell to 11th place in the first half of this year. San Francisco fell to 15th place from 10th place, Real Capital said.

Investors have lost their appetite for office buildings because the future of demand has been clouded by the popularity of working from home during the pandemic. Many office tenants have been adopting new workplace strategies that will allow more remote working even after the pandemic. (…)

Euro zone growth rebounds, inflation tops ECB target

The European Union’s statistics office Eurostat said on Friday that its initial estimate showed gross domestic product (GDP) in the 19 countries that use the euro had expanded 2.0% in April-June from the previous quarter.

Compared to the same period a year earlier, when lockdowns to slow the spread of the coronavirus brought economic activity close to a standstill, GDP jumped 13.7%.

But unlike the U.S. and Chinese economies, which have pulled above their pre-pandemic peaks, the euro zone economy remains some 3% smaller than it was at the end of 2019.

Eurostat also said euro zone inflation accelerated to 2.2% in July from 1.9% in June – the highest rate since October 2018 and above the 2.0% mean expectation of economists.

Economic growth also surpassed a Reuters poll forecast of 1.5% for the April-June quarter and a 13.2% annual increase.

Among the outperformers were the euro zone’s third and fourth largest economies, Italy and Spain, with quarterly growth respectively of 2.7% and 2.8%. Portugal’s tourism-heavy economy expanded by 4.9%. (…)

Figures on Thursday showed the U.S. economy grew at a slower than expected 6.5% annualised rate in the second quarter, pulling GDP above its pre-pandemic peak, as massive government aid and vaccinations fuelled spending on goods and services.

The equivalent euro zone rate was 8.3%. (…)

Without the volatile energy and unprocessed food components, or what the European Central Bank calls core inflation, prices rose 0.9% year-on-year, the same as in June. Economists had expected a dip to 0.7%. (…)

From Nordea:

  • Country-level differences continue to be significant

  • The Euro-area inflation was driven by the oil price

EARNINGS WATCH

We now have 255 reports in, a 9!% beat rate and a +17.8% surprise factor.

Q3 estimates: +29.6% vs +24.7% on July 1.

Q4 estimates: +21.0% vs +17.3% on July 1.

Trailing EPS are now $180.25. Full year 2021e: $197.47. 2022e: $216.58

Procter & Gamble Co (PG.N) beat quarterly sales estimates on Friday, helped by higher demand for its skin and health care products, but warned that rising commodity and freight costs would take a nearly $2 billion bite out of its earnings this year. (…)

The company forecast fiscal 2022 core earnings per share to rise between 3% and 6%, or about $5.82 to $6.00. Analysts were expecting a full-year profit of $5.90 per share, according to IBES data from Refinitiv.

(…) “We do expect price increases to accelerate from what you saw in the first half,” said Nestlé Chief Executive Mark Schneider. “After several years of low inflation, all of a sudden it accelerated very strongly starting in March and is continuing to accelerate.” (…)

Nestlé said it had raised prices by an average of 1.3% globally in the first six months of the year, driven by North America and Latin America. Prices of its milk-based products and ice cream were up by an average of 3.5%, while its water brands rose 1.6%.

In the U.S., Mr. Schneider said costs for transportation, commodities and packaging were all rising. He also said that labor costs were up significantly, with a tight labor market leading to staff turnover and salary increases. Overall, the company expects input costs to be 4% higher this year. (…)

Competitors Unilever PLC and Reckitt Benckiser Group PLC also flagged pressure on margins in recent days. That is partly because of the lag between having to cover higher input costs and being able to raise prices of their products. (…)

[AB InBev] Chief Executive Michel Doukeris said hedging had protected the company from some of these higher costs so far and that it was now assessing ways to mitigate them as they come through, including by raising prices.

Concerns about the impact of higher costs on the company’s profitability sent shares down as much as 8%.

(…) [Diageo] said its operating margin in North America had declined by 1.24 percentage point, partly reflecting rising costs of agave—a key ingredient in making tequila. (…)

Danone, meanwhile, beat analysts’ forecasts with a 6.6% rise in comparable second-quarter sales but flagged rising prices for milk, plastic, packaging and transportation.

To protect profitability, the yogurt maker said it had increased prices in places such as Latin America, Russia and Turkey where it sells many of its products to independent stores. In North America and Europe, however, raising prices takes more time because more of its products are sold through long-term contracts with major retailers. That means price rises negotiated now will come through in the coming months. (…)

Rising costs are being passed on, fully, partially or with a delay. So far, margins are holding, even rising, thanks to very strong demand/sales. Domestic final sales rose 12.9% YoY in Q2. Such growth rates are truly unsustainable, transitory. We shall see if costs also are…

  • Amazon’s New Day Has a Rough Start Amazon’s online stores segment saw revenue grow by only 16% to $53.2 billion in the second quarter, falling well short of analysts’ targets. (…) The midpoint of the company’s revenue projection for the third quarter represents growth of 13% year over year. That would be Amazon’s slowest growth rate in 20 years, even with the pandemic picking back up and possibly driving more sales online.

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Robinhood’s Stock Price Falls After IPO The company’s stock closed down 8.4% in its trading debut after pricing its shares at the bottom of its targeted range.

THE DAILY EDGE: 12 JULY 2019

Takeaways From Fed Chief’s Two Days on Capitol Hill
  • Mr. Powell also repeatedly cited soft inflation numbers.
  • “There are a lot of lessons to be learned from the experience of Japan over the last quarter century, and all of us have looked very carefully at that,” Mr. Powell said Wednesday, explaining why it was important to keep inflation at the Fed’s 2% target.
  • Mr. Powell pushed back against a characterization that the labor market is hot, or so tight it could fuel too much inflation. “To call something hot, you need to see some heat,” he said. “While we hear lots of reports of companies having a hard time finding qualified labor, nonetheless we don’t see wages really responding.”
  • Support for tighter money has evaporated.

Will this “never-mind-what-we’ve-been-saying-data-don’t-really-matter” Fed dismiss the recent uptick on core CPI as “transitory” given that goods inflation was positive for the first time in 5 months?

Source: Eric Winograd, AllianceBernstein (via The Daily Shot)

Looking at these Cleveland Fed table and chart, one could say that U.S. inflation is indeed at or above 2.0%.

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This chart from Blackstone also points to 2.0%+ core CPI:

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About Powell’s “we don’t see wages really responding”, somebody should show him this chart…

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…with this one: as of yesterday, initial unemployment claims are showing no signs of a “not hot” labor market slowdown just yet:

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In spite of this:

Source: Credit Suisse (via The Daily Shot)

One of these key economic gauges isn’t telling the truth

By Mark Hulbert:

Even as new all-time highs have been registered by broad-market U.S. indices such as the Dow Jones Industrial Average DJIA, +0.85%   and the S&P 500SPX, +0.23%  , the market’s transportation sector has lagged. The Dow Jones Transportation Average DJT, +0.96%  , for example, is more than 6% below its April high, and more than 10% below its all-time high set in 2018.

Dow Theorists will immediately recognize the significance of this divergence: it sets up a potentially bearish “non-confirmation” which, if it continues, could turn this oldest of stock market timing systems negative on the major trend. To some, this recent divergence is eerily reminiscent of a similar divergence prior to the bursting of the internet bubble in early 2000: near the top of that bull market, in March 2000, the Dow Transports hit a then all-time high in May 1999, almost a year prior to the broad market.

The lagging transports might worry you even if you’re not a follower of the Dow Theory. That’s because the transportation sector is widely considered to be a leading economic indicator, on the basis that this sector will be among the first to signal coming economic weakness.

As I’ve pointed out before, there is empirical support for this theory. According to research conducted by the Bureau of Transportation Statistics of the U.S. Department of Transportation, declines in the sector have, at least over the last three decades, led economic slowdowns by an average of four to five months. (…)

Which economic benchmark is painting a truer picture? (…)

To be sure, even if you believe that the Baltic Dry Index is painting the more accurate picture, it’s clear that the transportation sector needs to catch up with the broad market, and soon. It’s hard to imagine a healthy economy without the transportation sector’s participation, after all.

The sector’s performance on Thursday of this week is a small, but helpful, sign in this regard: The Dow Transports were up 0.96% for the day, versus 0.23% for the S&P 500. Still, the Dow Transports have a deep hole out of which to dig. Pay close attention.

But the Baltic Dry Index has shown much volatility in recent years. Some suggest the fluctuations have more to do with supply than with demand:

On June 19, the Daily Edge discussed the Economic Outlook from Freight’s Perspective from Cass Information System. To recall:

With the -6.0% drop in May, we see the shipments index as going from “warning of a potential slowdown” to “signaling an economic contraction.” (…) The weakness in spot market pricing for many transportation services, especially trucking, is consistent with the negative Cass Shipments Index and, along with airfreight and railroad volume data, strengthens our concerns about the economy and the risk of ongoing trade policy disputes. Weakness in commodity prices and the decline in interest rates have joined the chorus of signals calling for an economic contraction. (…)

Bottom line, more and more data is indicating that this is the beginning of an economic contraction.

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DHL designed its own Global Trade Barometer:

The DHL Global Trade Barometer predicts a deceleration in global trade growth, with a decrease in the overall growth index of -8 points to 48 compared to March, thus indicating negative growth. Air trade also decelerated -6 points to 49, while ocean trade fell -8 points to 48; this deceleration below 50 in the growth indexes for overall world trade, air trade and ocean trade is happening for first time since the GTB’s launch in January 2018 and just for the second time when using historical data that go back to 2013.

The negative outlook is to a large extent affected by decline in China and US (US -11 points, China –7 points). The fact that the trade conflict between US and China is leading to a shift in trade routes and supply chains, may be responsible for softening the impact on a global level, as the overall index is still just three points below positive growth.

Furthermore, Japan (-7 points,) India (-6 points,) and South Korea (-3 points) are expected to lose momentum, while Germany (-1 point) and the UK (+2 points) are relatively stable. (…)

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The DHL Global Trade Barometer predicted a downturn in US trade as the index drops rapidly to 44, representing a decrease of -11 points compared to the latest update in March. With this, The US is the GTB country with the most significant losses of the seven constituents. The decline in the US total trade index is substantiated by the weakening of air and ocean trade; air trade slides -8 points to 45, while ocean trade drops -14 points to 43. The overall sharp decline can be interpreted as a result of the increasing intensity in the US-Chinese trade dispute.

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I added this from the Association of American Railroads:

You have to look pretty hard to find good news in May’s rail traffic data, but disappointing news is easy to find. Total U.S. rail carloads were down 2.1% in May 2019 from May 2018, their fourth straight monthly decline.

I look at rail volume excluding coal, grain and oil to get a better sense of what’s happening in the economy: the 6-wk m.a. is down 5.4% in May, back to the 2017 level.

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U.S. IP could drop significantly in coming months:

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Is this only the result of pre-tariffs inventory hoarding temporarily impacting the goods economy?

The U.S. LEI better be turning up soon as Blackstone seems to suggest?

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ECB Follows Fed in Signaling Fresh Stimulus Minutes for June meeting suggest ECB could cut interest rates or restart its $2.92 trillion bond-buying program

(…) This puts the world’s two biggest central banks on the cusp of injecting fresh stimulus into their economies to ward off a global slowdown and weak inflation. (…) Many central banks in the Asia-Pacific region, including Australia and New Zealand, have already lowered interest rates. (…)

ECB officials were in “broad agreement” at their June meeting that the bank should “be ready and prepared to ease the monetary policy stance further by adjusting all of its instruments,” according to the minutes. (…)

The eurozone economy performed better than expected in the first three months of the year, but the June minutes revealed deep concerns that global uncertainties will weigh on the region’s economy for some time.

In particular, ECB officials highlighted a downward shift in market expectations of future inflation rates, which have fallen “near the previous lows recorded in September 2016.” The ECB has previously used weakening inflation expectations to justify aggressive stimulus measures.

“Inflation was still projected to reach only 1.6% in 2021, which was seen to remain some distance away from the Governing Council’s inflation aim,” the minutes said. (…)

The June minutes suggested that the ECB might be able to find creative ways to expand its toolbox. Officials argued that “considerations of a more strategic nature might be warranted in order to reinforce the credibility of the ECB’s monetary policy.” (…)

Eurozone production up in May, but outlook remains meagre

Industrial production bounced back by 0.9% in May after a weak start to the year. (…) The growth was broad-based, with only production in intermediate goods declining on the month, while consumer goods production grew at above 2% for both durable and nondurable goods production. (…) While May production may look like a green shoot, as we argued this morning, it looks like weakness in global demand and trade uncertainty will dampen the industrial outlook for the second half of the year. (…)

Even though export growth is still positive, business surveys have been pointing to a contraction in orders from abroad. Moreover, there is a strong correlation between the percentage that industries produce for foreign final demand and the performance in production since December 2017, with the industries that produce more for foreign final demand doing much worse than the ones producing more for domestic final demand. This indicator includes intermediates that are used in products that are exported, therefore giving a more complete indication of industry sensitivity to weaker external demand.

While export growth has remained positive up to now, weaker production of intermediates used for exports indicates that weaker gross exports could well be on the cards over the summer months. This view is also supported by the reported deterioration of eurozone companies’ international competitiveness. (…)

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When looking at episodes of declining production, this one stands out. We have not seen a decline this long and this deep without a contraction in GDP since the 1960s, which is the furthest back that the data go. This is except for the early 2000s around the dotcom crisis, which was officially not a eurozone recession although many eurozone countries did experience a recession at the time. Now, while the second half of 2018 saw a marked slowdown in growth, the eurozone has avoided a (technical) recession for now, but the question is, how long can this industrial slump continue without broader repercussions?

The strong performance of the service sector has kept the eurozone economy from contracting. Remarkably enough, the poor performance of the manufacturing sector has not yet led to a decline in employment growth in the sector. The expansion of the 2000s was marked by a strong decline in manufacturing employment, but the current picture is the reverse of that. Employment in the manufacturing sector continues to grow, thereby supporting household consumption, which in turn mainly benefits the service sector.

There are signs that manufacturing employment could turn down though. For example, businesses indicate that hiring intentions in the manufacturing sector are weakening and in Germany, layoffs have increased while short-term work is returning. Still, as long as overall manufacturing employment continues to grow, the sluggishness in industrial production may well remain relatively contained. The manufacturing job market could, therefore, be key in the coming months to see whether the expansion can hold out amidst industrial sluggishness.

Warning Shot to World Economy as Singapore Slumps, China Exports Drop

(…) Gross domestic product in export-reliant Singapore shrank an annualized 3.4% in the second quarter from the previous three months, the biggest decline since 2012. China trade figures showed exports fell 1.3% in June from a year ago and imports shrank a more-than-expected 7.3%.

Like South Korea’s economy — which already contracted in the first quarter — Singapore is often held up as a bellwether for global demand given its heavy reliance on foreign trade. (…) The data “points to the risk of a deepening slowdown for the rest of Asia.” (…)

About 40% of the city state’s exports are integrated circuits alone, according to Tuuli McCully, head of Asia-Pacific economics at Scotiabank in Singapore. (…)

Singapore exports dive on plunge in electronics shipments

Huawei sees little benefit from Trump promises, calls on U.S. to lift export restrictions

(…) “So far we haven’t seen any tangible change,” Liang said. (…)

U.S. Budget Gap Widened 23% in First Nine Months of Fiscal Year The government collected $2.6 trillion in receipts, a 3% increase, but higher spending on the military and interest on the debt drove federal outlays up 7%

(…) A strong economy typically leads to narrower deficits, as rising household income and corporate profits help boost tax collections, while spending on safety-net programs such as unemployment insurance tends to decline.

The U.S. economy has been growing for 10 years as of this month, the longest economic expansion on record. Yet annual U.S. deficits are on track to exceed $1 trillion over the next few years, due in part to the 2017 tax law, which constrained federal revenue collection last year, and a 2018 budget deal that busted spending caps enacted in 2011. (…)

In the 12 months that ended in June, the deficit totaled $919 billion, a 22.6% increase from the same period a year earlier. As a share of gross domestic product, the year-over-year deficit totaled 4.4%, much higher than the previous 12 months. (…)

Overall, corporate tax revenue is now up 1.6% for the fiscal year to date. (…)

The latest estimate puts pressure on Congress and the White House to reach an agreement on raising the limit before the House and Senate leave for their August recess. Lawmakers are not scheduled to return to Washington until Sept. 9. (…)

EARNINGS WATCH

At the end of the day, earnings always matter more than anything else.

The Q2 earnings season officially starts next week but we already have 24 companies in (13 consumer-centric, 4 industrials, 6 IT and 1 financial): their beat rate is 83% and their surprise factor +5.7%. But their aggregate earnings are down 7.8% on a 3.0% revenue growth rate.

Amazon Prepares to Retrain a Third of Its U.S. Workforce Amazon.com plans to spend $700 million over about six years to retrain a third of its U.S. workforce, as automation, machine learning and other technology upends the way many of its employees do their jobs.

U.S. companies are increasingly paying up to retrain workers as new technologies transform the workplace and companies struggle to recruit talent in one of the hottest job markets in decades. (…)

Amazon’s promise to upgrade the skills of its workforce—reported by The Wall Street Journal Thursday—represents one of the biggest corporate retraining initiatives on record, and breaks down to about $7,000 per worker, or about $1,200 a year through 2025. By comparison, large employers with 10,000 workers or more that were surveyed by the Association for Talent Development reported spending an average of $500 per worker on training in 2017. (…)

Yesterday I gave the link to a Blackstone webinar with Byron Wien and Joe Zidle. I encourage you to use 45 minutes of your time to watch it and access their chart package. An occasion to learn what a $500B investment organization thinks. I guarantee you will learn something.