MANUFACTURING

U.S. Light Vehicle Sales Maintain 15-Year High; Imported Truck Sales Surge

Total sales of light vehicles edged 0.4% higher during October to 18.24 million units (SAAR). The gain followed a total increase of 6.9% during the prior three months and left sales 10.0% higher than one year ago. Total unit sales were at the highest level since July 2005.

A 0.2% dip in light truck sales understates the dynamic behind last month’s truck market — a surge in imports and a decline in domestic sales. Imports’ 1.9% gain to 1.62 million units was to a record high, with sales nearly 50% higher versus a year ago. The strength came at the expense of domestic truck sales which eased 3.0% but were still 14.8% higher than last year.

Passenger car sales increased 1.3% (0.4% y/y) after a 2.3% September rise. Sales were barely higher (0.4%) than one year ago. Imported car sales paced last month’s increase with a 1.9% rise. The gain, however, did not make up September’s loss and sales of imports remained 0.8% lower than last year. Sales of domestic passenger cars fared somewhat better and gained 1.0% after a 4.1% surge in the month prior. Here again, though, the y/y comparison is a less-than-inspiring 0.9%. (Charts from CalculatedRisk)

U.S. Factory Sector Orders Decline Led By Aircraft

New orders in the manufacturing sector fell 1.0% during September (-7.1% y/y) following a revised 2.1% August decline. The drop roughly matched expectations in the Action Economics Forecast Survey. It was led by a 1.2% decline (-3.5% y/y) in durable goods orders which was unrevised from last week’s advance report. The decline was paced by a 36.0% drop (-33.6% y/y) in nondefense aircraft & parts. Factory sector orders excluding the transportation altogether eased 0.6% (-8.6% y/y), the fifth shortfall in the last six months.

US Consumers Are on a Shopping Spree

Interesting piece from Credit Suisse in the wake of my yesterday post MERRY CHRISTMAS?

(…) The four major factors that Credit Suisse believes are driving consumption higher suggest that lower-income households are finally starting to feel the benefits of a recovery that technically began in 2009.

For one thing, employment levels in the states hit hardest by the bursting of the housing bubble are starting to recover. The employment gap between the 20 percent of states that suffered the biggest drop in housing net worth during the crisis and the 20 percent with the smallest decline is narrowing.  

Current state-by-state consumer spending figures aren’t available. So it’s impossible to know whether the employment recovery is feeding through into higher spending in what Credit Suisse calls “bubble states.” But indirect measures suggest that it is. Consumers in bubble states are starting to charge more on their credit cards and take out more auto loans.

Rising debt levels among subprime borrowers in bubble states are part of a larger trend in which households of all kinds – those with good credit and bad, those in states pummeled by the financial crisis and those in states that remained relatively untouched – have been taking on more household debt. The long-running household deleveraging that began in the wake of the financial crisis started to reverse course in late 2013 and that turnaround is now filtering down to borrowers with less than sterling credit. That directly encourages consumer spending.  

Lower-income households have also enjoyed disproportionate relief from the decline in oil prices over the past year. For the lowest-earning 60 percent of households, gasoline made up 7.1 percent of non-discretionary spending after tax, compared to 3.7 percent for the top 40 percent. In aggregate, low gas prices have saved American consumers the equivalent of 1 percent of their total disposable income over the past year.

The evidence suggests that consumers are spending that windfall, rather than saving it: Household savings rates have declined dramatically since the beginning of this year, and restaurant spending has soared since oil prices first started to decline in 2014.

Falling gas prices aren’t the only factors encouraging – or, perhaps, allowing – lower-income Americans to spend. Higher income is playing a part, too. The lowest-earning 10 percent of American households have seen weekly earnings grow 2.6 percent a year since 2013, more than double the 0.9 percent annual growth rate between 2009 and 2012.

Workers in the two lowest-paid sectors, retail and leisure and hospitality, are working more hours and benefitting from steady growth in payroll income. Those two sectors account for more than 30 million jobs, or one-fourth of private employment.  

Credit Suisse believes that this broader recovery is directly responsible for the steady uptick in spending on discretionary items such as clothing, household products, and toys. Lower-income households spend a higher proportion of their income on discretionary goods than wealthier households do, and as their fortunes recover, they seem to be able to spend more on “extras.”

That’s a very good sign for the economy, as these kinds of spending recoveries tend to last for a while. Credit Suisse says trends in spending on services and non-durable goods tend to come in “long, slow waves.” (…)

BTW, Thomson Reuters’ tally of sss is finally showing some life. Consider that their index is heavily crowded with apparel chains and that apparel prices are down 1.4% YoY.

Excluding the drug stores, the Thomson Reuters Same Store Sales Index registered a 0.8% comp for September, beating its -0.1 final estimate. Including the Drug Store sector, SSS improves to 0.9%, beating its final estimate of 0.2%. 75% of retailers beat estimates. A later Labor Day weekend drove shoppers to the mall, and back-to-school sales picked up in the beginning of September right when school started.

EARNINGS WATCH

• 387 companies (81.7% of the S&P 500’s market cap) have reported. Earnings are beating by 4.7% while revenues have missed by 0.1%.
• Expectations are for a decline in revenue, earnings, and EPS of -3.8%, -2.3%, and -1.1%. EPS growth is on pace for -0.3%, assuming the current beat rate for the remainder of the season. This would be 6.7% excluding Energy.

St. Louis Fed Official: Maybe We Shouldn’t Count the Long-Term Unemployed as ‘Slack’ Are the jobless gone for good? A new analysis suggests they might be.

There might be much less slack in the labor market than Janet Yellen thinks.

That’s the prognosis offered by Stephen Williamson, vice president of the St. Louis Federal Reserve.

In a recent note, the economist examined different metrics that paint varying pictures of the U.S. labor market’s strength. (…)

This outcome is consistent with the view that there has been a growing mismatch between the skills available workers have and the ones companies want, he contended. That’s one reason people have been unable to find jobs for so long.

Viewing the long-term unemployed as victims of structural change would have potential implications for Federal Reserve policy. (…)

The unemployment rate would fall to 4.6 percent if the ranks of long-term unemployed were to fall to levels seen in 2007, with those people exiting the work force and all else holding equal, wrote Williamson. Unemployment currently stands at 5.1 percent.

If this segment of presumed would-be workers is unlikely to regain jobs, do people not in the labor force constitute a plentiful and viable source of untapped labor?

According to JP Morgan senior economist Robert Mellman, the answer is probably not. His research shows that flows into the labor force from outside it have not accelerated near the end of the last two expansions, notwithstanding an unemployment rate that was lower then than it is now. (…)

This isn’t the St. Louis Fed vice president’s first controversial report.

Early this year, Williamson released a white paper (PDF) noting that no research “establishes a link from quantitative easing to the ultimate goals of the Fed—inflation and real economic activity,” which questions the efficacy of the unconventional stimulus deployed in the wake of the Great Recession. (…)

Maersk Line to Cut Staff as Market Deteriorates

(…) Maersk Line’s full-year underlying earnings are expected to be $1.6 billion, compared with an earlier forecast of more than $2.2 billion. (…)

China Lowers Expectations for Growth

(…) The plan calls for increasing consumer spending and gradually raising the retirement age to respond to a labor force that is losing ground to an aging population—a demographic time bomb that also led Beijing in the last week to end its long-held policy limiting many parents to one child.

Despite pledges to shift to new growth engines, China signaled it is still clinging to a decades-old economic model with a focus on state-led growth that has fueled massive debt and bloated industry.

Mr. Xi hinted at a range of possibilities for China’s official five-year growth target, which won’t be announced until March, by saying that China could maintain its current pace this year of “about 7%”—which would be its lowest in a quarter-century. His comments Tuesday underscore a key challenge for China’s leaders: how to manage expectations amid a difficult bid to shift the economy to a slower-paced “new normal.” (…)

Mr. Xi said a minimum of 6.5% growth is needed to realize Beijing’s goals of doubling people’s average income and doubling the size of China’s economy from 2010 to 2020—objectives linked to the 100th anniversary of the Communist Party in China. (…)

The proposal also called for making China’s currency, the yuan, “freely convertible and usable” over the next five years, setting a new timetable for the long-promised and delayed capital account convertibility—whereby money can move freely across borders—in an orderly manner.

China also pledged to reduce its relative debt levels, which have surged since a massive stimulus program to avert effects of the 2008-2009 global financial crisis.

China’s Middle Class Buoys Some Consumer Businesses China’s economic slowdown has pummeled global suppliers of raw materials and industrial equipment, but business has remained surprisingly brisk for companies that cater to the country’s growing upper-middle class.

(…) Among the winners are sportswear maker Nike Inc., coffee-store chain Starbucks Corp., clothing retailer Hennes & Mauritz AB and gadget giant Apple Inc. Behind their success are people like 24-year-old Jiang Yang, a technology officer at a state-run factory in the northern Chinese city of Shenyang, who recently bought a new rose-gold Apple iPhone. Not only have Mr. Jiang and his affluent young peers been a bright spot in China’s economy, but many economist think they hold the key to its long-term growth.

Mr. Jiang, who insists he had to have the latest iPhone, said his monthly salary ranges from 2,500 yuan to 5,000 yuan, or roughly $395 to $790, depending on his workweek. When coupled with his family’s income, that puts him in the upper-middle class, defined by consulting firm McKinsey & Co. as households with annual income of 106,000 yuan to 229,000 yuan. The firm expects such households to account for 54% of the country’s total household income in 2022, up sharply from 14% in 2012.

(…) while it has risen over the past five years, household consumption still makes up less than 40% of China’s economy, according to official figures. (…)

A recent McKinsey survey of 1,200 Chinese consumers found that 71% expect wages to increase this year, and 84% expect to spend more. That jibes with official data that show retail sales growth in September accelerated slightly from a year earlier to 10.9%, while the growth rate for industrial production slowed. Retail-sales growth has accelerated modestly in four of the past five months as other economic indicators have weakened. (…)

Consumers between the ages of 21 and 30 accounted for more than 60% of China’s outbound tourists, according to Credit Suisse. Citing AC Nielsen data, Credit Suisse says consumers in that age group will account for 35% of China’s total consumption in 2020, up from 15% last year. (…)

Not all the news is good. Passenger-car sales have fallen from a year earlier in three of the past four months, and have risen a disappointing 2.8% in the first nine months of the year, hit by China’s stock-market slump and new limits on car buying in several cities. (…)

Last week, Hershey blamed China’s slowing economic growth for its woes in the third quarter, when its China sales dropped 14%. The candy maker’s products, which include chocolate Kisses and Reese’s peanut butter cups, are losing out to premium products that Chinese consumers buy as indulgences and gifts, while “Hershey’s is stuck at midlevel mass-market position,” said James Roy, retail analyst at Shanghai-based consulting firm China Market Research. “There are no must-have products,” he said.

A spokesman for Hershey said Chinese consumers are making fewer trips to the grocery store, which has hurt business. Hershey is now expanding its sales online, he said.

More on China’s consumer?

• Why China’s consumers will continue to surprise the world

• Five keys to connecting with China’s wired consumers

Brazil’s manufacturing downturn intensifies in October

Registering a 79-month low of 44.1 in October (Septem ber: 47.0), the seasonally adjusted Markit Brazil Purchasing Managers’ Index™ (PMI™) pointed to a sharp deterioration in business conditions across the nation.

Output fell for the ninth consecutive month, the longest sequence of continuous reduction since the global financial crisis. Moreover, October saw the rate of contraction accelerate to the sharpest since March 2009. According to survey members, production was lowered in response to a further decline in order book volumes and a fragile economic situation.

October data signalled another drop in new business inflows, with the pace of contraction being the quickest in 79 months. The domestic market was the main source of weakness as  new business from abroad rose in the latest month. Nonetheless, new export orders grew at a marginal rate overall.

Credit risk rises as leveraged deals climb Recent deals pass the 6-times leverage ratio set by the Fed

Credit risks are roaring to the fore as private equity groups seek to put a near record $540bn cash pile to work, pushing leverage back to levels not seen since the boom of 2007. (…)

The debt burden of the largest 20 companies taken private since the start of 2014 has climbed to an average 7.6 times earnings before interest, taxes, depreciation and amortisation, above the 6.2 average for the largest deals in 2010 and 2011 and roughly a point below the 8.7 times average recorded for the biggest transactions in the 2005 to 2007 boom. (…)

While equity contributions from financial sponsors has increased, the frenetic pace of mergers and acquisitions this year has buoyed valuations of companies across the S&P 500, which has forced PE firms to be “more aggressive” in their use of leverage, Mr Arden added.

That debt has not come cheap and has cut into free cash flow generation for newly acquired companies, adding another layer of risk for management teams to navigate. The cost of LBO credit in the first nine months of the year shot to 479 basis points above Libor, up from 388 basis points in 2013.

  Volkswagen Shares Dive as Scandal Spreads Shares in Volkswagen plunged after the German car maker said its emissions-testing scandal had widened beyond what was previously disclosed, now encompassing a broader set of infractions that could affect about 800,000 more cars and cost it at least an extra $2 billion.

Connecticut City Votes Felon Ex-Mayor Back In Joseph Ganim to return as mayor of Bridgeport after spending seven years in prison in corruption case

(…) Mr. Ganim served five terms as mayor from 1991 to 2003 and once was considered a contender for the Democratic nomination for governor. In 2003, he was convicted on 16 charges, including extortion, racketeering and bribery. (…)