US Demand Is Still Resilient, Even If GDP Doesn’t Show It Final sales to private domestic purchasers rose a robust 3.1%

Gross domestic product advanced at a 1.6% annualized rate, below all economists’ projections, with the biggest restraints stemming from less inventory accumulation and a wider trade gap.

However, so-called final sales to private domestic purchasers, which strips out inventories, trade and government spending, rose at a 3.1% rate after adjusting for inflation. For three straight quarters, this key gauge of underlying demand has expanded at least 3%.

That helps explain why the Federal Reserve’s progress on tamping down inflation late last year has stalled.

A closely watched measure of underlying price pressures advanced at a greater-than-expected 3.7% clip last quarter, the first acceleration in a year, the Bureau of Economic Analysis report showed Thursday. (…)

The first-quarter pickup in inflation was driven by a 5.1% jump in service-sector inflation that excludes housing and energy, nearly double the prior quarter’s pace. March figures on inflation, consumer spending and income are due Friday. (…)

While softer than forecast, personal spending increased at a still-healthy 2.5% pace. That was driven by the biggest gain in services outlays since 2021, fueled by health care and financial services. Business outlays for equipment picked up for the first time in nearly a year.

Moreover, residential investment registered the strongest advance in more than three years.

Spending on goods, however, decreased for the first time in more than a year, restrained by motor vehicles and gasoline. (…)

Separate data out Thursday showed initial applications for unemployment benefits fell to 207,000 last week, the lowest level in two months. Continuing claims also decreased. (…)

Wells Fargo:

After an unsettling headline miss, the picture that emerges from the details in today’s GDP report is actually more of the same in terms of the factors that are standing in the way of a lower rate environment.

Consumers are still spending, they are just prioritizing activities in the service sector. Spending on non-durable goods stalled in the quarter while outlays on big-ticket durable goods items contracted at a 1.2% annualized rate. That was not nearly enough to offset the much larger services category, where consumers spared no expense in the first quarter.

Like a relief pitcher in the late innings, services spending came in throwing heat in the first quarter with a blistering 4.0% annualized growth rate—the fastest surge in consumer services spending since the stimulus-fueled binge in 2021. Excluding 2020 & 2021, services has only come in above 4.0% three times in the last two decades (once in 2014 and twice in 2004). Higher rates are intended to cool consumer demand; the trouble for the Fed is: it’s not working.

The core PCE deflator rose at a 3.7% annualized rate in Q1, a notable acceleration after a sharp slowing the prior two quarters. This data implies a strong 0.4% increase in March core PCE, set to be released tomorrow. Services excluding energy and housing rose at a 5.1% annualized rate in Q1, the fastest in a year. (…)

In looking through some of these volatile factors, underlying growth remained quite solid in the first quarter. Real final sales to domestic private purchasers, which strips away net exports, inventories and government investment and gets at the underlying trend in domestic demand, rose at a 3.1% annualized rate during the quarter. The last three quarterly prints for this measure have all come in at 3.0% or higher, signaling healthy and stable growth. Don’t underestimate this economy.

• Traders pushed back the timing of the first rate cut to December from November. Treasuries sold off, and equities slid.

CONSUMER WATCH

• BofA: Total card spending per HH was down 0.5% y/y in the week ending Apr 20, according to BAC aggregated credit & debit card data.
• Retail ex auto spending per HH came in at -0.6% y/y in the week ending Apr 20.
• The slowdown in total card spending over the last few days of the sample was likely due to services. (MikeZaccardi)

Labor Tightness Lingers

We received further confirmation today that labor conditions remain tight, with both initial and continuing unemployment claims declining on a week over week basis and coming in beneath estimates. Initial claims dropped to 207,000 during the week ended April 20 versus the projected 214,000 and the previous period’s 212,000. Continuing claims for the week ended April 13 fell to 1.781 million from 1.796 million the week before while economists were expecting a number closer to 1.814 million. Both figures are indeed trending lower, with the four-week moving averages moving down to 213,250 and 1.794 million from 214,500 and 1.801 million during the prior weeks.

China to Pay Consumers Up to Nearly $1,400 to Replace Old Cars China plans to give car owners up to nearly $1,400 to replace their old cars with new ones, a move to boost slowing demand in the world’s largest electric-vehicle market.

Consumers who replace their cars with electric or hybrid vehicles can in some cases receive government subsidies of up to 10,000 yuan ($1,381) through the end of this year, China’s Ministry of Commerce and other departments said in a joint statement Friday. People trading in older cars for traditional cars with engines sizes of 2.0 liters and below are eligible for CNY7,000.

China’s policymakers are trying to boost consumption amid subdued domestic demand in the world’s second largest economy. Estimated passenger car retail sales dropped 1.5% on year in April, swinging from a growth of 6.2% last month, China Passenger Car Association data showed Thursday.

Beijing launched a similar trade-in program to boost domestic consumption in 2009 and 2010.

States Take On China in the Name of National Security Local politicians impatient with Washington’s actions against Beijing block Chinese land purchases, factory plans and research

States have a new adversary: China.

From Florida to Indiana and Montana, an expanding array of local proposals, bills, laws and regulations aim to block Chinese individuals and companies from acquiring land, winning contracts, working on research, setting up factories and otherwise participating in the U.S. economy.

State officials, overriding traditional local interests such as drawing investment and creating jobs, say they are acting where Congress hasn’t to address grassroots American distrust of the Chinese Communist Party.

The states have generally been moving faster on China legislation than Congress. By the time a bill that could force a sale of TikTok by its Chinese owner ByteDance reached President Biden’s desk Wednesday, over 30 state governments had passed regulations targeting the short-video app.

In their efforts to challenge perceived China threats, states are often claiming authority to define national-security risks.

“There is a real responsibility on behalf of governors and state legislatures to look out for the safety and protection of our citizens,” said Virginia Gov. Glenn Youngkin, who last year blocked Ford Motor from setting up a battery venture in his state with China-based Contemporary Amperex Technology, or CATL. He has also signed bills to curb Chinese land purchases and use of TikTok on state devices.

Youngkin says he opposed the plant for electric-vehicle batteries because he didn’t want to allocate Virginia taxpayer money to support Chinese technology. Ford is now building a scaled-down version of the project in Michigan, where it has also faced localized resistance.

When Iowa’s state Senate passed a bill this month to shield some of the world’s biggest chemical makers from certain pesticide lawsuits, its legislation specified that one type of company would be ineligible for the protection: Chinese. (…)

Since early 2023, states and the District of Columbia have introduced 624 pieces of legislation related to China, rivaling Congress’s 663, according to information service BillTrack50.com. (…)

Grand Forks, N.D., last year stopped a Chinese food ingredient maker, Fufeng Group, from building a corn-processing plant that promised to create 1,000 jobs. State and local authorities had initially welcomed Fufeng’s expected $700 million investment, pitched as the city’s largest private investment ever, but support collapsed when claims were made—with little substantiation—that the facility could be a conduit to spy on nearby Grand Forks Air Force Base. (…)

Fufeng later identified a site for its plant in Indiana, only to get tripped up by a new state law that forbids Chinese and other designated adversaries from entering deals for agricultural land.

One of the bill’s proponents, Indiana State Sen. Jean Leising, acknowledged the proposed plant was popular among corn farmers and that she was warned that between Fufeng and 10 other Chinese investors, the legislation would cost Indiana $14 billion in lost income. She reasoned that sacrifices are necessary. “Safety or revenue, you sometimes have to make a decision,” she said. (…)

Syngenta is also under fire in Arkansas, where authorities fined the company $280,000 and ordered it to sell 160 acres it has owned for 36 years for violating a new law barring land holdings by a “prohibited foreign-party-controlled business.” A spokeswoman for Gov. Sarah Huckabee Sanders said, “Gov. Sanders has promised Arkansans she’ll step up where the federal government has failed.” (…)

In a sign of inconsistencies between states pursuing similar goals, the same Indiana land-use bill that stopped Fufeng from building a plant there grandfathered Syngenta, which has around 100 employees and 115 acres in the state. (…)

Florida has legislated some of the most far-reaching China decoupling. While campaigning for president last year, Gov. Ron DeSantis signed a law to stop land purchases, block state contracting and university partnerships involving Chinese nationals. His office termed the package “a blueprint for other states.” (…)

Several efforts have faced legal challenges.

After Montana imposed an outright ban on TikTok in the state, a judge blocked the measure, citing the First Amendment—an avenue the company is expected to explore in challenging the federal legislation. Asian-Americans in Texas took credit last year for killing a state legislative effort to ban Chinese land ownership.

And in Florida, three Chinese nationals from large public universities argued in a suit against state agencies such as the state Education Department that new hurdles to their participation in academic research are unconstitutionally race-based. (…)

Trade restrictions in various forms are now ubiquitous worldwide:

Xi Warns Blinken Against ‘Vicious Competition’ Between US, China China’s Wang Yi sees rising ‘negative factors’ in relationship

(…) Overall the talks were cordial and muted, bolstering expectations that the two countries can keep ties steady.

“China and the United States should be partners rather than rivals,” Xi told Blinken, according to a Chinese Foreign Ministry statement. The two sides should “seek common ground and reserve differences, rather than engage in vicious competition,” he added. (…)

China’s Foreign Minister Wang Yi accused the US of taking “endless measures to suppress China’s economy,” during five-and-a-half hours of talks with Blinken, which included a working lunch. “This is not fair competition, but containment — and it is not removing risks, but creating risks,” he added, citing curbs on technology.

Blinken stressed to his Chinese counterpart US concerns over Beijing’s support for the Kremlin’s military industrial base, peace around Taiwan — which the Communist Party considers its territory — and China’s military activity in the South China Sea. He also brought up China’s “non-market practices.” (…)

Huawei’s New Phone Runs Latest Version of Made-in-China Chip The Pura 70 relies on a 7nm chip similar to the Mate 60’s

Huawei Technologies Co.’s latest smartphones carry a version of the advanced made-in-China processor it revealed last year, independent analysis revealed, underscoring the Chinese company’s ability to sustain production of the controversial chip.

The Pura 70 series Huawei unveiled last week sports the Kirin 9010 processor, consultancy TechInsights found in a teardown of the device. That’s a newer version of the Kirin 9000s made by Semiconductor Manufacturing International Corp. for the Mate 60 Pro, which alarmed officials in Washington who thought a 7-nanometer chip beyond China’s capabilities. (…)

US officials are now weighing additional sanctions intended to ring-fence the company and China’s semiconductor ambitions more broadly. (…)

For Huawei, it’s another step toward rebuilding a consumer business devastated by Trump-era sanctions. The company was roughly on par with Apple Inc. in terms of Chinese market share in the first quarter, underscoring the way it’s eroded the iPhone maker’s domestic market share in past months.

Japan Tightens Export Controls on More Chip and Quantum Tech

Japan said it plans to expand restrictions on exports of four technologies related to semiconductors or quantum computing, the latest in a global push to control the flow of strategic tech.

Tokyo’s new measures will affect scanning electron microscopes, used to analyze nanoparticle images, and gate-all-around transistors, a technology embraced by Samsung Electronics Co. to improve semiconductor design. Japan will also require licenses for shipments of cryogenic CMOS circuits used in quantum computers, as well as for quantum computers themselves. (…)

Last year, Japan expanded restrictions on exports of 23 types of leading-edge chipmaking technology. That measure came on the heels of US efforts to limit China’s access to key semiconductor processes. Washington officials have lobbied international partners like Japan and the Netherlands to match its trade sanctions on China, which the US sees as a geopolitical and potentially military rival.

America’s Economy Is No. 1. That Means Trouble. Solid growth, big deficits and a strong dollar stir memories of past crises

(…) it’s worth studying the reasons the U.S. is outperforming. In a nutshell, there’s an encouraging reason and a worrisome one.

The encouraging reason is that structurally, the U.S. continues to innovate and reap the rewards, judging by big-tech stocks and artificial intelligence adoption. The U.S. has done better at boosting productivity (output per worker).

It has also benefited from what economists call its terms of trade: The price of what it exports, notably natural gas, has risen more than the price of what it imports. In Europe, the opposite has happened.

The second, more worrisome, reason for stronger U.S. growth is government borrowing—including former President Donald Trump’s 2018 tax cut, bipartisan Covid-19 relief in 2020 and President Biden’s 2021 stimulus.

In fact, Washington continues to inject stimulus, albeit not with that label: hundreds of billions of dollars for veterans’ benefits, infrastructure, semiconductor manufacturing and renewable energy.

U.S. deficits have run roughly 2% of GDP higher than the IMF expected back in late 2022. They will be the highest, by far, among major advanced economies for the foreseeable future.

In the long run, deficits inflate future interest bills and crowd out private investment. But they might be leading to dangerous imbalances right now.

Deficits were justified when unemployment was high, private demand moribund and inflation and interest rates low. None of that is true now.

Instead, Biden and Congress continue to stoke demand in an economy that already has plenty. Through February, Biden had canceled $138 billion in student debt—and he has just unveiled plans to erase billions more—which directly boosts debtors’ purchasing power. Of the $95 billion in aid to Ukraine, Taiwan and Israel just approved by Congress, $57 billion will flow back to U.S. producers in the form of more weapons purchases.

It’s one reason inflation, though down from a year ago, has stalled above the Federal Reserve’s 2% target. The IMF thinks core inflation (which excludes food and energy) is a half percentage point higher than otherwise would be because of fiscal policy.

This, in turn, is keeping the Fed from cutting short-term interest rates. That, along with the flood of Treasury debt to finance the deficit, is pushing up long-term bond yields.

Textbooks predict that a combination of tight monetary and loose fiscal policy will suck in capital from overseas and drive up the dollar. That has often precipitated financial crises in emerging markets as exchange rates are devalued, governments default and banks fail.

The dollar has, indeed, risen this year. It hasn’t undermined emerging markets, which are generally in better shape than in previous crisis eras, though the risk bears watching. It might, however, destabilize the international economy another way: through protectionism.

In 1971, high U.S. inflation and government deficits led to an overvalued dollar and trade deficits. After the Nixon administration imposed a 10% surcharge on imports, West Germany and Japan agreed to revalue their currencies against the dollar.

In 1985, the script repeated: Higher U.S. interest rates and budget deficits had driven up the dollar and trade deficit. At New York’s Plaza Hotel that September, the Reagan administration persuaded Japanese and European officials to boost their currencies against the dollar. It followed with trade actions against Japan, in particular on autos and semiconductors.

The dollar hasn’t risen nearly as much now as it did in 1985, yet similar frictions are emerging. The Biden administration badly wants to boost American manufacturing, in particular of electric vehicles, and is watching with dismay as China, aided by a weaker yuan, floods the world with cheap exports. The U.S. trade deficit, after shrinking through most of last year, is growing again.

The macroeconomic solution would be for the U.S. to stimulate its economy less and China to stimulate its economy more. Neither seems likely. And unlike in 1971 and 1985, when West Germany and Japan felt compelled to raise their currencies to mollify the U.S.—their ally and protector—China feels no such obligation.

The result will almost certainly be more protectionist pressure. Biden is already planning higher tariffs on China. If Trump returns to the White House, expect no action on the deficit and, if his first term is a harbinger, more tariffs and a push to weaken the dollar.

The U.S. economy might still be king, but the reign will not be harmonious.

Greg Ip touches on some of the points I raised in American Exceptionalism: Don’t Extrapolate (Feb. 21, 2024).

This chart shows that higher borrowings and interest rates have doubled the Federal government interest payments in 3 years which now account for 15.3% of total expenditures from 10.9% in Q1’20. Meanwhile, expenditures ex-interest payments jumped 28%.

U.S Department of Treasury, U.S Department of Commerce and Wells Fargo Economics

About one third of Treasurys will be maturing during the next 12 months, very likely with a steep markup on renewals, taking even more budget space, crowding out more discretionary spending. And the Fed is not rushing to cut interest rates, is it?

Last February, I wrote:

Looking ahead, many important changes are likely:

• Consumer spending will normalize, with increased volatility. Since 1959, the personal savings rate has only been lower than the current 3.7% during the 2005-08 period when Americans splurged on housing, and briefly in 2022, in total only 7% of the time. Before the pandemic, the savings rate ranged between 5.0% and 8.5%.
• Construction spending will also normalize. Since 2010, total construction spending grew 50% faster than GDP, carrying a high economic multiplier.
• Government spending ex-interest expense will measurably slow down.
• The unemployment rate is at a historical low. Employment growth will slow.
• American politics are getting increasingly toxic and inefficient.

Bank of America’s data confirm my contention that March retail demand was not as strong as generally thought after March’s release (Roaring Lion???). It also looks like services were also on the weak side in March.

In fact, on a seasonally adjusted (SA) basis, total card spending per household fell 0.7% month-over-month (MoM) in March, following the 0.4% rise in February.

Spending on services fell 1.1% MoM SA in March, with weakness in both lodging and restaurant spending, while retail spending (excluding restaurants) decreased by 0.3% MoM.

Tuesday’s flash PMI raised the first yellow flag in quite a while:

• Slower increases in activity were recorded across both the manufacturing and services sectors, with rates of growth easing to three- and five-month lows respectively.
• April saw inflows of new business fall for the first time in six months and firms’ future output expectations slipped to a five-month low amid heightened concern about the outlook.
• Employment decreased for the first time since June 2020. The overall reduction in workforce numbers was centered on services, where employment decreased solidly and to the largest extent since mid-2020. In fact, excluding the opening wave of the COVID-19 pandemic, the decline in services staffing levels in April was the most pronounced since the end of 2009.

Indeed job postings, available through April 19, confirm the recent slowdown. Postings have declined 4% since the last BLS job openings data for February:

Canada Retail Sales Slip 0.1% in February, Seen Flat in March Data supports outlook for central bank rate cut as soon as June

An advance estimate of retail receipts indicates sales were unchanged in March, Statistics Canada said Wednesday.

That comes after sales in February edged down 0.1% to a seasonally adjusted C$66.73 billion, the equivalent of about $48.8 billion, the data agency said.

The monthly dip was softer than the modest 0.1% advance forecast by Statistics Canada and by economists, and follows a 0.3% pullback in January sales in a further sign of the strain on Canadian household budgets from high interest rates. February’s decline, led by a drop in trade at gas stations and fuel vendors, would have been even sharper if sales at motor vehicle and parts dealers hadn’t recovered from weakness the month before when vehicle production was disrupted by retooling at some production plants. (…)

Core sales—which strip out gas stations, fuel vendors and vehicle and parts dealers, were flat in February.

In volume terms, price-adjusted sales fell 0.3% from January, with a sharp fall in gasoline and fuel volumes. That suggests a modest headwind to industry-level gross domestic product, which Statistics Canada had previously projected grew for a second month running with a 0.4% increase in February. (…)

Canada’s per capita output drops 7% below trend, new Statscan report says

(…) Canada’s moribund economic performance on a per person basis has become a flashpoint of discussion over the past couple of years. In a speech last month, Bank of Canada senior deputy governor Carolyn Rogers said the country is facing an “emergency” of weak labour productivity and tepid levels of business investment.

The recent numbers paint a grim picture. Real GDP per capita has fallen to levels seen in 2017. Workers in places with higher per capita output tend to earn higher wages and live longer, making this a popular – if imperfect – measure of a country’s living standards. (…)

Productivity is the bedrock of per capita growth. Over the four decades leading up to the pandemic, increases in productivity accounted for 93 per cent of the improvement in real GDP per capita, Wednesday’s report said. (Economies can also boost per capita output via higher employment rates and the average employee working longer hours, although these have played a small role in Canada’s long-term gains.)

The trouble for Canada is that labour productivity has faltered of late: While it nudged higher over the final three months of 2023, that followed six consecutive quarters of decline. (…)

In its recent budget, the federal government pushed back on some of the pessimism regarding the decline in per capita output. Because newcomers typically earn less than the average Canadian, the government said that the recent influx of people is weighing on average income and productivity. “This should not be misinterpreted to imply that those already in the country are becoming worse off,” the budget read. (…)

In its latest projections, the Bank of Canada said it expects GDP per capita to decline in the first half of 2024, before picking up in the second half of the year and into early 2025. The central bank said the improvement would be driven by easing financial conditions – the bank is widely expected to lower its policy interest rate around the middle of the year – and rising confidence among consumers and businesses.

Since 1981, real GDP per capita has risen by an average annual rate of 1.1 per cent, the Statscan report said. To return to the long-term trend by 2033, Canada will need to experience a decade of above-average growth. (…)

The Statscan authors said it’s an open question of whether emerging technologies will usher in a new era of stronger productivity.

“The ability of Canadian companies to harness the benefits of new competitive technologies related to artificial intelligence, robotics and digitalization will be critical to the link between investment and productivity in the coming years and potentially important contributors to changes in living standards,” they wrote.

Chinese Tourists Are Again Embracing International Travel

More than a year since China reopened its borders, some 63% of its residents say they’re ready to return to exploring the world, according to a survey published on Wednesday, which Bloomberg previewed. They plan to venture farther afield than previously, with just 10% spurning international travel altogether—a significant shift from a year ago, when more than half of China’s consumers said they had no plans to go abroad and 31% said they weren’t even interested.

The return of China’s travelers has long been awaited in the travel industry, which is expected to surpass pre-pandemic levels this year by contributing $11.1 trillion to the global economy. The March 6–19 survey by marketing solutions firm Dragon Trail International queried 1,015 mainland Chinese leisure travelers located in 127 places, including first-, second- and third-tier cities. (…)

As of early April, outbound trip bookings for China’s weeklong May holiday lagged 2019 levels by only 13%, according to Dragon Trail, and included such places as Egypt and United Arab Emirates. The China Tourism Academy predicted that global Chinese tourist numbers will reach 130 million in 2024—84% of levels before Covid-19 struck. In 2019, some 155 million outbound Chinese travelers spent $253 billion abroad. (…)

Amid delays in visa issuance, first-quarter flights between the US and China remained 78.8% below those in the same period in 2019, according to data provided by aviation analytics firm Cirium. This contrasts with a near rebound for flights between the US and the rest of Asia, just 4% below pre-pandemic levels.

Still, Chinese travelers’ poor perception of the US has changed significantly since the pandemic. In 2021, 87% said they considered the US an unsafe tourist destination. In March, only 36% voiced that perception.

Meta’s Costs Rise Rapidly as Zuckerberg Vows to Keep Spending on AI Arms Race Meta reported record first-quarter sales, but investors soured on forecasts of rising costs related to AI. Shares fell about 15% after hours.

(…) Costs have mounted for many of the world’s biggest technology companies. AI models require sizable computing power to function, pushing companies to invest in servers and new generations of AI chips.

Wednesday’s stock hit for Meta shows the extent of unease, as the social-media company is the first of the world’s largest tech companies to report earnings. Google and Microsoft report earnings Thursday, and investors are likely to look closely at their AI-related spending. Amazon.com and Apple will provide January-to-March updates next week. (…)

Meta on Wednesday announced that it had increased its capital expenditures projections for 2024 to between $35 billion and $40 billion, up from between $30 billion and $37 billion. The company attributed the increase to its investments in its AI strategy. Meta said it expects its capital expenditures to increase in 2025 as well.

Meta also said it expects its revenue for the April-to-June period to be in the range of $36.5 billion to $39 billion. That was lower than the $38.3 billion that analysts surveyed by FactSet were expecting. (…)

Overall, Meta posted a net profit of $12.4 billion for the first quarter. That’s more than double the net profit that the company posted for the same period in 2023. (…)

• Apple’s troubles in China worsened. Even the Lunar New Year celebrations didn’t bring it much cheer with iPhone sales plunging 19% last quarter, the worst performance in four years, according to Counterpoint. (Bloomberg)

TRAVEL NOTES

• 45 days in Asia and SE Asia, impressions:
• Hong Kong: smoggy, smoggy.
• Ha Long Bay: foggy, foggy.
• Ho Chi Minh City (Saigon): one day of complete chaos is enough.
• Bangkok: worth much more than 2 days.
• Singapore: The “city in a garden” likely the best run large city in the world. Spectacular, loveable.
• Tokyo: 3rd time and still a great stay. 2nd best run large city in the world? Love Tokyo. Yen @ 155!!!