Month: October 2021

Consumer Spending Grew More Slowly in September Consumer spending rose 0.6% in September, as the Delta variant and supply-chain disruptions weighed on households.

Consumer spending rose 0.6% in September over the previous month, down from a 1% increase in August, the Commerce Department said Friday. Personal incomes fell 1% last month as the end of enhanced federal unemployment benefits offset an increase in wages, the department said. (…)

The personal consumption expenditures price index, the inflation measure most closely watched by the Federal Reserve, rose 0.3% in September from the previous month, the same rate as in August. It was up 4.4% from a year ago, up from 4.2% in August.

Excluding food and energy categories, which tend to be more volatile, the index rose 0.2% over the month and 3.6% over the year. (…)

Personal-consumption expenditures rose at a seasonally adjusted annualized rate of 1.6% for the quarter, boosted by a 7.9% increase in spending on services such as restaurant meals or movie tickets.

Spending on goods was down 9.2% for the quarter, largely because of a 26.2% drop in spending on long-lasting goods such cars, washing machines and other items where shipping logjams have reduced supply and driven up prices. (…)

U.S. GDP Growth Slows Sharply in Q3’21

Real GDP growth in Q3 2021 decelerated to 2.0% (SAAR) from an unrevised 6.7% in Q2. A 2.6% rise had been expected in the Action Economics Forecast Survey. During the last year the economy grew 4.9%. Stay-at-home guidelines and supply chain disruptions constrained spending.

These latter two factors limited Q3 consumer spending growth to 1.6% (7.0% y/y) after double-digit gains in the prior two quarters. Durable goods buying fell 26.2% (+5.7% y/y) as parts shortages limited the availability of new motor vehicles, depressing spending by 53.9% (-3.6% y/y). Home furnishings purchases fell 10.3% (+6.1% y/y) and sales of recreational goods & vehicles declined 7.3% (+10.0% y/y). Nondurable goods spending rose 2.6% in Q3 (7.6% y/y) following double-digit growth in the prior two quarters. (…)

Business fixed investment rose 1.8% last quarter (9.0% y/y) following a 9.2% rise. Structures investment fell 7.2% (-3.4% y/y) and has been falling since the end of 2019. Equipment outlays declined 3.2% (+11.9% y/y) following four quarters of strong growth. Industrial equipment investment rose 11.3% (17.3% y/y) after a 32.9% surge. Information processing equipment investment declined 5.9% (+6.1% y/y) after falling 7.8% in Q2. Spending growth on intellectual property products held steady at 12.2% (12.6% y/y).

Residential investment declined 7.7% (+5.5% y/y), off for the second straight quarter.

Government outlays grew edged 0.8% higher (0.6% y/y) last quarter following a 2.0% decline in Q2 as federal government spending dropped 4.7% (-0.7% y/y), the third decline in the last four quarters. Defense spending has been falling all this year. State & local government spending rose 4.4% (1.4% y/y) after a 0.2% gain.

The contribution to GDP growth from the change in inventories rose to 2.1 percentage points last quarter following inventory decumulation in the prior two quarters. The contribution from international trade was a negative 1.1 percentage points as exports fell 2.5% (+5.7% y/y) after a 7.6% rise and imports jumped 6.1% (13.0% y/y), the fifth straight quarter of firm growth.

The GDP price index rose 5.7% last quarter (4.6% y/y) compared to an expected 5.2% gain. The PCE price index increased 5.3% (4.3% y/y).

The U.S. economy seems to be 3% below trend and possibly flatlining:

U.S. Unemployment Insurance Claims Continue to Fall

Initial claims for unemployment insurance fell to 281,000 (-63.4% y/y) in the week ending October 23 from 291,000 the previous week, revised up slightly from 290,000. The Action Economics Forecast Survey had expected 295,000 initial claims for the latest week. The 4-week moving average fell to 299,250 from 320,000. Both the most-recent week claims and the four-week average were the lowest since March 14, 2020 when initial claims were 256,000 and the four-week average was 225,500. Clearly, initial claims are approaching pre-pandemic levels.

Initial claims for the federal Pandemic Unemployment Assistance (PUA) program in the week ended October 23 were 2,532 (-99.3% y/y) versus 2,565 in the prior week. The latest number was the lowest level since the program began on April 4, 2020, at the start of the pandemic. By comparison, these claims averaged 107,756 per week during August, the last month of the program. The PUA program provided benefits to individuals who are not eligible for regular state unemployment insurance benefits, such as the self-employed. This program expired on September 4, explaining the decline in new claims over the past few weeks. Given the brief history of this program, these and other COVID-related series are not seasonally adjusted.

Continued weekly claims for regular state unemployment insurance fell during the week of October 16 to 2.243 million from a slightly downwardly revised 2.480 million in the previous week. The insured unemployment rate edged down to 1.7% from 1.8% in the previous week. Both were the lowest reading since March 14, 2020. Continued weekly claims in the Pandemic Assistance Program (PUA) program dropped to 270,013 in the week of October 9 from 517,949 in the previous week, as the program continued to wind down. Continued weekly claims for Pandemic Emergency Unemployment Compensation (PEUC) declined to 244,379 in the week of October 9 from 331,567 in the previous week and from 3.645 million in the week ended September 4 (the last week of the program). This program covered people who had exhausted their state unemployment insurance benefits.

In the week ended October 9, the total number of all state, federal, PUA and PEUC continued claims fell to 2.831 million from 3.279 million and from 11.250 million in the week ended September 4. These total claims averaged 3.483 million over the four weeks ended October 9. These figures are not seasonally adjusted.

(Bespoke)

There’s “The Great Resignation” trend but the St-Louis Fed adds

The COVID Retirement Boom

(…) a significant number of people who had not planned to retire in 2020 may have retired anyway because of the dangers to their health or due to rising asset values that made retirement feasible. This essay provides a back-of-the-envelope estimate of the number of “COVID-19 retirements.”

The figure shows that the percentage of retirees in the U.S. population (the blue line) was relatively stable at around 15.5 percent until 2008 (the vertical dashed line). That year marked not only the beginning of the Great Financial Crisis but also when the oldest Baby Boomers, those born in 1946, turned 62 years of age and became eligible to receive Social Security retirement benefits. As Baby Boomers began retiring, the percentage of retirees in the U.S. population grew to 18.3 percent in February 2020, the eve of the COVID-19 outbreak. The percentage then increased at a much faster rate, reaching 19.3 percent in August 2021.

One simple way to disentangle “normal” retirements from excess retirements due to COVID-19 is to compare the predicted percentage of Baby Boomer retirements from 2008 to February 2020 (the red dashed line in the figure) with the actual percentage of all retirements. The 0.92 percent difference between the two can be interpreted as the excess retirements. Based on that number, as of August 2021, there were slightly over 3 million excess retirements due to COVID-19, which is more than half of the 5.25 million people who left the labor force from the beginning of the pandemic to the second quarter of 2021. (…)

Finally, there is the question of whether the excess retirements are permanent. If they are, then the amount of slack in the labor market may be smaller than the 5.25 million “lost workers” may suggest. However, many of these new retirees may decide to return to the labor force, which will depend on personal factors as well as aggregate labor market conditions.

HIGHER FOR LONGER

• Yellen expects inflationary pressures to ease by second half of 2022 “As demand shifts back to services and supply has a chance to adjust, I believe that price increases will normalize and we’ll see lower monthly inflation rates, I think, by the second half of (2022),” Yellen told CNN in an interview in Rome.

Just FYI, on August 4, 2021: Yellen Sees Inflation In Line With Fed’s Goal by End of Year “I believe it is temporary and inflation will recede to normal levels in the not-too-distant future”

• ECB Sticks With Negative Rates Despite Surging Inflation, Diverging From Fed European Central Bank is likely to maintain policy at least another year, expecting rise in prices to prove temporary

(…) ECB President Christine Lagarde acknowledged on Thursday that a recent rise in eurozone inflation, to 3.4% in September, would last longer than previously expected, while stressing it would be temporary. She said at a news conference that investors were wrong to expect the ECB to respond by increasing interest rates next year. (…)

Ms. Lagarde said that high energy prices would likely stabilize as inventories were rebuilt, and that supply-chain bottlenecks and shortages would ease over time. In a statement, the ECB said it would hold its key interest rate at minus 0.5% and continue buying bonds under a €1.85 trillion (equivalent to $2.16 trillion) asset-purchase program at least through March 2022. (…)

Nordea:

Core inflation increased to 2.1% y/y in October from 1.9% y/y, driven by an increase in services prices. Core inflation is elevated by the low base from the German VAT cut in the second half of last year and will drop at the beginning of the year. However, rising services price could be a sign of tighter labour markets.

However, the main reason for the high print was obviously energy prices. Half a percentage point of the 0.7% points rise stem from energy! That will fuel the ECB’s argument that inflation is largely driven by transitory factors. Energy futures – oil, gas and electricity – all point to lower prices next year.

The EurozoneS:

• Poland’s ‘Extraordinary’ Inflation Surge Stokes Rate-Hike Bets

Consumer prices jumped 6.8% from a year earlier in October compared with September’s 5.9% gain, preliminary data released Friday showed. None of the 22 economists polled by Bloomberg predicted such a steep acceleration. (…)

“Inflation is persistently elevated and price expectations are at risk of becoming unanchored,” Lukasz Hardt said this week, suggesting November projections will reveal a “significantly” higher path for inflation. (…)

A survey by consulting firm Grant Thornton warns of a possible acceleration to 8%-9% next year as more than two thirds of large and medium-sized companies increase prices. (…)

Flattening curves:

• Global Chip Shortage ‘Is Far From Over’ as Wait Times Get Longer The global semiconductor shortage is worsening, with wait times lengthening, buyers hoarding products and the potential end looking less likely to materialize by next year.

(…) The global semiconductor shortage is worsening, with wait times lengthening, buyers hoarding products and the potential end looking less likely to materialize by next year. Demand didn’t moderate as expected. Supply routes got clogged. Unpredictable production hiccups slammed factories already running at full capacity. (…)

The pain is spreading beyond the initially affected—like car makers and home appliance manufacturers—to makers of other products, including medical equipment and smoking devices. The smartphone industry will grow by just 6% year-over-year, or half the initial forecast from earlier this year, because of chip woes, according to Counterpoint Research, which tracks handset shipments. (…)

Over the summer, the wait stretched to 19 weeks on average, according to Susquehanna Financial Group. But as of October, it has ballooned to 22 weeks. It is longer for the scarcest parts: 25 weeks for power-management components and 38 weeks for the microcontrollers that the auto industry needs, the firm said. (…)

Sourcing chips has turned almost into a lottery, leading to over ordering that creates more supply strain, industry experts say. (…)

Stockpiling could also lead to an inflated sense of demand, analysts warned, which has raised concerns that an industrywide ramp-up in supply could lead to a chip glut. (…)

• A Simple Piece of Steel and Wheels Is Holding Up the Global Supply Chain Truckers in Southern California are struggling to move containers from port terminals and rail yards because of a shortage of the chassis that carry the boxes

The trucking trailers, known as chassis and used to ferry containers from dockside terminals, have grown more difficult to find at the ports of Los Angeles and Long Beach, Calif., officials said, as a flood of imports has swamped the facilities and tied up equipment needed to keep goods moving.

Executives close to the operations around the ports say unraveling the gridlock at the coast, including the backup of more than 70 container ships anchored offshore and waiting for berth space, won’t be possible without solving equipment problems, such as the chassis shortage, that have hamstrung operations.

“The chassis are the biggest issue” in problems that stretch from the docks at the neighboring Los Angeles and Long Beach ports to warehouses deeper into California and intermodal rail yards in the Midwest, said Matt Schrap, chief executive of the Harbor Trucking Association, which represents port truckers in Southern California.

(…) dockworkers can’t unload ships quickly because terminals are full of boxes that truckers can’t pick up because they can’t find a chassis. (…)

The frames are part of a choreographed operation. A trucker picks up the chassis at one site near the ports, drives to a terminal to have a container loaded, takes it to a warehouse perhaps 50 miles away and then returns to repeat the operation.

Because many warehouses are overwhelmed today resulting in delays in unloading the container, the trucker often leaves the box atop the chassis for days longer than usual at a receiving facility.

(…) too often today chassis “are being used as a storage mechanism.”

Ocean carriers have also placed restrictions on when empty containers can be returned, which worsens the congestion. A survey this week by the Harbor Trucking Association found that among 46 trucking firms, 6,592 chassis were stuck beneath empty containers.

“It becomes a vicious cycle,” said Lisa Wan, director of operations at Calif.-based trucking company RoadEx America. “If I cannot bring in an empty to reuse my chassis, then where do I find a bare chassis to pick up the import container?”

(…) “If you came to lease a chassis today, my response to you would be, ‘Here’s a piece of paper, sign it and I can get you a chassis in the third quarter of next year,’” Mr. Hoehn said.

• Prologis CEO Sees Supply-Chain Strains Extending to 2023 The head of the warehousing giant says it may take years for the supply side to catch up to demand

(…) “The systemic issues that are driving today’s supply chain headaches will not be fixed quickly,” Mr. Moghadam said. “It’s going to take several years for supply chains to catch up with the changes in shopping patterns brought about by the pandemic.” (…)

The San Francisco-based company reported Tuesday that U.S. logistics space “is effectively sold out.”

That lack of space is driving up rent rates for retailers, e-commerce companies and third-party logistics providers.

Commercial real-estate services firms CBRE Group Inc. and Cushman & Wakefield Inc. recently reported record-low vacancy rates across the U.S., pushing third-quarter industrial rents up by 10.4% and 8.3%, respectively, over the same period of last year.

Warnings:

Two large covid-19-winners hit hard by rising costs:

Apple Warns of Supply Chain Woes While Amazon Faces Increased Labor Costs Investors remain watchful of how pandemic-era leaders manage disruptions as effects drag on

Apple Inc. AAPL 2.50% and Amazon.com Inc. AMZN 1.59% reported quarterly results that showed how supply-chain problems and tight labor markets are tripping up even some of the biggest business winners of the pandemic era.

Apple, which had record 12-month profit nearing $100 billion, warned that supply-chain disruptions are hindering iPhone and other product manufacturing and would bring increased challenges during the important holiday-shopping quarter.

Amazon AMZN 1.59% posted lower-than-expected third-quarter sales as labor and supply-chain challenges pushed costs up $2 billion and have made it harder to meet demand. The company has had to reroute products and has seen inconsistent staffing in some areas, according to executives. Sales of $110.8 billion fell below Wall Street expectations, and profit of $3.2 billion fell by about 50% from the same period a year earlier. (…)

McDonald’s Corp. is raising menu prices to keep pace with rapidly growing costs, with wages increasing 10% so far this year at its U.S. restaurants. (…)

Actually, the supply-chain disruptions during the fiscal fourth quarter were worse than expected, Apple Chief Financial Officer Luca Maestri said. The problems were twofold—the chip shortage roiling everyone and an unanticipated increase in Covid-19 cases in Southeast Asia that affected manufacturing. (…)

Mr. Maestri acknowledged that wait times for some Apple products were longer than the company would like. Supply constraints during the fiscal fourth quarter hurt potential revenue by $6 billion, he said, and will be worse in the current period.

Mr. Maestri said the iPhone maker still expects to see year-over-year revenue growth during the period that ends in December. “We fully expect to set a new December quarter record for revenue,” he said. “But we also expect the supply constraints will be greater than the $6 billion.…We expect most of our product categories to be constrained during the December quarter.” (…)

• Amazon Earnings Suffer as Costs Rise E-commerce and cloud-computing company tries to navigate supply-chain and staffing challenges to maintain growth

(…) the online retailer posted sales of $110.8 billion and generated a profit of $3.2 billion, down from the $6.3 billion the company made during the same period a year earlier. Wall Street expected $111.6 billion in quarterly revenue and profit of $4.6 billion.

In the current quarter, “we expect to incur several billion dollars of additional costs in our consumer business as we manage through labor supply shortages, increased wage costs, global supply chain issues, and increased freight and shipping costs—all while doing whatever it takes to minimize the impact on customers and selling partners this holiday season,” Mr. Jassy said.

For the fourth quarter, the company projects sales between $130 billion and $140 billion, compared with a Wall Street expectation of $142.2 billion. Amazon said operating income in the three months ending Dec. 31 is expected to be between break-even and a $3 billion profit, down from $6.9 billion a year earlier and trailing expectations. (…)

Sales for the cloud unit continued to climb sharply, totaling $16.1 billion in the third quarter, up about 39% from a year earlier. Amazon’s unit that primarily includes ad sales grew by 50%. (…)

The company spent $2 billion during the third quarter on extra pay and incentives as well as other constraints related to its supply chain, he said. With the arrival of some goods disrupted, Amazon warehouses for the first time since the start of the pandemic aren’t squeezed for space, he said.

Mr. Olsavsky said labor is the company’s main capacity constraint, calling the development “new and not welcome.” The company, he said, hopes the situation will resolve itself through this quarter going into next year. (…)

The quarter’s growth also was dented by Amazon’s decision to hold its annual Prime Day sales extravaganza during its second quarter, taking away the revenue boost from the event that has typically been held during its third quarter. (…)

“We will get through this period, and then we are committed to getting our cost structure down,” he said.

• Apple, Amazon Results Spark Fears of an Unhappy Holiday Season
• ‘Some People Are Suffering’: Shopify’s Lutke on Macro Pressures

Lohman via The Market Ear

Amazon’s results and comments are particularly revealing:

• Amazon’s 4Q retail sales guidance is for $130-140B (+4-12% YoY). Note the wide gap!
• While retail sales would rise $5-15B, labor, labor-related productivity losses, and cost inflation will results in $4B in incremental costs in 4Q, up from $2B in Q3. Costs have doubled in one quarter.
• Operating income in Q4 is expected to be between break-even and a $3 billion profit, down from $6.9 billion a year earlier. Normally the year’s most profitable quarter!
• AMZN’s inventory at the end of Q3 is up 30% YoY. This is huge in % and in $B and very likely voluntary amid widespread shortages. AMZN’s clout should help it gain market share.

A very significant cost squeeze! Imagine companies with slower revenue growth and/or less clout.

Evergrande Averts Default Again by Making Second Late Payment The Chinese real-estate developer made an overdue interest payment on dollar bonds shortly before the end of a 30-day grace period, buying time to organize its finances and negotiate with creditors.

(…) Evergrande was on the hook to pay about $45 million of interest on $951 million of bonds, which have a 9.5% coupon and mature in 2024, according to CreditSights research.

Last week, Evergrande unexpectedly made a $83.5 million payment on another set of dollar bonds.

By making these last-minute payments, Evergrande is buying time to organize its finances and negotiate with creditors. If it had let either grace period run out, that would likely have spiraled into the biggest corporate default in Asia, by enabling creditors to declare defaults on some of Evergrande’s other debts. (…)

Evergrande’s $4.7 billion of 8.75% bonds due 2025—its largest outstanding international debt issue—were bid at 22.75 cents on the dollar by late Friday morning in Hong Kong, according to Tradeweb. That price indicates deep skepticism among investors that they will be repaid in full, though it is modestly higher than a low point reached earlier this month, when the bonds hit a closing low of 19.25 cents.