Month: April 2022

U.S. Housing Starts Unexpectedly Edge Higher in March

Housing starts rose 0.3% (3.9% y/y) during March to 1.793 million from 1.788 million in February, revised from 1.769 million. It remained the highest level of starts since June 2006. January starts were revised to 1.679 million from 1.657 million. The Action Economics Forecast Survey expected 1.741 million starts during March.

Starts of single-family units fell 1.7% (-4.4% y/y) last month to 1.200 million after rising to 1.221 million in February. Multi-family housing starts improved 4.6% (26.2% y/y) to 593,000 from 567,000 in February.

By region, housing starts in the Northeast more-than-doubled m/m (77.6% y/y) in March to 293,000. Starts in the West increased 7.7% (13.9% y/y) to 434,000. In the South, housing starts declined 17.2% (-6.4% y/y) to 834,000 units. Starts in the Midwest eased 2.9% (-19.4% y/y) to 232,000 in March.

Building permits rose 0.4% (6.7% y/y) to 1.873 million from 1.865 million in February. Permits to build single-family homes declined 4.8% (-3.9% y/y) in March to 1.147 million units. Permits to build multi-family homes rose 10.0% (29.4% y/y) to 726,000.

  

Housing starts remain on a solid trend, so far, in spite of rising mortgage rates.

This next chart looks at housing units under construction: the single-family is back to its 1978 peak excluding the 2004-05 speculative boom. But the multi-units market is exploding. In total, the U.S. was completing construction of 1.62 million units in March, 14% more than at the 2005 peak and the highest total since 1973.

Construction delays have aggravated vacancy rates recently but pressures on rents could ease in 2023.

@jayparsons

Several Million U.S. Workers Seen Staying Out of Labor Force Indefinitely

Several million workers who dropped out of the U.S. workforce during the Covid-19 pandemic plan to stay out indefinitely because of persistent illness fears or physical impairments, potentially exacerbating the labor shortage for years, new research shows.

About three million workforce dropouts say they don’t plan to return to pre-Covid activities—whether that includes going to work, shopping in person or dining out—even after the pandemic ends, according to a monthly survey conducted over the past year by a team of researchers. The workforce dropouts tend to be women, lack a college degree and have worked in low-paying fields. (…)

The labor force grew to 164.4 million workers, down just 174,000 from its prepandemic level. The rebound has been particularly sharp in recent months as the winter outbreak of the Omicron variant of Covid-19 faded.

Even with those gains, the U.S. is still missing about 3.5 million workers, by the team’s calculations. That figure represents the difference between the number of workers in March and how many there would be if the labor force had continued to grow at the pace it did from 2015 to 2019, absent the pandemic. (…)

For each month over the past year, the team has anonymously surveyed 5,000 people—not always the same ones—age 20 to 64 who earned at least $10,000 in the prior year. The survey asked whether they plan a full, partial or no return to normal activities after the pandemic. Consistently, 1 in 10 have said they plan no return. In the early months of this year, when the Omicron variant was surging, that share rose to 13%. (…)

The Census Bureau has surveyed adults throughout the pandemic, asking among other questions whether they didn’t work in the past week because they were afraid of getting Covid or spreading it.

That figure peaked at above six million early in the pandemic, fell sharply a year ago after vaccines became widely available and remained around three million for much of 2021. In mid-March 2022, the figure fell to 2.3 million from three million in February. (…)

The squeeze is on: consumers, particularly the lower income segment, are starting to react to the inflation bite on their real spending power and making choices:

Netflix earlier in the day said it ended the first quarter with 200,000 fewer subscribers than it had in the fourth, missing on its own projection of adding 2.5 million customers in the period. Netflix said it expected to lose two million global subscribers in the current quarter. (…)

In the U.S. and Canada, the company lost 600,000 subscribers, which it attributed to its recent price increase. (…)

The company blamed password sharing among its members and increased streaming competition for pressuring revenue growth. Netflix estimated that besides its almost 222 million paying households, the service is being shared with an additional 100 million homes including 30 million in the U.S. and Canada. (…)

Netflix warned that gains made during the Covid-19 pandemic hid the fault lines that have emerged in its business over the past few years. “Covid clouded the picture by significantly increasing our growth in 2020, leading us to believe that most of our slowing growth in 2021 was due to the Covid pull forward,” the company said in its letter. (WSJ)

Japan posts trade gap far wider than forecasts as China exports slow, energy imports soar   

Outgoing trade was restrained by a decline in car exports and a slowdown in the growth of shipments to Japan’s biggest trading partner China, data showed, indicating continuing risk from global supply constraints and the coronavirus pandemic. (…)

Imports soared 31.2% in the year to March, Ministry of Finance data showed on Wednesday, above a median forecast of 28.9% in a Reuters poll of economists.

That outpaced a 14.7% rise in exports, resulting in a trade deficit of 412.4 billion yen ($3.19 billion) – eclipsing the 100.8 billion yen estimated in the poll. (…)

Exports to the United States, the world’s largest economy, grew 23.8% on stronger shipments of motor vehicle parts and power-generating machinery.

Overall, however, exports were dragged down by a 0.7% drop in motor vehicle shipments.

Imports were mainly pushed up by larger shipments of oil from the United Arab Emirates as well as coal and liquefied natural gas from Australia, the data showed. (…)

But rapid weakening of the yen, which has slid to two-decade lows against the U.S. dollar on prospects of widening U.S.-Japan interest rate differentials, are inflating already rising import costs for fuel and food, putting pressure on household spending power.

IMF Sees Global Economic Slowdown Amid Ukraine War The IMF sees the world’s economy expanding 3.6% this year, down from 6.1% last year. The new forecast is 0.8 percentage point lower than its projection in January and a 1.3 point cut from its October 2021 outlook.

The multilateral group, in its flagship World Economic Outlook report, also reduced its 2023 global growth projection to 3.6%, down 0.2 point from its January forecast. (…)

The IMF projects Ukraine’s economy will contract by 35% this year. (…) Russia’s economy is forecast to shrink by 8.5% in 2022 and 2.3% in 2023, following 4.7% growth last year, the IMF said. (…)

The IMF forecasts the euro area’s economy to grow 2.8% in 2022 and 2.3% in 2023, down from 5.3% in 2021.

In the U.S., where the Federal Reserve is raising interest rates to cool the highest inflation in four decades, the economy is projected to grow 3.7% this year and 2.3% in 2023, down from 5.7% last year. In January, even before the war, the IMF forecast U.S. growth to slow to 4% this year and 2.6% next year.

The IMF sees growth in China, amid prolonged pandemic lockdowns, tumbling to 4.4% this year from 8.1% last year, well short of the government’s forecast of around 5.5%. (…)

The growth rate for emerging market and developing economies is projected to slow to 3.8% this year after their 6.8% expansion last year. The outlook is down 1.0 point since the IMF’s January forecast, greater than a 0.6-point cut for advanced economies. (…)

The outlook remains extraordinarily uncertain, the IMF said. The war and sanctions could escalate, and new Covid-19 variants could emerge and hold back the postpandemic recoveries. (…)

“Never have so many countries experienced a recession at once, suffering lost capital, jobs, and livelihoods,” said World Bank Group President David Malpass in a speech last week. “At the same time, inflation continues to accelerate, reducing the real incomes of households around the world, especially the poor.”

Currency devaluation and inflation are pushing up poverty rates and adding to debt burdens of many developing nations, he said. Developing-country debt has risen to a 50-year high at 250% of government revenue. “Most emerging market and developing economies are ill-prepared to face the coming debt shock,” Mr. Malpass said. (…)

Kremlin Insiders Alarmed Over Growing Toll of Putin’s War in Ukraine Some in the elite fear the invasion was a catastrophic mistake — but say the Russian president won’t relent and is in no danger of losing power.

Russia’s Central Bank Governor Elvira Nabiullina on Monday as reported by Reuters:

• Sanctions had mainly affected the financial market, “but now they will begin to increasingly affect the economy,”
• “The period when the economy can live on reserves is finite. And already in the second and third quarter we will enter a period of structural transformation and the search for new business models,”
• “The main problems will be associated with restrictions on imports and logistics of foreign trade, and in the future with restrictions on exports.”
• “Russian manufacturers will need to search for new partners, logistics, or switch to the production of products of previous generations,”
• Exporters would need to look for new partners and logistical arrangements and “all this will take time,”

China Says it Will Keep Boosting Strategic Ties With Russia

Vice Foreign Minister Le Yucheng called for deepening ties in a range of fields during a meeting on Monday in Beijing with Russian envoy Andrey Ivanovich Denisov, according to a Chinese Foreign Ministry statement. He said that a nearly 30% jump in trade between the nations during the first three months of 2022 demonstrate “the great resilience and internal dynamism of bilateral cooperation.”

While bilateral trade did grow in the first quarter, much of that was before the invasion of Ukraine, with Chinese exports to Russia slumping in March to the lowest level since mid-2020, according to data released last week. The increasing sanctions on Russia by many nations, the drop in the Russian currency and U.S. efforts to stop Russia from using the dollar probably pushed Chinese firms to hold back on exports. (…)

U.S. Industrial Production Remains Strong in March

Industrial production increased 0.9% (5.5% y/y) during March following a 0.9% February gain, revised from 0.5%. January’s 1.0% rise was revised from 1.4%. A 0.4% increase had been expected in the Action Economics Forecast Survey.

Manufacturing output rose 0.9% (4.9% y/y) in March after increasing an unrevised 1.2% in February. January’s 0.2% gain compared to 0.1% reported last month. Utilities output rose 0.4% (7.5% y/y) following February’s 1.0% decline. Mining output strengthened 1.7% (7.0% y/y) after a 1.2% February increase.

The March production increase was led by a 7.8% rise (3.9% y/y) in motor vehicle output which followed a 4.6% decline. Output of computers & electronic products improved 0.6% (7.5% y/y) following a 2.1% jump. Machinery production rose 0.8% (6.1% y/y) after increasing 0.5% and electrical equipment & appliance production rose 1.0% (5.5% y/y), half the February increase. (…)

In the special classifications, factory output of high technology industries rose 1.4% in March (8.9% y/y) after a 2.6% gain. Less the high technology sector, factory output rose 0.8% (4.8% y/y) following a 1.4% rise. Manufacturing production excluding both high tech and autos rose 0.4% (4.9% y/y) after surging 1.5% in February.

Capacity utilization rose to 78.3% last month from 77.7% in February. A 77.8% rate had been expected. Utilization in the factory sector rose to 78.7%, the highest rate since July 2007. Factory sector capacity rose 0.3% y/y.

  

U.S. manufacturing production is up 4.4% from its pre-pandemic level and now exceeds its 2018 highest level since the GFC. It is up 4.4% YoY in March and 9.5% annualized in Q1’22. This without a strong motor vehicle sector, poised to rebound sometimes this year.

Manufacturing capacity utilization, at 79%, significantly exceeds its 75.7% pre-pandemic level and even its 2108 high point. Its peak level was 80.6% in April 2000.

Meanwhile, manufacturing employment remains 0.5% below its February 2020 level, even though job openings in manufacturing are almost double what they were pre-pandemic and since 2001.

Goldman Sachs’ capex tracker points to strong growth:

• U.S. Empire State Manufacturing Index Rebounds in April

The Empire State Manufacturing Index of General Business Conditions jumped to 24.6 in April from -11.8 in March and 3.1 in February, according to the Empire State Manufacturing Survey released by the Federal Reserve Bank of New York. A reading of 1.5 had been expected for April in the Action Economics Forecast Survey. The April reading was the highest since December, slightly down from 26.3 in April 2021.

An increased 39.6% of respondents reported that conditions had improved in April compared to 23.6% in March, while a lessened 15.0% reported that conditions had worsened compared to 35.4%. The latest survey was conducted between April 4 and April 11.

Haver Analytics constructs an ISM-adjusted Empire State diffusion index using methodology similar to the ISM series. The index was at 60.2 in April, meaningfully up from 55.0 in March but slightly down from 60.5 in April 2021 and a 63.4 high in July 2021, indicating that activity remained robust in April. (…)

The new orders index rebounded to 25.1 in April, a four-month high, from -11.2 in March. An increased 43.3% of respondents reported higher orders in April, while 18.2% reported lower orders. The shipments index recovered to 34.5, the highest reading since July 2021, from -7.4. An improved 45.4% of respondents reported higher shipments, while 10.9% reported lower shipments.

The unfilled orders index increased to 17.3 in April, the highest level since December, from 13.1 in March. The delivery times index fell to 21.8 from 32.7, with a lessened 31.8% of respondents reporting higher delivery times and 10.0% of respondents reporting lower delivery times. The inventories index fell to 13.6 in April from March’s high of 21.5 (the highest level since September 2001).

The number of employees index dropped to 7.3 in April from 14.5 in March, registering the lowest level since October 2020. A lessened 15.2% of respondents reported increases in employment in April, while 7.9% reported lower employment. The average workweek rebounded to 10.0 from March’s low of 3.5 (the lowest since August 2020).

Inflation pressures continued this month. The prices paid index advanced to a record 86.4 in April from 73.8 in March and the prices received index declined to a still-elevated 49.1 from March’s record high of 56.1, indicating ongoing substantial rises in both input prices and selling prices. An increased 86.4% of respondents reported higher prices paid in April, while 0% reported lower prices paid. A lessened 49.1% of respondents reported higher prices received in April, while 0% reported lower prices received.

The indexes of expected conditions in six months fell markedly. The index for future business conditions dropped to 15.2 in April, the lowest level since April 2020, from 36.6 in March. Expectations for new orders, shipments, unfilled orders, delivery times, inventories, prices paid, prices received, and employment, all fell this month. Expectations for capital spending eased slightly, still remaining firm. Expectations for technology spending improved modestly.

  

Manufacturing production generally requires a lot of natural gas:

U.S. Home Builder Index Continues to Weaken in April

The Composite Housing Market Index from the National Association of Home Builders-Wells Fargo fell 2.5% (-7.2% y/y) to 77 in April from an unrevised 79 in March. It was the fourth straight monthly decline, pushing the index 14.4% below its peak in November 2020. The decline matched expectations in the INFORMA Global Markets survey.

The current sales reading fell 2.3% (-3.4% y/y) to 85 and stood at its lowest level since September 2021. Moving upward by 4.3% (-8.8% y/y) to 73 was the index of expected sales in the next six months. The index peaked at 89 in November 2020.

The index measuring traffic of prospective buyers fell 9.1% (-18.9% y/y) to 60. The index stood at the lowest level since last August and was 22.1% lower than the November 2020 peak.

Regional activity varied in April. The index for the Midwest fell 17.6% (-18.7% y/y) to 61, its lowest level since June 2020. The index for the West declined 7.7%, both m/m and y/y, to 84. Moving 13.8% higher (-11.9% y/y) to 74 was the index for the Northeast. In the South, the home builder index rose 1.2% (-2.4% y/y) to 82.

The majority of renters asked by the Federal Reserve Bank of New York’s 2022 SCE Housing Survey say they now either prefer to rent (36%) or are waiting for prices to come down (42%).

As for the likelihood that they would own a home in the future, the annual survey found that this average has fallen to a series low and well below 50% for the first time since the series began.

Renters expect rents to rise by 12.8% one year from now, compared to 5.9% a year ago. (Axios)

Hot Economy, Rising Inflation: The Fed Has Never Successfully Fixed a Problem Like This The central bank says it is possible, but many factors are out of its control.

(…) During the past 80 years, the Fed has never lowered inflation as much as it is setting out to do now—by 4 percentage points—without causing recession. (…)

In seven different episodes during the past 80 years, inflation has fallen as much as the Fed bank wants it to drop now, with varying outcomes. The episodes suggest that the desired scenario is theoretically possible though the risk of failure is high, especially because the bank is chasing inflation that already exists, rather than addressing the problem before it arises as it did in some earlier episodes. (…)

Fed officials say they can curb that [labor] demand, causing employers to eliminate vacancies without laying off existing workers, and tamp down inflation without a recession—what economists would refer to as a “soft landing.” (…)

The war and new Covid-19 lockdowns in China, which have boosted prices while further disrupting supply chains, have made life harder for the Fed. (…)

In the scenario Fed officials mapped out, their benchmark interest rate will rise to around 2.75% by the end of next year, just above estimates of a rate that neither spurs nor slows growth.

They project inflation will drop to slightly above 2% by 2024, a rare 4-percentage-point decline in less than three years. They see economic output growing at a rate between 2% and 3% while unemployment holds below 4%. (…)

John Taylor, an economist at Stanford University who is the author of an influential policy-setting rule of thumb called the “Taylor rule,” says his formula calls for the Fed to set interest rates at 5% right now. Because the Fed is unlikely to lift rates so dramatically in one year, he said officials instead ought to raise rates to 3% by December and signal more increases after that unless inflation comes down.

“This is not the only time in history that they’ve been behind, but they are strikingly behind,” said Mr. Taylor. “They need to catch up and do it in a systematic and understandable way.”

The Fed’s success will depend on several factors outside its control. Those include whether global energy supplies recover from the shock of Russia’s invasion of Ukraine, reducing energy prices; whether sidelined U.S. workers rejoin the labor force, easing the labor shortage and wage pressures; whether Chinese plants reopen in the face of more Covid-19 lockdowns, clearing supply bottlenecks; and whether Covid itself recedes for good in the U.S., ending other pandemic-related economic disruptions such as business closures.

The Fed’s job will be easier if these supply constraints ease. If they don’t, the central bank will need to push rates higher to squeeze demand, with a risk of more damage to the economy. (…)

Goldman analysts estimate the Fed can achieve its goal of bringing down inflation and slowing upward wage pressures by reducing job openings by about 2.5 million [to about 8.8M].

If workforce participation rates return to prepandemic levels, that would add around one million workers, Goldman estimates, making the Fed’s job of easing supply-and-demand imbalances in the labor market somewhat easier.

In recent weeks, Fed officials have zeroed in on this logic.

“There is plenty of room for businesses to reduce the number of job openings,” said Lael Brainard, a Fed governor awaiting Senate confirmation to become Fed vice chairwoman, in an interview with The Wall Street Journal last week. “I see that as being consistent both in bringing inflation down and sustaining the recovery.” (…)

Between 2020 and 2021, federal spending rose from 21% of gross domestic product to 31% of gross domestic product, and is projected by the White House Office of Management and Budget to return to 24% of GDP in 2022 and less than 23% of GDP in 2023. These are the largest swings in federal spending since World War II, an era when the Fed also kept interest rates low to support a post-Depression economy and the war effort. (…)

Ms. Brainard said waning fiscal stimulus would help to restrain demand this time around, too. (…)

Fed’s Bullard wants to get rates up to 3.5% by year end

(…) “What we need to do right now is get expeditiously to neutral and then go from there,” Bullard said at a virtual event held by the Council on Foreign Relations. But with economic growth expected to remain above its potential, he added, the economy won’t fall into recession and the unemployment rate, now at 3.6%, will likely drop below 3% this year. (…)

The likely rate path is probably somewhere in between, based on interest-rate futures contracts, which are currently pricing in a year-end policy rate range at 2.5%-2.75%.

Bullard said he also wants to begin reducing the Fed’s balance sheet at an upcoming meeting, though he said he did not see a need to start selling bonds unless inflation does not recede as the Fed expects.

U.S. Companies Face Hurdles in Moving Production Closer to Home It may take years to duplicate the supplier networks and availability of raw materials on a scale found in Asian manufacturing hubs, experts say

U.S. importers who are studying shifting their sourcing from the Asia-Pacific region to Mexico and deeper into Latin America are finding it tougher to find suppliers with the right raw materials, production quality and networks for getting their own components that have been established in manufacturing hubs like China and Southeast Asia. Reproducing that capacity and re-creating clusters of suppliers under a nearshoring strategy will take years, experts say. (…)

“A part of the evolution of nearshoring and regional sourcing has to be looking at the inputs and the availability of raw materials to support that.” (…)

Although 70% of CEOs have planned, are considering or expect to move manufacturing to Mexico, only 17% have already done so, according to a recent Kearney study of American manufacturing executives.

Many companies are finding that capacity in Mexico is tight and that certain pieces of equipment or components can’t be made there, like expensive molds for plastic goods that have to be brought in from China, said Mr. Troncoso. (…)

“Frankly, you have to convince them that your business is good for them, because they’re going to have to invest.” (…)

• Mexican Congress Rejects More State Control Over Energy Industry The bill would have rolled back a large part of the 2013 opening of Mexico’s electricity and oil industries to foreign investment, which led to billions of dollars of investment in power plants, oil exploration and gas stations by international energy companies.

UK Households Cancel Streaming Subscriptions In Record Numbers As Inflation Forces Cutbacks Most of those canceling their subscriptions cited a desire to save money as the most important reason for canceling their subscriptions

China unveils support measures as lockdowns batter economy

Data: FactSet, National Bureau of Statistics of China; Chart: Axios Visuals

U.S. Stocks See Biggest Outflows of the Year Investors are rapidly exiting stocks as recession fears take hold, according to BofA strategists.

U.S. equity funds had outflows of $15.5 billion in the week through April 13, while European funds experienced a ninth straight week of outflows, Bank of America Corp. strategists wrote, citing EPFR Global data. The bank’s private clients — with $3.2 trillion of assets under management — also exited stocks in the largest amount since November. (…)

Among sectors, equity investors exited financials while technology, materials and energy stocks saw inflows, according to the data. (…)

Yen Extends Its Longest Losing Streak in at Least 50 Years

The yen extended its longest-losing streak in at least half a century as traders ignored government warnings about the speed of the currency’s decline, focusing instead on the widening gap between Japanese and U.S. interest rates.

Japan’s currency slid for a 13th day against the dollar, the longest run of losses in Bloomberg data starting in 1971, after Federal Reserve Bank of St. Louis President James Bullard said U.S. interest rate increases of 75 basis points are an option.

The 1% drop on Tuesday came even after Japan’s Finance Minister Shunichi Suzuki stepped up verbal defense of the currency, with traders looking for more concrete signs of intervention. Selling the yen has become a favorite trade, with asset managers placing record short bets, as the dovish Bank of Japan keeps policy rates anchored to the floor while the Federal Reserve hikes. (…)

The yen dropped to a low of 128.31 per dollar, the weakest level since May 2002. The currency has now slumped 5% since its current run of losses began on April 1. (…)

Japan last intervened to sell dollars and buy yen in June 1998 at the height of the Asian currency crisis. Japan has traditionally intervened to weaken the yen as a huge current account surplus exerted upward pressure on the yen. Japan has not stepped into markets since November 2011. (…)

So far, Kuroda and Suzuki have only acknowledged the yen’s rapid weakness without sounding really preoccupied and about to intervene.

• “Recent yen moves have been very rapid,” Kuroda said in response to questions in parliament Monday. “That can cause trouble for companies when they make their business plans and we will need to take into account negative factors like these.”
• Finance Minister Shunichi Suzuki said the Japanese currency was weakening rapidly and indicated that the impact of the moves could be harmful for the economy. “There are positive aspects to it, but given the current economic climate, strong negative aspects exist,” Suzuki said
• Kuroda’s gradual escalation of language, built on years of experience dealing with currencies at the finance ministry earlier in his career, is probably aimed at slowing moves and buying time rather than stopping the weakening. That could be enough to keep his stimulus rolling without any changes at all. (…)