Month: November 2022

Small Businesses Struggle with Inflation, Labor Shortages

NFIB’s Small Business Optimism Index declined 0.8 points in October to 91.3, which is the 10^th consecutive month below the 49-year average of 98. Thirty-three percent of owners reported that inflation was their single most important problem in operating their business, three points higher than September’s reading and four points lower than July’s highest reading since the fourth quarter of 1979.

“Owners continue to show a dismal view about future sales growth and business conditions, but are still looking to hire new workers,” said NFIB Chief Economist Bill Dunkelberg. “Inflation, supply chain disruptions, and labor shortages continue to limit the ability of many small businesses to meet the demand for their products and services.”

• Of the 10 Index components, two increased, seven declined, and one was unchanged.
• Owners expecting better business conditions over the next six months deteriorated two points from September to a net negative 46%.
• The net percent of owners raising average selling prices decreased one point to a net 50% (seasonally adjusted). Half of all firms are raising prices, that’s inflation.
• The net percent of owners who expect real sales to be higher decreased three points from September to a net negative 13%.

A net negative 8% of all owners (seasonally adjusted) reported higher nominal sales in the past three months, three points worse than from September.

The net percent of owners raising average selling prices decreased one point from September to a net 50% (seasonally adjusted). Unadjusted, 8% of owners reported lower average selling prices and 56% reported higher average selling prices. Price hikes were the most frequent in retail (69% higher, 6% lower), wholesale (64% higher, 12% lower), construction (61% higher, 5% lower), and services (54% higher, 5% lower). Seasonally adjusted, a net 34% of owners plan price hikes.

Seasonally adjusted, a net 44% of owners reported raising compensation, down one point from September. A net 32% plan to raise compensation in the next three months, up nine points from September and the highest since October 2021.

The frequency of reports of positive profit trends was a net negative 30%, up one point from September. Among owners reporting lower profits, 34% blamed the rise in the cost of materials, 22% blamed weaker sales, 12% cited labor costs, 12% cited lower prices, 7% cited the usual seasonal change, and 2% cited higher taxes or regulatory costs. (…)

U.S. Consumer Credit Growth Slows During September

Consumer credit grew $25.0 billion (7.9% y/y) during September following a $30.2 billion August increase, revised from $32.2 billion. A $30 billion gain had been expected in the Action Economics Forecast Survey. The ratio of consumer credit outstanding to disposable personal income held steady at 25.0% in September, remaining the highest since March 2020.

Revolving consumer credit balances grew $8.3 billion (15.1% y/y) after increasing a little-revised $17.1 billion in August. (…)

Nonrevolving consumer credit balances rose $16.6 billion (5.8% y/y) after increasing $13.0 billion in August, revised from $15.1 billion. (…)

The value of student loans outstanding rose 1.7% y/y to $1.769 trillion in Q3’22. The value of motor vehicle loans outstanding rose 7.4% y/y to $1.397 trillion.

Putting your bills on a retail credit card will cost you more than ever this holiday shopping season, Axios writes. The average annual percentage rate for a retail credit card is 26.72%, an all-time high, according to data collected by CreditCards.com. 11 cards have maximum APRs of 30.74%, including Speedy Rewards Mastercard and Kroger Rewards World Elite Mastercard.

The October 2022 Senior Loan Officer Opinion Survey on Bank Lending Practices

How’s this as a recession indicator?

Most banks assigned probabilities between 40 and 80 percent to the likelihood of a recession in the next 12 months, with no bank reporting a probability less than 20 percent. Although banks in general assigned relatively high probabilities to a recession occurring in the next 12 months, most banks reported expecting the recession to be mild to moderate, should one occur.

Callum Thomas illustrates the CRE crunch. It can’t get much worse…can it?

Soft landing still possible, Goldman economist says (Axios)

In a new note from Goldman Sachs, chief economist Jan Hatzius puts the likelihood of a recession in the U.S. over the next 12 months at 35% — far below some of the more dire predictions circulating.

While surging inflation makes the economy feel terrible and a recession seems inevitable, there are signs that a “soft landing” is still possible. It’s a “narrow path,” Hatzius writes.

• “The most encouraging recent step on the narrow path to a soft landing has been the slowdown in nominal wage growth,” Hatzius writes.
• He points to a few data sets, including Goldman’s own aggregated business survey data on actual or expected wage changes, which has fallen from 5.5% wage growth to around 4% now.
• The Employment Cost Index also turned over in the third quarter after two years of steady increases.

Hatzius notes that GDP growth is slowing and the labor market is moderating in terms of fewer job openings and a falling quits rate.

• To be sure, the labor market is still quite strong. He calls this a “modest loosening.”
• Asking rent prices are also slowing, according to private market data, as Hatzius notes. But that decline will take a while to show up in the official inflation numbers, as Fed chair Jerome Powell said last week.
• “[T]here will come a point at which rent inflation will start to come down. But that point is well out from where we are now,” Powell said.

No one really knows anything. “[T[he Fed is tightening aggressively, and we live in an exceptionally uncertain world in terms of both US politics and geopolitics,” Hatzius writes.

More Workers Get Side Hustles to Keep Up With Rising Costs As full-time workers feel pinched by inflation, some are turning to second part-time jobs to supplement their incomes.

The October jobs report shows the number of Americans working part-time jobs in addition to their full-time jobs has increased 6%, year-over-year, to 4.5 million people, according to statistics from the Labor Department. (…)

Nearly three-quarters of workers said they need additional work to make enough income due to inflation, according to an October survey of more than 1,700 U.S.-based employees by job search website Monster.com. A separate survey of more than 4,700 people conducted by Prudential Financial Inc. found 81% of Gen-Z and 77% of millennial workers said they have pursued gig work or are considering additional side work this year to supplement their income. (…)

Even though the number of full-time workers holding second part-time jobs is nearly back to prepandemic levels, the chronic staff shortages in retail and hospitality mean there are still a lot of traditional part-time jobs open, said Jim McCoy, senior vice president of enterprise solutions at ManpowerGroup, which offers temporary-staffing services. Sometimes, there are even perks. (…)

• Inflation, Recession Fears Have Some Holiday Shoppers Trading Down Consumers are swapping everything from Lululemon leggings to Natori underwear for cheaper alternatives: “A $12 bra is good enough.”

Covid’s Drag on Workforce Proves Persistent The virus is still keeping millions of Americans out of work while reducing the productivity and hours of millions more. That is disrupting business operations and raising costs for employers.

(…) In the average month this year, nearly 630,000 more workers missed at least a week of work because of illness than in the years before the pandemic, according to Labor Department data. That is a reduction in workers equal to about 0.4 percent of the labor force, a significant amount in a tight labor market. That share is up about 0.1 percentage point from the same period last year, the data show. (…)

Another half a million workers have dropped out of the labor force due to lingering effects from previous Covid infections, according to research by economists Gopi Shah Goda of Stanford University and Evan J. Soltas at the Massachusetts Institute of Technology. In a Census Bureau survey in October, 1.1 million people said they hadn’t worked the week before because they were concerned about contracting or spreading the virus. (…)

The virus’s lingering effects on staffing have forced employers to change how they operate, such as keeping more people on payroll so that work continues without interruption during surges of infections, and cross-training staff and standardizing processes so that one person’s absence doesn’t slow down a project. That has made many companies less efficient. (…)

Aaron Sojourner, a labor economist at the W.E. Upjohn Institute for Employment Research, estimates that at least one million people weren’t working in October because of current or past Covid infections. Aside from a few big spikes, the number of short-term Covid absences has held relatively steady through the pandemic, on average, but the number of extended absences due to long Covid absences has been adding up. (…)

In the average month this year, 890,000 more workers were out for at least a week because of their own illness—Covid or other—child-care problems or an unspecified reason than in the corresponding months between 2017 and 2019. In addition, in the average month, some 2.3 million employees who were normally full-time worked less than 35 hours a week due to their own illness or child-care problems. That is about 490,000 more workers out each month, on average, than the corresponding month in the three years before the pandemic. (…)

Around 420,000 workers ages 16 to 64 likely left the labor force because of long Covid, according to a new analysis of disability data by Louise Sheiner and Nasiha Salwati of the Brookings Institution. (…)

The Pace of Tech Job Cuts is Reaching Early Pandemic Levels

(…) More than 104,000 startup workers have lost their jobs so far this year, surpassing the roughly 81,000 posts shed in 2020, said Lee, whose site tracks cuts at startups, which it defines as any firm formed after the dot-com bubble. Layoffs.fyi’s estimates differ from Challenger’s because they include numbers from media reports companies may not have confirmed. (…)

The predicament is more dire for startups, which likely will have to make more significant cuts to their staffs as soaring interest rates hinder their ability to raise capital, said Stephen Levy, director of the Center for Continuing Study of the California Economy, a research firm based in Palo Alto, California.

“It’s real, and it won’t go away until we get interest and inflation rates back to normal,” Levy said of startups’ woes.

To be sure, the scale of layoffs remains a far cry from the cuts made after the dot-com bubble burst. In 2001, the tech industry shed 168,395 jobs, followed by another 131,294 posts lost in 2002, according to Challenger. (…)

China vows to continue with ‘dynamic-clearing’ COVID strategy

China will persevere with its “dynamic-clearing” approach to COVID-19 cases as soon as they emerge, health officials said on Saturday, adding that measures must be implemented more precisely and meet the needs of vulnerable people.

The country’s strict COVID containment approach is still able to control the virus, despite the high transmissibility of COVID variants and asymptomatic carriers, an official from the China National Health Commission told a news conference. (…)

Asked if there would be a change of policy in the near term, disease control official Hu Xiang said China’s measures are “completely correct, as well as the most economical and effective.”

“We should adhere to the principle of putting people and lives first, and the broader strategy of preventing imports from outside and internal rebounds,” she said. (…)

Officials said they would begin a push to increase vaccinations among the elderly, noting that while 86.35% of citizens aged 60 and over are fully vaccinated, fewer people 80 and older have had vaccinations and boosters. (…)

Nvidia Offers Alternative Chip for China to Clear U.S. Export Hurdles The new graphics-processing chip, branded the A800, replaces the A100, a chip widely used in servers and AI applications by Alibaba, Tencent and Baidu.

(…) According to a memo Nvidia sent to its channel distributors last Thursday, the A800 has the same computational performance but a narrower interconnect bandwidth, the capacity of a chip to send and receive data from other chips, crucial for training large-scale AI models or building supercomputers.

“The A800 meets the U.S. Government’s clear test for reduced export control and cannot be programmed to exceed it,” the company said. Nvidia’s plans to offer the new chip was earlier reported by Reuters. (…)

About a quarter of Nvidia’s $26.9 billion in revenue in its most recent fiscal year came from China and Hong Kong, the company said. (…)

The change is akin to reducing the lanes of a highway from six to four, and would have the largest impact on the performance of supercomputers, which string thousands of graphics-processing chips together. Simpler tasks that require only one or a few chips, such as AI inference—running an AI model after it has been trained—will be minimally affected.

The U.S. restrictions on advanced chip exports announced last month limited the interconnect bandwidth of chips that could be exported to China without a license to less than 600 gigabytes per second, alongside other performance thresholds.

Job Market Remains Strong, but Shows Signs of Cooling The October labor report points to an economy that is gradually losing momentum following a torrid stretch of growth last year and earlier this year. The jobless rate rose to 3.7%. Labor-force participation rate fell slightly.

Employers added a seasonally adjusted 261,000 jobs in October, a robust number but the fewest since December 2020, and the unemployment rate rose to 3.7%, the Labor Department said Friday. Wage gains in October ticked up from the previous month. On an annual basis, however, wage increases have eased, a possible sign of loosening in the labor market. (…)

Over the past three months, employers added an average 289,000 jobs a month, down from 539,000 during the same period a year ago. But that is still far more than before the pandemic. In 2019, job gains averaged 164,000 a month. (…)

Average hourly earnings rose 0.4% in October from the previous month, up from 0.3% in September, the Labor Department said. But they slowed on an annual basis, rising 4.7% in October, down from 5% in September. Annual wage gains have been softening steadily since peaking at 5.6% in March but they remain well above where they were before the pandemic. (…)

The share of adults holding or seeking jobs—the labor-force participation rate—fell slightly last month to 62.2% from 62.3%, which could keep the labor market tight. Notably, participation of prime-aged workers, those between the ages of 25 and 54, has fallen for two straight months. (…)

• Logistics Companies Are Reversing Their Hiring Binge Warehousing and storage companies cut payrolls by 20,000 workers last month as supply-chain bottlenecks eased.

(…) Warehousing and storage companies added more than 400,000 jobs in two years through the end of 2021. (…) It was the fourth straight monthly pullback in payrolls and the largest since the sector lost 75,000 jobs in April 2020 as pandemic lockdowns took hold. (…) “We certainly did not expect that the market was going to come down as rapidly as it did.” (…) Employment in the warehousing and storage sector has fallen by nearly 50,000 jobs since June, according to the BLS data. (…)

There are two separate measures of employment: the Current Population Survey (CPS), also known as the household survey, and the Current Employment Statistics (CES) survey, also known as the payroll or establishment survey. The BLS says that “Both surveys are needed for a complete picture of the labor market”, yet Fed members, and the media, rarely mention the household survey.

The payroll survey estimates the nation’s employment based on responses from a sample of about 400,000 business establishments, which account for about one-third of total nonfarm payroll employment. The payroll survey counts the number of jobs.

The household survey, in contrast, estimates the nation’s employment based on responses from interviews with approximately 60,000 households; the BLS then inflates the survey data by the most recent estimates of the population. The household survey counts the number of employed individuals.

The surveys may differ over short periods but they converge over the longer term.

Since March 2022, however, the readings vary considerably: payroll employment is up 1.6% while household employment is up only 0.1%. Full time employment (from the household survey) is actually down 0.3% during the same period.

Is this like the recent discrepancies between Gross Domestic Product and initially faster growing Gross Domestic Income which was eventually revised down to reveal an actually slower economy than originally measured by GDI?

Last month, the household survey was much weaker than the payroll survey with a 328k decline in household employment driven by a 489k decline in the important prime-age employment. The BLS household employment measure adjusted to reflect nonfarm payrolls methodology showed an even larger employment decline (-741k).

How useful is that when trying to navigate treacherous waters?

Job Cuts Highest Since February 2021, Up 13% Over September, 48% Over October 2021

U.S.-based employers announced 33,843 job cuts in October a 13% increase from the 29,989 cuts in September. It is 48% higher than the 22,822 cuts announced in the same month last year, according to a report released Thursday from global outplacement and business and executive coaching firm Challenger, Gray & Christmas, Inc.

October saw the highest number of job cuts announced in a single month since February 2021 when 34,531 job cuts were recorded. It is the sixth time this year that cuts were higher in 2022 than in the corresponding month a year earlier. (…)

That said,

• recent job cut announcements remain substantially lower than in pre-pandemic years.
• On the other hand, announced hiring plans totalled 659k in the 3 months to October, down from 1085k in 2021.
• The 12 companies having announced seasonal hiring plans will hire 189k (-25%) fewer workers this year.

Other facts from the NFP report:

• Growth in aggregate weekly payrolls (employment x hours x wages) averaged 6.4% a.r. in the last 3 months, down from 7.4% and 8.3% in the 2 previous 3-month periods respectively. A clear slowdown. On a YoY basis, real labor income growth is now close to zero (the Oct. CPI is out Thursday).

• Employers have not cut hours since June. Average weekly hours are stable in the middle of their normal 2012-2019 range.
• Employment growth (blue bar) is an ever diminishing contributor to payrolls growth: +2.3% a.r. in the last 3 months following +3.2% and +4.0% in the 2 previous 3-month periods respectively.
• But wages are not taking off, quite the opposite actually: average hourly earnings (black bar) grew 3.8% a.r. in the last 3 months, after +5.2% in the 3 months previous.

• The wage slowdown is visible on this chart:

Averaging the last 2 months, hourly earnings rose 4.0% a.r., indicative of restraint on the part of business leaders. Indeed, this table of the last 2-month annualized wage growth rates far from suggests we are near a wage/price spiral (number on left is % of total employment, right brackets are YoY):

•   0.4% Mining & Logging: ……………………….0.2% (3.6%)
• 10.4% Retail Trade ……………………………… 3.1% (4.2%)
• 16.1% Education & Health Services: …………. 1.9% (4.4%)
• 14.7% Professional & Business Services: ……. 4.0% (5.0%)
•   8.4% Manufacturing: …………………………… 3.7% (3.6%)
• 10.4% Leisure & Hospitality : …………………… 4.7% (6.5%)
•   3.7% Other Services: ………………………….. 6.9% (2.7%)
•   5.0% Construction: …………………………….. 6.2% (5.6%)
•   4.2% Transportation & Warehousing: ………… 5.1% (6.3%)
•   5.9% Financial Activities: ……………………… 4.2% (3.8%)
•   2.0% Information: ……………………………… 2.0% (6.4%)

Seven of the 11 sectors (58% of employment) are growing annualized wages at a slower rate than their YoY trend.

Total Private service-providing employee wages are up 4.8% YoY but 3.9% a.r. in the last 2 months.

But what is good or bad news today? Faster wage growth to offset inflation and keep consumer spending or slower wage growth risking a consumer strike?

The Fed, or at least Mr. Powell, are clearly in the second camp. They (he) might be getting it sooner than later…

What about those large excess savings expected to keep consumers buoyant?

Judging by the recent surge in credit card borrowing, +18.2% YoY at the end of October, many Americans are struggling to pay their bills:

• PayPal said lower- and middle-income households had started reducing non-essential spending, as they grapple with higher prices of food, energy and gas.
• NRF Predicts Healthy Holiday Sales as Consumers Navigate Economic Headwinds

Holiday spending is expected to be healthy even with recent inflationary challenges, as the National Retail Federation today forecast that holiday retail sales during November and December will grow between 6% and 8% over 2021 to between $942.6 billion and $960.4 billion. Last year’s holiday sales grew 13.5% over 2020 and totaled $889.3 billion, shattering previous records. Holiday retail sales have averaged an increase of 4.9% over the past 10 years, with pandemic spending in recent years accounting for considerable gains.

FYI, CPI-Durable Goods was up 7.6% YoY in Q3. CalculatedRisk uses retail hiring in October to assess Q4 sales: current forecast: +2.75% YoY in Q4.

Summers Sees Risk Fed Needs to Hike Past 6% to Curb Inflation

Real world anecdote:

It feels like the economy is heading off a cliff right now. In our larger portfolio of companies I can see the trajectory. After Q1 board meetings 1/3 were missing their numbers and it felt like the ones missing were related to these specific companies, not a macro trend. After Q2 board meetings 2/3 were missing and after Q3 board meetings, like now, the entire portfolio is re-forecasting. Even the best companies are seeing major headwinds. This is an economy wide-slowdown. (VC investor David Sachs quoted by The Market Ear)

Frackers Say Oil Production Slowing in the Shale Patch U.S. oil-and-gas companies offer little relief for tight global markets

(…) In the contiguous U.S., oil production through August has increased only 3% since December, up 288,000 barrels a day to 9.77 million, according to the Energy Information Administration. It had earlier expected total U.S. oil output—including Alaska and the Gulf of Mexico—to hit 12.64 million by December, growing more than 1 million barrels a day compared with the same month last year. It has since lowered its projection almost 500,000 barrels a day. (…)

Growth forecasts may fall further because many drillers have relied on wells they had previously drilled but left offline for future production, so-called drilled but uncompleted wells, or DUCs. The EIA said companies have tapped most of their best DUCs, after they used the wells to save money on drilling as the pandemic led to a historic oil-price collapse. That trend, combined with a gas-pipeline bottleneck in the Permian, is expected to further constrain U.S. oil production growth, the EIA said. (…)

Canada Rate-Hike Pressure Grows With Wages Up 5% for Fifth Month Average hourly wages rose 5.6% annually in October as the economy added 108,000 jobs, more than 10 times the consensus forecast. Workers in construction, professional services, accommodation and food saw even bigger gains than that.

China’s Exports Drop Sharply as Global Economy Slows The pullback in demand for its goods abroad removes a key prop for China’s growth as its economy is pressured by the government’s zero-Covid strategy and a severe real-estate slump.

(…) Exports from China declined 0.3% last month compared with a year earlier, China’s General Administration of Customs said Monday, the weakest pace of growth since May 2020, when trade was hobbled by countries’ early efforts to contain a worsening global pandemic. That was well below the expectations of economists polled by The Wall Street Journal, who had expected exports to increase 4% year over year.

Monday’s data showed exports to the U.S. fell 13% on the year in October, the third month of decline, while sales to the European Union fell 9%.

The data showed big falls in exports of products including home appliances and medical supplies, and weakening growth in exports of mobile phones and automobiles.

Other bellwether exporters in Asia, such as South Korea and Taiwan, have also reported faltering overseas sales, pointing to a broad slowdown in trade as the global economy loses momentum.

South Korea’s trade ministry said Nov. 1 that exports fell 5.7% in October compared with a year earlier, led by sinking exports of memory chips, petrochemicals and computers. (…)

China’s imports from the rest of the world dropped 0.7% in October from a year earlier, underscoring weak domestic spending in China’s economy. (…)

Will China pivot on Covid-19 lockdowns, given the weakening economy?

That would be untimely just before winter and given these trends (as of Nov. 6):

EARNINGS WATCH

From Refinitiv/IBES:

Through Nov. 4, 428 companies in the S&P 500 Index have reported earnings for Q3 2022. Of these companies, 71.3% reported earnings above analyst expectations and 24.1% reported earnings below analyst expectations. In a typical quarter (since 1994), 66% of companies beat estimates and 20% miss estimates. Over the past four quarters, 78% of companies beat the estimates and 18% missed estimates.

In aggregate, companies are reporting earnings that are 3.5% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.1% and the average surprise factor over the prior four quarters of 7.0%.

Of these companies, 69.6% reported revenue above analyst expectations and 30.4% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 74% of companies beat the estimates and 26% missed estimates.

In aggregate, companies are reporting revenues that are 1.9% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.2% and the average surprise factor over the prior four quarters of 2.7%.

The estimated earnings growth rate for the S&P 500 for 22Q3 is 4.3% [4.1% on Oct. 7]. If the energy sector is excluded, the growth rate declines to -3.4% [-2.6%].

The estimated revenue growth rate for the S&P 500 for 22Q3 is 11.0% [9.7%]. If the energy sector is excluded, the growth rate declines to 7.7% [6.4%].

The estimated earnings growth rate for the S&P 500 for 22Q4 is 0.4% [5.2%]. If the energy sector is excluded, the growth rate declines to -4.1% [1.3%].

The estimated revenue growth rate for the S&P 500 for 22Q4 is 5.1% [6.9%]. If the energy sector is excluded, the growth rate declines to 3.9% [5.1%].

Ed Yardeni’s data reveal that, as of Nov. 2, 58.1% of S&P 500 companies having reported (344) are showing positive YoY growth, and 39.0% negative YoY growth (worst since Q3’20).

More pre-announcements, all negative, so far vs at the same time last quarter.

Interestingly, the number of estimate revisions jumped 50% in the last 2 weeks vs the previous 2 but ups vs downs were about equal…

…however, the cumulative number of downward revisions is high:

In terms of actual YoY growth, the pretty good correlation with the Manufacturing PMI suggests near stagnation for now. In November 2021, S&P 500 EPS were $196. Current trailing EPS: $223.37. Full year 2022: $220.91e (+6.1%). Forward EPS: $227.72e. Full year 2023: $232.64e (+5.3%).

Senior White House Official, Putin Aides Involved in Talks on Avoiding Wider War Jake Sullivan has had confidential discussions with Russian counterparts amid concerns over escalation and nuclear threats.