Month: January 2023

Weak US Retail Sales, Factory Data Heighten Recession Concerns

The value of overall retail purchases broadly decreased 1.1% in December after a downwardly revised 1% drop in the prior month, Commerce Department data showed Wednesday. Separate figures showed a 1.3% decline in factory output last month that wrapped up the weakest quarter for manufacturing since the onset of the pandemic.

(…) So-called control group sales — which are used to calculate gross domestic product and exclude food services, auto dealers, building materials stores and gasoline stations — dropped 0.7%, the most in a year. (…)

Taken together, the data show a consumer that’s losing steam and business investment falling, portending weaker growth and raising concerns that the economy may be inching closer to a recession. Combined with easing inflation, the figures put the Fed on track to further slow the pace of interest-rate hikes. (…)

The two consecutive -1% down bars in the chart above are a spooky rarity in the U.S.. As I show below, -2% in 2 months has only occurred in recessions and were always followed by at least 2 more down months.

But because of the severe goods deflation underway, the recent nominal retail sales data can be misleading to the unwary.

There is no official retail sales deflator but a weighted sum of CPI-Durables (33%) + CPI-Nondurables (67%) provides a decent approximation of “CPI-Retail”. In December, CPI-Retail prices declined 1.1% after -0.3% in November.

So inflation-adjusted retail sales were actually unchanged in December following -0.7% in November and +0.7% in October.

The very spotty quarter ended with nominal retail sales up 6.8% YoY in Q4 (6.0% in December), down considerably from 9.4% in Q3, 8.4% in Q2 and 12.6% in Q1 but still well above the 4.5-5.0% average growth in retail wages.

Retail profits in Q4 will thus be negatively impacted by heavy markdowns but operating expenses will not make things worse, thanks also to the 3.1% decline in weekly hours worked by retail employees in Q4 (-4.1% in December) and lower energy costs.

Crucially, Christmas was not a disaster economically when considered in real terms, enabling retailers to reduced part of their excess inventories during the biggest retail month of the year.

The National Retail Federation said Wednesday that holiday sales were disappointing with November and December sales up 5.3% YoY. My CPI-Retail data puts inflation at 5.9% during these two months, implying real sales were down 0.6%, right in line with my data.

• Industrial Production Decreased 0.7 Percent in December

(…) Industrial production decreased 0.7 percent in December and 1.7 percent at an annual rate in the fourth quarter. In December, manufacturing output fell 1.3 percent amid widespread declines across the sector. (…) total industrial production in December was 1.6 percent above its year-earlier level. Capacity utilization dropped 0.6 percentage point in December to 78.8 percent, a rate that is 0.8 percentage point below its long-run (1972–2021) average. [view full report]

More importantly,

Manufacturing production declined 1.3% in December, well below consensus expectations. The capex-sensitive business equipment category decreased 2.0% and mining production decreased 0.9%, while the utilities component—an input into consumption in the GDP accounts—increased 3.8%, as cold temperatures increased demand for heating.

Total motor vehicle assemblies declined 1.1% to an annual rate of 10.0 million (vs. 10.9 million on average in 2019). The decline in motor vehicle assemblies likely reflects a planned temporary slowdown in production, as Wards production schedules had shown planned declines in auto assemblies for both November and December.

David Rosenberg tweeted yesterday: “Sorry, folks. No soft landing. On track for 3 straight quarters of declines in real retail sales alongside 2 successive negative production numbers. Only happens in recessions.”

Sorry David, not necessarily. In 2015-16, both sales and manufacturing were quite weak and the economy kept growing on a YoY basis.

N.Y. Fed’s Business Leaders Survey

Yesterday, we got the very weak manufacturing survey. Services are not much better:

Activity continued to decline significantly in the region’s service sector, according to firms responding to the Federal Reserve Bank of New York’s January 2023 Business Leaders Survey. The survey’s headline business activity index fell four points -21.4, its lowest level in nearly two years.

The business climate index came in at -41.8, suggesting the business climate remains much worse than normal.

Employment growth slowed to a crawl, though wage increases remained widespread. The pace of input price increases continued to trend lower, while the pace of selling price increases moved slightly higher. Looking ahead, firms do not expect conditions to be better in six months.

Fed’s Beige Book Says Businesses Expect Weak Growth in Months Ahead Inflation showed some signs of easing while labor-market conditions remained tight, Federal Reserve’s business contacts report

Half of the Fed’s 12 regional banks reported no change or slight declines in economic activity in their districts, with several others reporting slight or modest growth and one saying it had a significant decline.

Some retailers “noted that high inflation continued to reduce consumers’ purchasing power, particularly among low and moderate-income households,” according to the central bank’s latest compilation of economic anecdotes from around the country, known as the Beige Book.

The Fed said most regions benefited from a slight increase in consumer spending during the holiday season. Many business contacts said it had become more difficult to pass higher costs to consumers, “suggesting greater price sensitivity on the part of consumers.”

“Selling prices increased at a modest or moderate pace in most districts, though many said that the pace of increases had slowed from that of recent reporting periods,” the Fed report said.

The report included information gathered through Jan. 9. (…)

Labor-market conditions remained tight for many businesses, the report said, and many of them “hesitated to lay off employees even as demand for their goods and services slowed and planned to reduce head count through attrition if needed.” (…)

Wage pressures persisted for several businesses and many in the Richmond Fed’s district “reported being at a breaking point on increasing wages as they cannot pass through costs anymore to consumers.” (…)

In the New York Fed’s district, the only one that reported a significant decline in economic activity, manufacturers “wound up 2022 on a bleak note, reporting the most widespread decline in activity since early in the pandemic.” (…)

Producer Price Increases Decelerated in December Supplier prices rose 6.2% last month from a year earlier, the slowest pace since March 2021

That was down from November’s revised 7.3% increase and well below the 11.7% rise in March 2022, the fastest pace since PPI records began in 2010.

Core PPI, excluding often-volatile food, energy and supplier margin categories, rose 4.6% in December from a year earlier, down from 4.9% in November, the department said.

On a monthly basis, the PPI declined 0.5% in December from November, the first monthly decline since August. Supply-level energy prices fell sharply last month while food prices decreased modestly. Core PPI, excluding often-volatile food, energy and supplier margin categories, rose 0.1% last month compared with 0.3% in November. (…)

It is up 4.6% YoY, down from 4.9% in November.

PPI-Final demand-core goods is up only 1.5% a.r. in the last 4 months but 3.0% a.r. in the last 2 months.

PPI-Services keeps behaving very well, up 0.1% in December in sharp deceleration since the 0.5% print in August.

Two Fed Officials Back Quarter-Point Rate Rise Next Month

• Fed policy makers are starting to show differing opinions on the path for US interest rates this year. Two voting regional governors have backed moderating the pace of rate rises, while two other Fed officials have stated a preference for additional hikes. Dallas Fed President Lorie Logan and Philadelphia Fed chief Patrick Harker laid out the case for easing the Fed’s hiking campaign in comments on Wednesday, which followed a weak retail sales report. Meanwhile, St. Louis Fed chief James Bullard and Loretta Mester of the Cleveland Fed — also speaking on Wednesday — stressed the need to keep policy restrictive for longer. (Bloomberg)

Lagarde Says Inflation Way Too High, ECB to Stay the Course

Empire State Manufacturing Survey

Business activity contracted sharply in New York State, according to firms responding to the January 2023 Empire State Manufacturing Survey. The headline general business conditions index fell twenty-two points to -32.9.

New orders and shipments declined substantially. Delivery times held steady, and inventories edged higher.

The index for number of employees fell eleven points to 2.8, its lowest level in more than two years, signaling that employment growth stalled. The average workweek index remained negative at -10.4, indicating a decline in hours worked.

Input price increases slowed considerably, with the prices paid index dropping eighteen points to 33.0. Selling price increases also moderated, with the prices received index falling six points to 18.8.

The index for future business conditions held steady at 8.0, suggesting that firms expect little improvement over the next six months. New orders and shipments are expected to rise somewhat, while employment is expected to increase only modestly. The capital spending index held steady at 22.3, and the technology spending index rose to 17.0.

Weak, very weak!

Points to ISM Manufacturing around 42-43

@AndreasSteno

Declining ISM New Orders generally point to declining S&P 500 profits. The index was 45.2 in December:

• Japan Nov core machinery orders tank more than expected

Core machinery orders fell 8.3% in November from the previous month, government data showed on Wednesday.

The decline was significantly bigger than the 0.9% dip expected by economists in a Reuters poll and marked the first decrease in two months after a 5.4% gain in October.

Orders from manufacturers fell 9.3% in November, a third consecutive month of contraction, driven down by a 32.7% decline in orders from electric-machinery companies. Demand for items such as semiconductor-making equipment turned weaker, a government official told a media briefing. (…)

Non-manufacturers in “core” sectors excluding ship and electric utility firms also cut their orders by 3.0%, following a 14.0% increase in October.

Core orders, a highly volatile data series regarded as a leading indicator of capital spending in the coming six to nine months, were down 3.7% in November on a year earlier, versus a forecast 2.4% increase, the data showed.

• Morale at Japan big manufacturers logs first negative reading in 2 years

Business confidence at big Japanese firms slid in January with manufacturers showing a negative reading for the first time in two years, the Reuters Tankan survey found, reflecting a slow recovery from the pandemic amid a global economic downturn and rising living costs. (…)

The Reuters Tankan index for big manufacturers stood at -6 in January, down from +8 last month, with car, electronics and textiles manufacturers among the gloomiest sectors. (…)

“Prices are rising everywhere including prices for gas and electricity, materials, shipping and processing machinery. And some clients won’t swallow price hikes, squeezing our profits to a degree,” wrote a manager at a metal firm.

Morale was much stronger in the service sector, with that index at +20 in January, a drop from +25 in the prior month which was its highest level in more than three years. Among non-manufacturers, only the real estate and construction sectors had negative readings. (…)

Microsoft to Cut Engineering Jobs This Week as Layoffs Go Deeper The reduction is said to be larger than in previous rounds.

Oil Demand to Hit Record as China Reopens, IEA Says

The energy watchdog lifted its forecast for oil demand growth this year by nearly 200,000 barrels a day to 1.9 million barrels a day. The extra demand means that the IEA now expects total oil demand this year to average 101.7 million barrels a day, well above pre-Covid levels and a record amount. (…)

A similarly sudden turnaround for the fortunes of economies in Europe and the U.S. is also boosting oil-demand expectations, the IEA said. Europe’s economy this year is expected to fare better than previously forecast, as warmer temperatures have eased its energy supply crisis. Meanwhile, the Federal Reserve’s efforts to tame inflation have shown recent signs of success. (…)

The IEA raised its forecast for Chinese demand by 100,000 barrels a day to 15.9 million barrels a day. (…)

In a separate report Tuesday, the Organization of the Petroleum Exporting Countries held off from making adjustments to its demand forecasts, said that China’s reopening could spur a flare-up in Covid-19 cases that could delay a rebound in crude demand.

The stronger economic outlook for Europe is also not entirely positive for oil demand, the IEA said. High natural-gas prices and reduced gas supplies from Russia had in recent months boosted expectations that European nations would need to burn more crude-derived heating fuels to compensate.

In December, the IEA had raised its demand forecasts on those expectations. But it said Wednesday that the extra demand would be around 200,000 barrels a day less than expected last month, as warmer-than-usual winter temperatures in Europe meant fewer European utilities were switching from natural gas to oil.

The Paris-based agency kept its estimate of 2022 oil demand largely unchanged at 99.9 million barrels a day.

Goldman Sachs:

Through financial deleveraging and physical destocking, market participants and physical end-users in commodity markets are preparing for one of the most widely anticipated recessions in history, that we do not believe is going to materialize. We believe that, aside from the broader structural underinvestment thesis, oil markets are therefore simply unprepared for the sequential demand growth we expect this year as China reopens and international travel continues to recover.

Canada: December’s CPI data ends a tumultuous year on a good note (NBF)

Inflation was dizzying in 2022, leading to an extremely rapid tightening of monetary policy. But the end of the year is offering hope that this inflationary surge will fade quickly in 2023.

The spectacular drop in gasoline prices in December (-13.1%) has largely contributed to the monthly weakness, but other elements are also very encouraging, including the moderation of the food component.

Excluding food and energy, m/m inflation came in at 0.28%, its lowest pace in 13 months, and would have been lower had it not been for the ongoing spike in mortgage interest costs (MIC), primarily due to central bank tightening. CPI excluding F&E&MIC is running at an annualized pace of 2.4 % over the past three months, within the central bank’s target range of 1 % to 3 %.

The recent trend is also encouraging for the central bank’s preferred measures, as evidenced by the three-month annualized change of 3.6% for the CPI-Trim and 4.3% for the CPI-Med, compared to over 7% earlier this year.

This morning’s data does not change our view that the Bank of Canada should consider a pause next week after the extremely aggressive tightening orchestrated in 2022 that brought real rates essentially back to pre-pandemic levels.

Inflation in the last quarter of 2022 turned out to be 4 tenths lower than what the BoC projected last October (6.7% vs. 7.1%). In that same projection, the central bank saw inflation settling at 2.8% at the end of 2023, whereas we believe it will be below that level as early as the second quarter of the year.

The actions taken so far will continue to dampen economic activity in the quarters ahead and, consequently, inflation. GDP and the labour market have remained healthy until the end of 2022, but the economic outlook is darkening according to the BoC’s Business Outlook Survey.

As many as 30% of corporations expect their sales volumes to decline, a record level outside of a recession. Higher inventories than before during the pandemic, significantly lower transportation costs, sales price reductions by Chinese producers and the global economic slowdown suggest that the lull on the goods side will continue.

For services, the return to normal inflation levels may take a little longer, but there are reasons to believe that the labour market will ease in a low-growth environment, contributing to a reduction in wage pressures.

But Goldman Sachs sees one more hike coming:

(…) we think the BoC would be worried about whether enough progress has been made on the labor market given strong recent employment growth, elevated wage growth, elevated wage-sensitive inflation, and the message from both the BOS and CSCE today.

Moreover, it is possible that consumers/businesses have responded more negatively to surveys given heightened discussion around recession and growth concerns (like the outperformance of hard vs. soft data in Europe this winter).

Given upside risks to inflation are more concerning when the starting level is so high, we think the BoC will hike another 25bp next week. However, we think the soft tone of the reports suggests that we are near the end of the cycle, and we do not expect further hikes after next week.

JPMorgan’s Kolanovic Cuts Equity Allocation Again on Growth Risk

(…) “We remain cautious on risk assets and are reluctant to chase the past weeks’ rally as recession and overtightening risks remain high, and we believe that a lot of good news is already in the price in terms of inflation moderation or the potential for a soft landing,” a team of strategists led by Kolanovic wrote in a note to clients.

One of Wall Streets biggest optimists through most of the market selloff last year, Kolanovic has since reversed his view, cutting his equity allocation in mid-December due to a soft economic outlook this year. (…)

“The market is behaving as if we were in an early cycle recovery phase, but the Fed has not even concluded hiking yet,” Kolanovic wrote. “While signs of declining inflation pressures are in principle positive, ongoing tightness in labor markets is likely to put pressure on margins, and may cause central banks to tighten further than markets expect.” (…)

Kolanovic’s baseline forecast is that the US will fall into a recession at the end of 2023, with inflation gradually normalizing and the Federal Reserve cutting rates in early 2024. (…)

ChatGPT

Performance of ChatGPT on USMLE: Potential for AI-Assisted Medical Education Using Large Language Models

We evaluated the performance of a large language model called ChatGPT on the United States Medical Licensing Exam (USMLE), which consists of three exams: Step 1, Step 2CK, and Step 3.

ChatGPT performed at or near the passing threshold for all three exams without any specialized training or reinforcement.

Additionally, ChatGPT demonstrated a high level of concordance and insight in its explanations.

These results suggest that large language models may have the potential to assist with medical education, and potentially, clinical decision-making.