Did you miss yesterday’s Economic Perspectives: Re-Acceleration!?
BTW, the Chicago Fed National Activity Index for March came out yesterday, improving from -0.13 in February to +0.01 in March, well above the -0.70 level signalling an economic contraction.
(Advisor Perspectives)
Even though the seasonally adjusted annual rate could decline slightly from the prior quarter’s 15.2 million units, sales volume is forecast to rise a robust 13% year-over-year in Q2. Inventory will undergo a seasonally related month-to-month decline in April but resume growth by the end of the quarter. (WardsAuto)
(…) The darkening industrial outlook, which contrasts with low unemployment and a robust service sector, has pulled benchmark diesel futures down nearly 25% this year, to $2.53 a gallon. Federal record-keepers peg the year-over-year hit to domestic demand at 8.4%. (…)
In the U.S., where stores and warehouses remain overstocked after a pandemic-era boom in consumer goods, container imports in the first three months of 2023 slid about 23% from the same period last year, according to logistics technology firm Descartes Systems Group Inc. (…)
The diminished activity means fewer trips by fuel-guzzling semitrailers hauling goods across the country, a pullback that has punished trucking firms and pushed the Dow Jones Transportation Average down 7.8% from its 52-week high in February.
Knight-Swift Transportation Holdings Inc. and J.B. Hunt Transport Services Inc. last week reported year-over-year quarterly revenue declines and earnings that missed Wall Street’s expectations. Shares in both companies have since held steady.
J.B. Hunt executives pointed to consumers’ waning hunger this year for big and bulky products such as appliances, furniture and exercise equipment. They added that the company’s customers have been less accurate recently in predicting their freight needs than ever before.
“Simply stated, we’re in a freight recession,” J.B. Hunt President Shelley Simpson told analysts in an earnings call.
Bob Costello, the American Trucking Associations’ chief economist, said he has seen trucking companies with fleets in the range of 200 to 300 vehicles failing at a rate of about one a week.
That doesn’t bode well for even smaller operators. “I think a lot of these little ones are going out of business,” he said. (…)
After every boom, a bust happens. But this is not a typical economy-wide bust, perhaps not even an industry-wide bust.
- Inventories swelled during the pandemic recession but booming sales quickly restored inventories/sales ratios across the economy. IS ratios are now below their pre-pandemic levels except for wholesalers and the problem there is centered on housing and home improvement related goods, including lumber.
- I/S ratios for building materials dealers are 7% above pre-pandemic levels.
- Manufacturing production has been soft lately but new orders are 20% above their late 2019 levels and well above previous cycle peaks.
- Last week’s April flash manufacturing PMI indicated that “manufacturing new orders returned to expansion for the first time in seven months”.
- Total freight shipments are not in recession mode:
- The trucking industry’s main volume problems are with lumber (housing) and metals (autos, Boeing).
- The trucking industry’s main profitability problems are that freight rates have weakened 10% while trucking wages are still up 8.3% YoY.
- As to the “sliding diesel prices” as an economic warning signal, the reality is that diesel prices have held up much better than crude oil and gasoline prices in the past 12 months. No warning there!
TECHNICALS WATCH
What about market breadth?
The percentage of stocks outperforming the index has collapsed. Bearish Wilson adds: “We are challenged to find a period in history during which these indices have underperformed to such a degree while a new bull market was beginning.” (The Market Ear)
MS
SentimenTrader’s Jason Goepfert does the analysis since 1928.
Breadth is showing negative divergences based on various (and sometimes wholly arbitrary) metrics. By this, the usual definition is that price in, say, the S&P 500 is making higher highs while fewer of its stocks are holding above their moving averages.
We can see this in the percentage of stocks trading above their 50-day moving averages. When the S&P formed a 30-day peak in February, more than 74% of its stocks traded above their 50-day; on April 18, barely 60% of stocks were.
It’s also evident in the percentage of stocks above their 200-day averages. In February, more than 78% of stocks traded above their long-term averages. By last week, that had dropped to fewer than 62%.
What the research tells us…
Based on the above [see Jason’s complete post), investors should be much more welcome of significant positive divergences in breadth than negative ones. That seems like a “duh” statement, but we’ve seen hundreds of times over the decades that “duh” shouldn’t be taken for granted in auction markets.
And even so, it might seem automatic that large negative divergences in breadth like we are seeing now, at least in two common metrics, should be a good sell signal. But they aren’t. They proved to be a couple of times over the past decade and before that, but most of the time, they gave false signals.
Executives at the San Francisco-based lender laid out plans Monday for shoring up the firm after its first-quarter results showed customer deposits plunged 41% to $104.5 billion in the period. That missed the $137 billion average of analyst estimates compiled by Bloomberg and came even after the country’s largest lenders parked $30 billion of their own cash there.
The figures underscored that First Republic is still contending with the impact of last month’s regional-banking crisis, in which wealthy customers and businesses yanked their money from small- and midsize lenders over worries that rising interest rates were eroding the value of their assets. First Republic said it will cut as much as 25% of its workforce, lower outstanding loan balances and curb other non-essential activities. (…)
From David Kelly, J.P. Morgan Asset Management
(…) For many decades, it has been economic dogma that “inflation is always and everywhere a monetary phenomenon” and the monetarist school of economic thought rose to prominence in the 1970s in part because of a very strong relationship between the growth in the money stock and the subsequent growth in nominal GDP.
For those who do worry about the money supply, recent data have been very concerning. Through February, M2 has fallen for seven consecutive months and is down 2.4% from a year ago. The March data, due out on Tuesday, could show an intensifying contraction.
However, the truth is that the tight positive relationship between money supply and nominal economic growth has evaporated in recent decades. This collapse in correlation partly reflects a proliferation in alternative, easily-accessible financial stores of value and means of payment. It also could reflect a collapse in the negative correlation between policy interest rates and nominal economic activity which is the rationale for any activist monetary policy. (…)
Why M2 is Falling
(…) There are at least three big reasons behind this recent decline. The first is simply quantitative tightening.
In its most recent quantitative easing campaign, initiated to reduce the economic and financial strain of the pandemic recession, the Fed boosted its total assets from $4.1 trillion in February 2020 to almost $9 trillion two years later. This was achieved by buying huge quantities of Treasuries and mortgage-backed securities in the open market. Much of the cash received by the sellers of these securities ultimately found its way into deposit accounts and money market funds, causing M2 to vault higher from $15.7 trillion in February of 2020 to $21.7 trillion last July. This process is now firmly in reverse with the Fed ramping up quantitative tightening last summer and currently reducing its balance sheet at a pace of up to $95 billion per month.
However, beyond this obvious force in reducing the money stock, two other factors may be in play.
First, recent changes in the macro environment may have reduced the desirability of holding cash or low-interest checking accounts.
- First, physical cash obviously pays zero interest which isn’t a big deal when inflation is 2%. However, with CPI inflation hitting a peak of 8.9% year-over-year last June and still running at 5.0% in March, there is now an incentive to conserve on cash holdings.
- Second, even with the Fed raising short-term interest rates sharply, average bank deposit interest rates remain well below 1%, increasing the incentive to move deposits out of the banking system. That being said, money market mutual funds, which are part of M2 but not M1, pay much more competitive interest rates and this is very likely contributing to the sharper decline in M1, which has fallen by 5.8% over the past year compared to a 2.4% decline in M2.
- Moreover, in addition to higher U.S. inflation and interest rates, the exchange rate of the U.S. dollar has been falling recently, with the dollar index now down 11% since last September. Fears of a further dollar decline give global investors a reason to transfer liquid assets out of physical U.S. dollars and dollar-denominated accounts.
Second, a decline in M2 holdings could reflect economic deceleration. If, due to worsening economic prospects, businesses are more reluctant to borrow and banks are less willing to lend, commercial and industrial loans should fall or grow more slowly and this very much appears to be the case in recent months. This, in turn, leads to a diminished flow of money into corporate checking accounts. This reluctance to lend or borrow has worsened in recent weeks in the wake of the closure of some smaller regional banks and could contribute to an expected M2 decline in March.
The Collapse of the Relationship between Money and GDP
However, while it is possible to rationalize the recent decline in the money supply, the ability of the money supply to drive or predict economic activity has collapsed in recent decades. (…)
Milton Friedman described the process very eloquently. A surge in the money supply meant that people had more money than they wanted in their pockets or their checking accounts. They would try to reduce those balances by buying goods and services, thereby boosting economic activity. However, the recipients of those dollars would also then find themselves carrying too much money and would consequently spend them down, further boosting activity. Eventually, there would be an increase in real output or prices or both to a level that was sufficient to make money holdings appropriate again.
Moreover, if a central bank increased the money supply when real output couldn’t accelerate any further, inflation was inevitable. Hence, inflation was a monetary phenomenon.
Strangely, however, as soon as the monetarist doctrine had become the dominant line of economic thought in the early 1980s, the relationship collapsed. From 1984 to 2019, year-over-year M2 growth explained less than 1% of the year-over-year change in nominal GDP two quarters later. So why did money stop talking?
The main reason appears to be that a lack of liquidity ceased to be a binding constraint on the operations of the economy.
(…) today, the proliferation of alternative payment methods and competitive interest paid on money market mutual funds and ETFs has made monetary aggregates, such as M1 and M2, much less relevant to the economy. If, for some reason, the use of cash and checking accounts was somehow constrained, the economy would seamlessly move to using other means to complete transactions.
This is likely the main reason for the decline in the relationship between the money supply and nominal economic growth. However, there is another trend that is worth considering. A time-series of rolling correlations between M2 and nominal GDP doesn’t just show a decline from positive to zero over the decades – it shows a decline from strongly positive to mildly negative, with the zero correlation since the mid-1980s being an average of small positive numbers at the start of period offsetting small negatives in this century.
But how could an increase in the money supply actually predict a decline in economic activity? This may have something to do with the Fed’s use of quantitative easing as it cuts interest rates. Prior to the Great Financial Crisis, the whole idea of quantitative easing hadn’t been tried since the 1950s. However, in recent years, it has become part of the Fed’s standard toolkit. When the economy gets into trouble, the Fed both cuts short-term interest rates and engages in quantitative easing, which boosts the money supply.
However, starting from already low interest rates, it may well be that further cuts in interest rates actually cause the economy to slow, by reducing the income of savers, increasing public worries about recession and encouraging people to wait for even lower rates before completing transactions.
Meanwhile, the interest sensitive parts of the economy, including home-building and capital spending have diminished in importance and are also highly sensitive to economic expectations.
If, over the decades, the negative lagged relationship between policy interest rates and nominal GDP growth has actually turned positive, and the Fed boosts the money supply via quantitative easing at the same time as it cut interest rates, a surge in M2 may reflect a supposedly stimulative monetary policy that is actually slowing the economy down.
On the Edge of a Swamp without a Monetary Raft
This last issue may become important in the year ahead. While the money supply data does not provide a reliable guidepost for the direction of the U.S. economy, there are plenty of other signs of trouble ahead.
In particular, while first-quarter GDP, due out on Thursday, is likely to show positive growth, unemployment claims have been rising in recent weeks. In addition, survey data show a continued tightening of lending standards both as perceived by senior loan officers and small businesses. Delinquencies on consumer loans are rising and an expected restart of student loan repayments in the next few months could force consumers to retrench elsewhere. In short, the economy remains on the edge of a swamp – not in recession yet but close to one.
In recent press conferences, Jay Powell, has stressed that the Fed has the tools to restart the economy should it fall into recession. However, it is not at all clear that this is the case. Cutting short-term interest rates proved very ineffective at boosting economic growth in the last long expansion. And if the Fed decides to resort to quantitative easing to boost the money supply, the history of recent decades suggests that this won’t work either. For this reason, the Fed would be wise to stop raising rates now to avoid adding further stress to the banking system which could, indirectly, topple the economy into recession.
However, if they instead boost the federal funds rate to above 5% next week and hold it at that level throughout the rest of 2023, a return to monetary easing in 2024 would do little to boost the economy in 2024. This would be a painful outcome for many American households. However, by ushering in a new era of low inflation and low interest rates, a succession of monetary mistakes could help boost the value of both stocks and bonds.
We study the staggered introduction of a generative AI-based conversational assistant using data from 5,179 customer support agents. Access to the tool increases productivity, as measured by issues resolved per hour, by 14 percent on average, with the greatest impact on novice and low-skilled workers, and minimal impact on experienced and highly skilled workers.
We provide suggestive evidence that the AI model disseminates the potentially tacit knowledge of more able workers and helps newer workers move down the experience curve. In addition, we show that AI assistance improves customer sentiment, reduces requests for managerial intervention, and improves employee retention.
Researchers tested AI software with a customer service team of more than 5,000 agents at an unnamed Fortune 500 company that provides software to small businesses.
- The AI monitored customer chats and gave agents real-time suggestions for how to respond, including ideas for wording — key to keeping customers from growing hostile — and links to technical information to help troubleshoot issues.
- Agents were free to ignore the advice.
Use of the AI led to a 14% increase in the number of customer service chats an agent successfully responded to per hour.
- Agents spent less time handling individual chats, and were able to take care of more customers per hour — there was also a small increase in the share of chats resolved successfully.
- The AI had the biggest impact — and helped reduce turnover — among the lowest-skilled customer service agents new to the job. Experienced customer service agents saw only a slight lift.
- That’s because they already have learned the information the AI was sharing — in this case, the AI basically serves as a way for more experienced customer service agents to transfer knowledge to newbies.
One in five cars sold this year will be electric – IEA
Reproduced from IEA. (Includes fully electric and plug-in hybrid vehicles.) Chart: Axios Visuals
The S&P 500 is rising, but fewer members are in uptrends
When Money Stops Talking