Year: 2023

CONSUMER WATCH

U.S. Watch: Have consumers overstretched themselves? (NBF)

The U.S. GDP data released just under two weeks ago were truly impressive, with the economy growing by no less than 4.9% annualized in the third quarter, boosted by a significant increase in household spending. In fact, the data was so strong that many analysts began to doubt that the Federal Reserve had done enough to bring supply and demand back into better balance.

But while recognizing the economy’s amazing resilience in the face of aggressive monetary tightening by the central bank, our group did express some reservations about the sustainability of consumption spending.

Our doubts stemmed in large part from the fact that rising household spending in Q3 had not been accompanied by a corollary increase in disposable income but was rather the result of a significant drop in the savings rate (which is counterintuitive in a world of higher interest rates).

We felt consumers had been incentivized to spend beyond their means by cultural phenomena such as the Taylor Swift and Beyonce concert tours and the Hollywood blockbusters Barbie and Oppenheimer. As such, we feared that the burst of vigor would be short-lived.

Data published today by the New York Fed (in partnership with Equifax) seemed to corroborate this view, pointing to consumers’ growing difficulty in servicing their debts.

As today’s Hot Chart shows, the percentage of outstanding credit card and auto loans transitioning into serious delinquency (90+days) indeed rose to a 12- and 13-year high, respectively, in Q3. In the case of credit cards, the increase in delinquency rates from one quarter to the next was even the largest recorded to date.

And with interest rates having continued to rise on average in Q4, another increase in the last three months of the year looks inevitable, especially as payments on student debt have now resumed.

To be sure, these payments are now back to their pre-pandemic level (around $7 billion per month) according to data published by the U.S. Treasury, a development that is likely to squeeze consumers further.

For these reasons, we continue to expect a marked slowdown in consumption – and hence GDP growth – in the fourth quarter. The latter should settle at around 1.0%/1.5% annualized before slowing further in early 2024.

“The continued rise in credit card delinquency rates is broad based across area income and region, but particularly pronounced among millennials and those with auto loans or student loans,” Donghoon Lee, an economic research adviser at the New York Fed, said in a press release

Transition into serious delinquency (i.e. 90+ days) continued to rise for all loan types other than student loans & home equity loans. (@Econ_Parker)

Credit card and auto loan transition rates have surpassed their pre-COVID level and are trending higher.  The share of loan balances in serious delinquency remained below pre-COVID levels for all loan types but credit cards are rising most rapidly. 

The early transition rate for mortgage delinquencies (i.e. into 30-60 days late) has climbed back to roughly the pre-COVID level along with the transition rate into seriously delinquent. 

Credit card & auto loan stress has been concentrated in younger age groups, with the transition rate into serious delinquency of the 30-39-year-old cohort rising most rapidly and far surpassing the pre-COVID rate.

• Ebay forecast fourth-quarter revenue and profit below Wall Street estimates on Tuesday and joined other e-commerce platforms in sounding the alarm on weaker-than-expected consumer spending.

Some relief:

• Futures for wholesale gasoline are now at their lowest level of the year, thanks to both the decline in oil prices, and refiner margin compression. (Bloomberg’s Joe Weisenthal)

In Canada (with the usual lags!):

(NBF)

Eurozone Recession: Increasingly Possible, But Not Yet Inevitable

• The Eurozone has continued to deliver disappointing economic data as Q3 GDP shrank 0.1% quarter-over-quarter, the first decline (outside of the pandemic) since early 2013. With recent activity and survey data remaining soft, the natural question to ask is whether the Eurozone is on the cusp of, or perhaps already in, recession.

• One notable area of weakness has been consumer spending. That said, we believe the worst of the consumer slowdown may now have largely passed, as real household income trends have turned more positive and household interest costs have risen only moderately. We do, however, expect a further slowdown in investment spending given slowing corporate profit growth and declining capacity utilization rates.

• The mixed outlook for consumer and investment spending leaves the Eurozone very close to recession. While we are not calling for recession just yet, should the PMI surveys stay at their current contractionary levels in the months ahead or soften further, an economic downturn may eventually become unavoidable.

• The underwhelming growth outlook means European Central Bank (ECB) rate hikes are very likely done, with the most recent progress on the inflation front reinforcing the view that the peak in policy rates has already been reached. However, we believe the ECB will still want to see underlying inflation trends move closer to, and remain near, its 2% inflation target before it becomes comfortable embarking on a monetary easing cycle.

• Against that backdrop, we do not forecast an initial ECB rate cut until the June 2024 meeting, although a steady series of rate cuts after that should see the ECB lower its Deposit Rate by a cumulative 150 bps to 2.50% between mid 2024 and early 2025. Overall, we view the risks as skewed toward the ECB lowering interest rates earlier, or more aggressively, than generally expected.

The latest PMI details were not encouraging:

• In fact, the rate of decrease in business activity accelerated since September and was the strongest since November 2020. Fragile demand conditions also remained a notable feature of the survey results, with overall new business intakes falling at the quickest rate since September 2012, during the sovereign debt crisis, when pandemic-affected months are excluded. New business from abroad was a considerable drag, falling at one of the steepest rates since this particular series was first compiled in 2014.
• A darkened economic outlook was also reflected by a stagnation of employment, ending a 32-month period of job creation.
• It looks like the service sector in the Eurozone is stumbling out of the gates for this final quarter. October marks the third straight month of business activity taking a hit. With new business diving steeply, it is not painting a rosy picture for what is ahead.
• With the exception of Spain (where private sector activity stagnated in October), declines in output were broad-based across the euro area constituents monitored. Germany and France continued to contract sharply, and Italy posted the fastest deterioration for a year. Ireland registered the first decline in output in 11 months, albeit one that was only slight.
• While business activity has moved into recessionary territory, indices for prices remained well above 50. There is a name for it, stagflation.
• International business, which includes tourism, took a major hit with one of the biggest drops since 2014. This segment has been on a downward trend since June. It indicates that tourism, which had been a major source of support especially for the southern European countries, is evaporating.
• All in all, GDP of the Eurozone may well fall in the fourth quarter.

Eurozone retail sales continued to trend down in September The 0.3% drop in retail sales in September confirms a continued weak consumption environment for goods.

China Car Sales Surge on Promotions and Boom in Electric Vehicles October sales climb most in five months, car association says

Sales rose 10.2% from a year earlier to 2.03 million vehicles, data from China’s Passenger Car Association showed Wednesday. Of those, 767,000 were electric vehicles and plug-in hybrids, an increase of 37.5%. Exports rose 49%, with 391,000 cars shipped abroad.

Dubbed “Golden September and Silver October,” the fall season in the world’s largest auto market usually sees car deliveries increase as production picks up after the summer holidays and carmakers push to reach annual sales targets. (…)

EVs accounted for almost 38% of new car sales, the highest in 12 months.

Tesla Inc. produced 72,115 cars at its Shanghai plant last month, of which 43,489 were exported. Having started a price war in China’s EV market a year ago, Tesla said this week it will raise the price of some of its cars, including the updated version of Model Y variants.

China’s Ping An Exited Its Country Garden Stake, Has No Takeover Plan Speculation over Country Garden’s fate has been swirling.

Ping An Insurance (Group) Co. sold all of its shares in Country Garden Holdings Co. and has no plans to acquire the distressed developer, according to people with knowledge of the matter.

The Chinese insurer offloaded the stake last quarter, the people said, asking not to be identified because the matter is private. Ping An held 4.9% of Country Garden shares as of August, according to data compiled by Bloomberg.

Reuters reported earlier Wednesday that China’s State Council instructed the local government of Guangdong province to ask the company to take a controlling stake in Country Garden. Ping An said the report is untrue and it hasn’t received any such requests. Country Garden said the company wasn’t aware of the information in the report. (…)

As a non-state company, Ping An lacks ready access to government funding of the sort that would likely be required to restore market confidence in Country Garden without putting the insurer’s own financial health in doubt. (…)

Thawing US-China ties following high-level meetings are sending “positive signals,” China’s Vice President Han Zheng said. Joe Biden and Xi Jinping are expected to meet Nov. 15 in San Francisco, Kyodo News reported.

• Chinese President Xi Jinping is set to be the guest of honor at a dinner with top US business executives when he visits San Francisco for the Asia-Pacific Economic Cooperation summit next week, according to people familiar with the matter. The meeting comes amid China’s faltering efforts to win back foreigners as data shows more direct investment flowing out of the country than coming in, suggesting companies may be diversifying their supply chains to reduce risks.

The October 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices

(…) Regarding loans to businesses, survey respondents, on balance, reported tighter standards and weaker demand for commercial and industrial (C&I) loans to firms of all sizes over the third quarter.

Furthermore, banks reported tighter standards and weaker demand for all commercial real estate (CRE) loan categories.

For loans to households, banks reported that lending standards tightened across all categories of residential real estate (RRE) loans other than government residential mortgages, for which standards remained basically unchanged. Meanwhile, demand weakened for all RRE loan categories.

In addition, banks reported tighter standards and weaker demand for home equity lines of credit (HELOCs). Moreover, for credit card, auto, and other consumer loans, standards reportedly tightened, and demand weakened on balance. (…)

Banks most frequently cited a less favorable or more uncertain economic outlook; reduced tolerance for risk; deterioration in the credit quality of loans and collateral values; and concerns about funding costs as important reasons for tightening lending standards over the third quarter. (…)

Among all the charts in the SLOOS report, this is the critical one: consumers demand for all types of loans is falling.

Regarding demand for consumer loans, significant net shares of banks reported weaker demand for auto and other consumer loans, while a modest net share of banks reported weaker demand for credit card loans.

The holiday spending outlook is sluggish across thousands of retailers: CNBC Supply Chain Survey

As holiday shopping season begins, lack of big orders from retailers is the rule amid fears that consumer spending will be weak, according to a new CNBC Supply Chain Survey.

At C.H. Robinson, which serves 7,500 retailers, customers are generally being cautious, said Noah Hoffman, vice president for North American Surface Transportation, with inflation still an issue and ongoing uncertainty about the U.S. economy and risk of recession.

“The largest retailers are past working through their excess inventories, but careful not to over-order,” Hoffman said, while some of the small- to medium-sized retailers are still destocking.

The national inventory-to-sales ratio, which on the surface appears to have returned to a pre-pandemic level, is skewed by the largest retailers, he said, adding that, “further upstream in the retail supply chain, many wholesalers are also still carrying excess inventory.”

C.H. Robinson’s economics team believes that the economy is approaching an inflection point in consumer spending as Americans deplete savings they built up from pandemic stimulus.

“We’re already seeing this emerge in some leading indicators like loan and credit-card delinquencies,” Hoffman said.

During earnings, major U.S. banks have presented a picture of the consumer that is more resilient. “Where am I seeing softness in [consumer] credit?” said JPMorgan chief financial officer Jeremy Barnum, repeating an analyst’s question on the bank’s earnings call. “I think the answer to that is actually nowhere.”

But the recent message from retailers and shippers has been more pessimistic. At the CNBC Evolve Global Summit last Thursday, Target CEO Brian Cornell said the company is doubling down on its cautious outlook for the holiday season. At the same event, FedEx CEO Raj Subramaniam said that while the destocking period has ended for retailers, restocking has not been widespread.

A majority of logistics firms (67%) say that products being moved into stores this holiday season are more promotional, lower-cost items into the store. An even larger majority (83%) indicated that they are not moving more higher-priced items. (…)

“Retailers are finding that the items they rely on to bring people into the store and boost sales are costing them more,” Hoffman said. “That’s limiting how much they can discount so we’re working with them to find savings elsewhere in their supply chains.” (…)

Starting in November, logistics companies start to receive orders from shippers ahead of Lunar New Year. Traditionally, manufacturing plants in China shut down for around a month, so shippers bring products in ahead of time to avoid delays. The survey finds that there is a similarly muted outlook for orders surrounding Lunar New Year, which falls on February 10, with a majority of respondents (67%) not seeing an order increase. (…)

The survey finds respondents split in their outlook for 2024. In the first half of 2024, 34% expect freight volumes to be down either 5% or 10%; 33% of participants said it would be unchanged; and an equal percentage expect an increase of 5%. (…)

Trucking companies get paid per load, and the low expectations for orders imply potentially lower revenue this holiday season. Logistics executives were split on LTL (less-than-truckload) freight rates for the first quarter, with half looking for a 5% bump and the other half expecting rates to be unchanged to down as much as 15%.

The majority believe rates for full truck loads will be unchanged or down, while 33% expect prices to be up marginally at 5%. (…)

This chart confirms wholesalers’ excess inventories. Since the end of 2019, both merchant categories recorded similar growth in sales.

The New Headache for Bosses: Workers Aren’t Quitting Just last year, companies were struggling to keep staff. Now, they say not enough people are leaving their jobs.

(…) Turnover has declined so steeply at some large employers that companies now find themselves over budget on certain teams, requiring leaders to weigh whether to postpone projects or to cut additional staff as the end of year approaches. Other bosses worry about how to keep star employees engaged when there are far fewer vacant positions internally, making it harder to move people into new roles.

Companies such as Bank of America and drugmaker Ferring Pharmaceuticals said they have seen fewer employees leave their jobs this year. In some cases, executives said, turnover is returning to prepandemic levels following years of upheaval in the labor market. 

“The attrition level is going down, that’s for sure,” said Denis Machuel, chief executive of global staffing firm Adecco Group, which works with large employers. “People feel it’s probably a bit cold outside with the macroeconomics not being so good. And with this last-in, first-out typical scheme, they’re more likely to stay in their current role.” (…)

Morgan Stanley had layoffs in recent months in part because of low attrition within the 80,000-person Wall Street firm, CEO James Gorman said on a call with investors in mid-October.

“Really high performers are in demand across the Street, but we’ve actually had the opposite issue,” Gorman said. “We’ve had very low attrition, which is why we did some of the expense initiatives.”

Wells Fargo’s Chief Financial Officer Mike Santomassimo told investors this summer that attrition has been slower than expected at the company and that the bank planned to record higher severance expenses to reduce its head count. He reiterated the message in mid-October, telling investors that the company believed it still had more jobs to cut, as attrition has remained low, which will likely result in additional severance costs next year. (…)

Employers try to accurately predict how many staffers will quit in a given year to help set budgets for teams and establish hiring plans. At the software provider ServiceNow, the company uses a machine-learning model to anticipate the number of employees it expects will step down each quarter. Voluntary turnover this year has fallen below levels forecast by those models, said Sarah Tilley, senior vice president of global talent. She didn’t cite specific figures, but attrition among top-performing employees in 2023 is less than half of what it was in 2022. (…)

In surveys of workers, many show a newfound commitment to their current employers. This year, 73% of workers said they planned to stay at their jobs, up from 61% last year, according to a survey released in October by Adecco. (…)

Staying put is a sign of cautiousness.

Taking multiple jobs is a sign of financial stress. The number of multiple jobholders has surged recently. As a percent of employeds, it is back to pre-pandemic levels and the highest since the GFC. Less buffer.

• The Fed’s Neel Kashkari told the WSJ that overtightening monetary policy is preferable to doing too little and added that he’s concerned that inflation could tick up again. He later told Fox it’s “too soon” to declare victory over inflation, adding that three months of promising numbers on inflation isn’t enough.

China’s Import Surprise Offers Hope as Recovery Risks Linger Imports increased 3%, bucking forecast for a decline
but exports’ worse-than-expected drop adds to mixed signals

Imports rose 3% from a year earlier last month, the first gain in eight months and bucking the consensus forecast for a drop. Overseas shipments dropped 6.4%, worse than expectations. The resulting trade surplus was $56.5 billion. (…)

Import growth suggests domestic demand may be recovering, but the decline in exports was a big disappointment for a period that should have been more favorable: This October compared to a month in 2022 when the pandemic and controls to contain it disrupted logistics and production. (…)

For China, however, exports to the US declined 8.2% in the first 10 months from a year ago in dollar terms, while that to the European Union dropped 12.6%, according to customs data. (…)

The volume of China’s crude oil imports climbed 14.4% in the first 10 months of the year from a year ago, while that of coal surged 66.8%, according to customs data.

• Taiwan’s Exports Fell in October in Sign Demand Remains Weak

Overseas shipments dropped 4.5% last month from a year earlier, the Ministry of Finance said in a statement on Tuesday. That was despite exports rising in September for the first time in more than a year.

Imports shrank 12.3%, compared to economist expectations for a 15.2% decline. (…) Overseas shipments of chips fell 6.5% in October. (…)