Year: 2023

Job Openings Near Two-Year Low as Layoffs Jump Construction, leisure and hospitality and healthcare cuts drive March increase in layoffs

Layoffs rose to a seasonally adjusted 1.8 million in March from the prior month, up from a revised 1.6 million in February, the Labor Department said Tuesday. The increase was led by job losses in construction, leisure and hospitality and healthcare industries—sectors that have driven job growth in recent months as tech, finance and other white-collar industries cooled.

Employers also reported a seasonally adjusted 9.6 million job openings in March, the Labor Department said Tuesday, a decrease from a revised 10 million openings in February. (…)

Data: Department of Labor; Chart: Axios Visuals

The decline in job openings has been steep since December; -1.6M or -14.6%. However, job postings on Indeed have stabilized in April (through April 28).

April PMI surveys indicated continued resilience in labor demand:

• “the rate of job creation accelerated at the start of the second quarter of the year. Growth in private sector employment numbers was the quickest since last July as goods producers and service providers showed some success in efforts to expand capacity. Nonetheless, backlogs of work increased for the second month running as companies mentioned further struggles finding suitable candidates and retaining staff amid rising wage costs.”
• [April marked] “the fastest rise in employment at service providers since July 2022” as “new business grew for the second successive month in April, as the rate of expansion accelerated to the fastest since May 2022.”
• “Manufacturers expanded workforce numbers at the fastest pace in seven months in an effort to broaden capacity [given the] return of new order growth following six successive months of contraction.”

While we’re at it, here’s what purchasing managers were saying about costs and price increases:

• “Meanwhile, [manufacturers’] input costs and output charges increased at steeper rates during April. Higher supplier prices reportedly drove inflation as firms passed through greater operating expenses to customers. The rate of cost inflation quickened to the sharpest in three months, while the pace of increase in selling prices also accelerated above the series average.”
• “[Service providers’] selling prices increased at a sharper pace, as firms responded to higher cost burdens by passing these through to customers where possible amid more accommodative demand conditions. The rate of inflation accelerated for the third month running and was the quickest since last August.”

Recall that for service providers, the main costs are labor and energy. Given the decline in energy costs in recent quarters, their “higher cost burdens” must be labor.

One and done?

• Employees Are Bullish on Pay Raises, Companies Not So Much Workers are anticipating bigger increases than last year while companies are pulling back on earlier projections.

Businesses are still handing out substantial pay increases, though less than what they projected last fall, according to a new survey of nearly 1,000 major employers by benefits-advisory firm Mercer.

On average, employers are giving annual merit raises of 3.8% and total compensation increases of 4.1% in 2023—still the highest-reported raises in the survey since the 2008 financial crisis.

The companies also said they were being more cautious in doling out off-cycle raises and bonuses this year, a departure from 2022 and 2021, when employers were scrambling to address labor shortages and keep talent. Additional levels of approval are now required for raises at some companies, while others are limiting unbudgeted raises to a smaller number of employees, said Lauren Mason, senior principal in Mercer’s career practice. (…)

Increases in employee base pay rose an average 3.4% between October and March, down from 4.7% in between January and September of last year, according to Mercer.

Meanwhile, a majority of U.S. employees say they are confident they’ll get a pay raise this year and, on average, expect one of 6.7%, according to a recent survey of 2,000 workers by the research arm of payroll provider ADP. Last year, workers received an average 6.5% increase, ADP data show. (…)

The employment cost index was up around 5% YoY and sequentially in Q1.

The Atlanta Fed wage growth tracker reached +6.4% in March, +5.9% for job stayers. These are 3-m moving averages.

Mission not accomplished just yet…

• NYC Board Proposes Up to 7% Hike for Rent-Stabilized Apartments

Tenants in New York City’s 1 million rent-stabilized apartments could potentially face increases of 4% to 7% for two-year leases as a key panel offered preliminary support for price hikes.

The city’s Rent Guidelines Board also endorsed 2% to 5% increases on one-year leases at a meeting Tuesday. If rent hikes in those ranges are approved at a final vote in June, it would be the second year in a row of more substantial increases.

More than 2 million New Yorkers live in stabilized units and may face higher costs when renewing their leases starting Oct. 1. The increases for rent-stabilized apartments would compare with a nearly 13% rise in the median rent on new leases for market-rate Manhattan apartments tracked by appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. (…)

During former Mayor Bill de Blasio’s tenure, the board approved small rent hikes of less than 3% and also froze rents multiple times. Last year, under the Adams administration, the panel increased rents 3.25% on one-year leases and 5% on two-year leases. (…)

The board typically votes on the proposed rent guidelines each June. An earlier report from the panel’s staff detailed how rents would have to rise 5.3% to 8.25% for one-year leases and 6.6% to 15.75% on two-year leases to keep net operating income constant for the apartments based on various formulas. (…)

Owners’ expenses have increased 8.1% through March 2023 from a year earlier, according to the board’s analysis. Higher taxes, driven by rising assessments, as well as gains in fuel and insurance costs contributed to the increase in expenses. That’s pressured the margins for landlords, with net operating income — revenue that remains after operating costs are paid — falling 9.1% from 2020 to 2021 citywide for buildings with rent-stabilized apartments. (…)

Vehicles Sales at 15.91 million SAAR in April; Up 11.4% YoY

Wards Auto estimates sales of 15.91 million SAAR in April 2023 (Seasonally Adjusted Annual Rate), up 7.4% from the March sales rate, and up 11.4% from April 2022.  (…)

Regional Bank Stocks Close at Lowest Since 2020 Shares of a number of midsize lenders fell sharply Tuesday following the collapse of First Republic Bank, a sign that investors are still worried about the industry’s health.

Banks that took a hit following the March collapse of Silicon Valley Bank fell the most. Los Angeles-based PacWest dropped 28%, while Phoenix-based Western Alliance fell 15%. Metropolitan Bank, based in New York, declined 20%.

A broader index of regional-bank stocks fell more than 5% to its lowest close since 2020. Citizens, Truist and U.S. Bank each shed about 7%. The biggest banks also fell but the declines were less severe. Bank of America and Wells Fargo slid a respective 3% and 4%, while JPMorgan was down nearly 2%.

Stocks were broadly lower, with the three major indexes each losing about 1%. (…)

Many banks reported modest declines in deposits and lowered their profit forecasts, saying they would have to pay higher interest on savings accounts and certificates of deposits to keep customers around.

“The failures created an inflection point for the industry,” Huntington Bank Chief Executive Steve Steinour told The Wall Street Journal.

The KBW Regional Banking Index has lost 8% this week to hit its lowest since 2020.

• Bank Pain Is Just Getting Started, Ex-Fed President Kaplan Says

(…) “I’d prefer to do what’s called the hawkish pause, not raise but signal that we are in a tightening stance, because I actually think the banking situation may well be more serious than we currently understand,” Kaplan, whose career has also included time as a senior executive at Goldman Sachs Group Inc., said in a Bloomberg Television interview.

Kaplan went on to say that bank equities have been marked down solely because of their over-investment in US Treasuries, while the credit phase, which is “normally more serious,” is yet to unfold. (…)\

“It is more important to be able to sustain the current rate for an extended period of time, longer than the market thinks, than to get another 25-50 basis points and risk having to cut again. I think that will be very troubling,” said Kaplan, who left the Fed in 2021 after disclosures about his trading activity that drew criticism for potential conflicts of interest.

To combat inflation, the US need fiscal restraints and actions outside the authority of the Federal Reserve, “so I will pause here,” he added.

Toronto home sales jump 27 per cent in April, home prices spike Number of new listings was up 6.5 per cent after adjusting for seasonal influences, but is still well below the 10-year average

The weak stuff getting weaker

Russell looks to be falling below the lower part of the huge range. Note we have not closed this low since October last year. (The Market Ear)

Refinitiv

Druckenmiller Warns US Debt Crisis Worse Than He Imagined

(…) “honestly, all this focus on the debt ceiling instead of the future fiscal issue is like sitting on the beach at Santa Monica worrying about whether a 30-foot wave will damage the pier when you know there’s a 200-foot tsunami just 10 miles out.” (…)

The big issue is entitlements such as Social Security, Medicare and Medicaid, which without cuts today will have to be slashed in the future, he said. (…)

Spending on seniors will reach 100% of federal tax revenues by 2040 based on Congressional Budget Office estimates, he said, including interest expense. What’s more, the current $31 trillion US debt load doesn’t account for future entitlement payments. Accounting for the present value of that burden, the debt load is more like $200 trillion, he estimated. (…)

BTW: “The federal government missed out on locking in low long-term rates in recent years, causing interest payments to surge.” (The Daily Shot)

Gavekal Research

Copper Mine Flashes Warning of ‘Huge Crisis’ for World Supply

(…) “There’s no way we can supply the amount of copper in the next 10 years to drive the energy transition and carbon zero. It’s not going to happen,” adds Kirwin, now an independent consulting geologist. “There’s just not enough copper deposits being found or developed.”

Analysts at Wood Mackenzie estimate a greener world will be short about six million tons of copper by next decade, meaning 12 new Oyu Tolgois need to come online within that period.

But they aren’t — there are simply not enough new mines, much less enough large ones. The result is a gap: BloombergNEF estimates appetite for refined copper will grow by 53% by 2040, but mine supply will climb only 16%. (…)

Building mines, as opposed to buying them, is still too painful a headache. Prices are not shiny enough to cover rising costs, and risks abound. Take Oyu Tolgoi, where construction has involved adding a 200km labyrinth of concrete tunnels to the open pit, but also roads, an airport, power transmission and water infrastructure. Never mind Mongolia’s largest canteen, for 20,000 or so workers — and, Mongolia hopes, an eventual power plant. (…)

“Oyu Tolgoi is now 20 years old, and it’s just getting started,” he said. “It doesn’t matter whether the copper price is $3 a pound or $30 a pound, you can’t speed up the process materially.” (…)

“Mines are getting older, mines are getting deeper, and mines are getting lower grade,” said David Radclyffe, managing director at Global Mining Research. “Then you’ve had the added complications of the need to conform with the shift in terms of environmental requirements. And political risk on top of that.” (…)

“The uncertainty out of both Chile and now ongoing in Peru, that’s just added an extra level of complexity that the market never expected, and that hasn’t really been resolved.” (…)

MANUFACTURING PMIs

USA: PMI signals expansion for first time in six months, but improvement sparks higher price pressures

The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI™) posted 50.2 in April, up from 49.2 in March, and broadly in line with the earlier released ‘flash’ estimate of 50.4. The latest index reading was the first to post above the 50.0 neutral mark for six months and was the highest since October 2022.

Supporting the renewed overall upturn was a return of new order growth following six successive months of contraction. The rise in new sales was only fractional, however, as manufacturers continued to note hesitancy among customers to place orders amid higher prices and global economic uncertainty. The improvement in demand was also limited to the domestic market, as new export orders contracted for an eleventh consecutive month and at a solid pace.

Meanwhile, input costs and output charges increased at steeper rates during April. Higher supplier prices reportedly drove inflation as firms passed through greater operating expenses to customers. The rate of cost inflation quickened to the sharpest in three months, while the pace of increase in selling prices also accelerated above the series average. (…)

The filling of long-held vacancies and anticipations of greater new order inflows to come led to a stronger increase in employment in April. Manufacturers expanded workforce numbers at the fastest pace in seven months in an effort to broaden capacity.

Manufacturers were upbeat in their year-ahead output expectations in April. The degree of optimism rose to the strongest for three months and was broadly in line with the series long-run average. Planned investment, greater supply chain reliability and hopes of an uptick in client demand reportedly drove confidence.

The ISM: Economic activity in the manufacturing sector contracted in April for the sixth consecutive month

           New Orders                          Customers’ Inventories

  

WHAT RESPONDENTS ARE SAYING

• “Having invested heavily to de-risk the supply chain over the last three years due to COVID-19, we are looking to reset with a number of our suppliers to reduce inventory, which has grown steadily over that period. Lead times are generally coming down, although electronic components are still a concern.” [Computer & Electronic Products]
  

• “Business continues to contract, albeit slowly year over year. We are burning existing inventory when possible and catching up on orders. Suppliers are shipping materials at a faster pace, especially to get the payable process started at the end of the first quarter. Employment is steady, with manpower decisions based on expected order flow in the second quarter, which is subject to change. Staffing levels in our sector are not decreasing, but employment openings are slowing across the economy, which reduces the pool of replacement candidates. We are currently projecting that the third quarter will see some improvement in business, especially in our metals coating for the aerospace industry. But unforeseen circumstances — international or domestic — could change things quickly.” [Chemical Products]
  

• “Pricing pressures continue to plague daily operations. After consecutive years of inflation and aggressive pricing to our retailers, we are starting to see resistance in the willingness to pass along pricing to end consumers. Discounting has entered into conversations.” [Food, Beverage & Tobacco Products]
  

• “Business is steady. Closely monitoring demand going forward to detect a negative trend.” [Transportation Equipment]
  

• “Customers seem to be quite heavy on inventory (as is my employer). This has made for a significant slowdown in sales orders for the last number of months.” [Machinery]
  

• “Faster deliveries and shorter lead times from suppliers. … Customers starting to talk build rate reductions for the second half of 2023.” [Fabricated Metal Products]
  

• “Business conditions remain strong, with sales and bookings exceeding plan. The backlog continues to grow due to increased bookings and supply chain constraints on electronic components.” [Miscellaneous Manufacturing]
  

• “Sales continue to be soft, similar to 2019 pre-COVID. Expect softness to last for as long as another two years.” [Electrical Equipment, Appliances & Components]
  

• “Business is picking up a bit in the automotive and construction industries — not on par with 2022 but beginning to look better.” [Plastics & Rubber Products]
  

• “We seem to be in a season of contradictions. Business is slowing, but in some ways, it isn’t. Prices for some commodities are stabilizing, but not for others. Some product shortages are over, others aren’t. Trucking is more plentiful, except when it isn’t. There’s uncertainty one day, but not the next. The next couple of months should provide answers — or not. It’s hard to make projections at the moment.” [Primary Metals]

Canada: Slight improvement in operating conditions during April

Operating conditions in Canada’s manufacturing sector were little-changed during April. Although output and employment both increased, order books fell modestly, and firms were cautious with regards their purchasing and stock management policies. Confidence in the future was a little lower, whilst input prices increased at a sharper rate. Output prices, however, rose to the weakest degree in nearly three years.

The seasonally adjusted S&P Global Canada Manufacturing Purchasing Managers’ Index® (PMI®) posted 50.2 during April, up from March’s 48.6. Posting just above the crucial 50.0 no-change mark that separates growth from contraction, the index signalled a marginal improvement in operating conditions since the previous month.

Growth was linked to a marginal rise in output. Firms attributed this in part to a rise in capacity capabilities, with some panellists signalling better stability in labour provision. Employment growth was sustained, and the rate of increase accelerated since March to reach its highest level since June 2022. Companies reported that jobs were added in anticipation of higher sales, but also to help to keep on top of workloads. Levels of work outstanding declined for a ninth successive month, and the rate of contraction was again solid.

Firms were able to make cuts to backlogs due to extra capacity and increased output, but also because incoming new orders fell modestly for a second successive month. Export sales were also down again, extending the current sequence of contraction to just under a year. Firms reported hesitancy amongst clients in decision-making, reflective in part ongoing concerns over elevated inflation and the future direction of the economy. These factors also weighed on confidence amongst Canadian manufacturers themselves, with optimism down on March’s 11-month high and to a level just below trend.

Prices paid for inputs rose sharply in April, with the rate of inflation accelerating to its highest level of the year so far. Companies signalled costs were rising generally across a wide range of goods. Higher transportation costs were also cited as a factor driving inflation. There were also reports of higher supplier surcharges being applied. This was despite some signs of improved stability in the supply of inputs. Latest data showed that average lead times worsened again in April, but only slightly and to the smallest degree in over three-and-a-half years of worsening supplier performance.

With manufacturers facing the opposing forces of sharply rising input costs but soft sales, output charges continued to be increased during April. However, the rate of inflation was the lowest recorded by the survey in just under three years.

Euro area manufacturing production falls for first time since January

The eurozone manufacturing sector saw operating conditions worsen to a greater extent at the start of the second quarter, latest HCOB survey data compiled by S&P Global showed, as production volumes fell for the first time since the beginning of the year. Additionally, new factory orders across the euro area fell at the sharpest pace in four months as the downturn in demand intensified.

Meanwhile, eurozone manufacturers recorded a second successive month-on-month decrease in their input costs. The decrease in operating expenses was the fastest in almost three years, with rapidly improving supply conditions helping to cool inflationary pressures. Indeed, another survey-record shortening in average input delivery times was registered in April.

The HCOB Eurozone Manufacturing PMI®, compiled by S&P Global, posted 45.8 during April, down from 47.3 in March and below the 50.0 no-change mark that separates growth from contraction for a tenth straight month. The headline figure also signalled the fastest deterioration in manufacturing sector conditions since May 2020, during the first wave of COVID-19 lockdowns.

Of the eight eurozone countries monitored by the survey (which account for an estimated 89% of total manufacturing activity), seven posted a sub-50.0 Manufacturing PMI reading in April. The lowest was in Austria (42.0), although this primarily reflected a considerable downward influence from the Suppliers’ Delivery Times Index reaching a fresh survey high. This was also the case in Germany (44.5), the second-weakest performer in April. Greece (52.4) was the only monitored euro area constituent to see an expansion during the latest survey period.

Eurozone manufacturers recorded a renewed decrease in output during April, contrasting with back-to-back expansions in the two previous survey periods. The decrease was modest overall, but the quickest since December last year. Driving production levels lower was a faster deterioration in demand conditions at the start of the second quarter. New orders fell for the twelfth month running, with the rate of decline accelerating since March to its quickest in four months. According to panel members, customer hesitancy and high client inventory levels restricted new business intakes. Demand from international markets also dipped again in April, with the decrease in new export orders also quickening.

There was clear evidence of spare capacity across the euro area manufacturing sector during April, with backlogs of work falling for an eleventh consecutive month and at the steepest rate since last November. With factory new orders decreasing, purchasing activity continued to fall in April as firms responded to reduced production requirements. The decline quickened markedly since March and was the strongest for five months.

With manufacturers cutting back their buying more aggressively in April, capacity at vendors feeding into the euro area was freed up, facilitating speedier deliveries. Supplier delivery times shortened to the greatest extent since the survey began in 1997, surpassing the previous record set only in March. Amid improved supply conditions and persistent purchasing cutbacks, pre-production inventories across the euro area fell for a third month in succession during the latest survey period. The rate of depletion was the strongest since January 2021.

According to surveyed companies, quicker delivery times reflected greater availability of raw materials, with reduced competition across the market also boosting supply. Indeed, greater balance between supply and demand drove manufacturers’ costs lower during April for the second month running, with firms often commenting on successful price negotiations with vendors. The decrease in average input costs was marked and the quickest for nearly three years. Meanwhile, factory gate charges rose, albeit to the weakest extent since November 2020.

Looking ahead, eurozone manufacturers were optimistic of growth over the next 12 months, with confidence in the outlook strengthening slightly since March. Surveyed companies also expanded their workforce numbers for the twenty-seventh successive month, although the rate of job creation eased to the slowest since February 2021.

Japan: Softer deterioration in Japanese manufacturing conditions

The downturn in the Japanese manufacturing sector softened at the start of the second quarter of 2023. Weak domestic and global economic trends reportedly led to sustained contractions in production and order books. That said, the latter fell at the slowest rate for nine months. Businesses also signalled that supply chains continued on their path to recovery, as average lead times lengthened by the smallest degree in the current 39-month sequence of deterioration. Concurrently, input costs rose at the slowest pace since August 2021. That said, input price inflation was still historically elevated, and contributed to a steeper rate of charge inflation that was the strongest since last October.

The headline au Jibun Bank Japan Manufacturing Purchasing Managers’ Index™ (PMI) rose from 49.2 in March to 49.5 in April to indicate a sixth successive deterioration in the health of the Japanese manufacturing sector. The latest reading was only mild and the softest reduction in the sequence.

The improvement in the reading came from a slower reduction in total new order inflows. Firms registered a tenth consecutive reduction, but the rate of contraction was the softest since last November. Weak economic conditions domestically and globally reportedly weighed on demand and client confidence, though some firms mentioned that inbound demand had stabilised somewhat. As such, the rate of reduction in foreign demand for Japanese manufactured goods eased to the slowest for six months. (…)

As new orders remained in contraction territory, Japanese manufacturers allocated resources to complete outstanding business, as indicated by a seventh successive reduction in backlogs of work. Moreover, firms also took the opportunity to continue building up their workforces in preparation for an eventual demand recovery. Employment levels rose for the twenty-fifth month in a row and at the strongest pace since last October. (…)

April data was indicative of a sustained trimming of input buying at Japanese manufacturing firms. The decline was solid overall and quickened from the previous survey month, reflecting the sharper downturn in output. Nevertheless, holdings of both pre- and post­production inventories accumulated in April, albeit only modestly.

The year-ahead outlook for output remained positive during April. Firms were hopeful of a strong market recovery which would encourage new product launches and demand improvements. Business confidence was robust overall, and little-changed from March’s 14-month high.

China’s Consumers Lead Recovery in April Retail spending has come back strong, but surveys also showed a surprise contraction in factory activity in April

China’s official purchasing managers index for the nonmanufacturing sectors of the economy—that is, services and construction—came in at 56.4 in April, a weaker reading than March’s 58.2 level but still comfortably above the 50 mark that separates expansion from contraction, according to data released Sunday by China’s National Bureau of Statistics.

A similar gauge of activity in manufacturing fell unexpectedly below the 50 line in April, falling to 49.2 from the previous month’s 51.9 reading, suggesting activity in the sector shrank over the past month. (…)

Weakening external market has started to put pressure on the domestic market

Source: CEIC, ING

The Caixin China General Manufacturing PMI will be out Thursday.

Tight Supply Fuels Demand for Newly Built Homes A recent fall in mortgage rates relieves a source of industry pressure.

Now, new single-family home sales are bouncing back with supply tight in the existing-home market. Active listings in March stood at roughly half of where they were four years earlier, according to Realtor.com, in part because higher mortgage rates made many homeowners reluctant to sell and give up their current low rates. (News Corp, parent of the Journal, operates Realtor.com.)

That low inventory has put home builders in a good spot. Newly built homes made up about one-third of single-family homes for sale in March, up from a historical norm of 10% to 20%. (…)

“The consumer has really adjusted to this new rate environment,” said Sheryl Palmer, chief executive of Scottsdale, Ariz.-based builder Taylor Morrison Home, on an earnings call last week. “They no longer believe that rates are going to return to 3% or 4%.” (…)

• The Building Boom Is Prolonging Market Pain Construction employment is higher than ever—undermining bets the Fed will soon pivot

Construction spending and employment have risen to new records this year, boosted by government outlays for infrastructure, a domestic manufacturing renaissance and a wave of apartment building that got off to a slow start during the pandemic when prices for building materials, such as lumber, were sky high.

Construction companies with jobs ranging from airport overhauls to bathroom renovations say they have enough work booked to maintain payrolls—for years in some cases. Even home builders, who slowed down last year when rates began to rise, are ramping up into spring.

The persistent strength in a sector that is usually among the first to suffer job loss when borrowing costs rise is undermining investor hopes that the Fed’s aggressive interest-rate increases would quickly slow inflation and rejuvenate the stock market.

It also threatens to upend bets in the market that recession and lower rates are on the horizon. Investors are trading government bonds as if rate cuts will come within the next year and buying technology stocks, bitcoin and other speculative assets that surged when borrowing costs were near zero.

The issue for investors is that the longer it takes for construction activity and employment to decline, the longer it will be before the central bank can cut rates. (…)

“Maybe we’re starting to see the effects of higher cost of capital on interest-rate-sensitive sectors,” said Anirban Basu, chief economist at trade group Associated Builders and Contractors, which said its measure of construction backlog declined in March to the lowest level since August. “The Federal Reserve raises rates until something breaks and something is starting to break.” (…)

So far, the roughly $50 billion decline in residential construction spending over the past year has been more than made up for by gains in commercial projects, including highways, hotels and hospitals. A record $108 billion was spent building factories last year, and the amount has risen this year, to a seasonally adjusted annualized rate of about $141 billion in February, according to Census Bureau data. (…)

This chart plots housing construction stages. “Under construction” (black) has just begun to roll over as “completed units” have edged up in Q1. But permits (-22.5% YoY) and starts (-18.9%) have yet to recover.

Non-residential spending is much less cyclical than residential and generally weakens after the recession. In 2008-09, flat non-resid did not prevent a 20% drop in construction employment. But that was perhaps a unique one.

• New Home Sales: Head Fake or Did We Find a Bottom? 

New home demand continued to improve through March on the heels of:

• significant price discounts in the last half of 2022 and 
• robust sales in January and February.

Given the economic uncertainty, quickly changing consumer sentiment, and historically poor new home affordability, we are watching for signs that this momentum may be a head fake.

So much coverage on housing shows year-over-year (YOY) numbers but doesn’t consider long-term fundamentals and trends. Let’s look at both.

Home builders sold 3.5 homes per community in March 2023, which was 20% above the typical 2.9 net sales per community seasonal average from March 2013 to March 2019. 

The lack of resale supply has clearly helped home builders, as many would-be sellers decided to either:

• stay in place as they are locked into below-market mortgage rates (sometimes sub-3%) or 
• rent their home and enjoy the positive cash flow while they lease or buy another home.

Here are a few home builder quotes from our monthly survey:

• Austin, TX: “Sales were solid across all products in March, but definitely a slight downtick from the strong sales paces seen in January.”
• Orange County, CA: “Price adjustments have found a market that is still undersupplied. Failing to re-price means you aren’t in the game.”
• Philadelphia, PA: “Sales have remained strong in the first three months of this year.”

Housing costs in relation to incomes have historically boomed and busted, as shown in the chart below. We expect a correction close to the 30.6% norm sometime in the future through a combination of rising incomes, falling home prices, and falling mortgage rates. New home affordability is closer to its historical norm since home builders have already lowered housing costs for new home buyers by dropping prices and buying down the mortgage rates.

Builders are bridging the affordability gap. Builders are more inclined to adjust prices versus resale home sellers to meet the market, drive demand back to their sales offices, and move homes off their balance sheet. Most are offering incentives that reduce the monthly payment, including closing costs, mortgage rate buydowns, and base price reductions. These incentives, particularly mortgage rate buydowns, remain a key sales advantage over the resale market and should continue with rates still elevated as long as forward commitments purchased by the builders remain available and not overly cost prohibitive.

Our consultants and survey leaders also inform us that consumers are becoming more comfortable with higher mortgage rates.

How sustainable is the positive momentum?

• The economy, particularly the job market, has always played a significant role in housing demand. The labor market remains strong as job and wage growth continue supporting homebuying activity. However, recent interest rate hikes have yet to work their way through the economy, resulting in less housing demand. 
• The increased banking sector distress will likely only exacerbate the economic slowdown. We might get lucky and have inflation return to normal without significant job losses, but that would be unprecedented — at least in our careers.

Enjoy the short term while it lasts. Affordability has always returned to normal levels in the past, and we expect it to return to normal levels in the future.

• A Tight Labor Market Could Keep Rent Inflation Elevated

Rent inflation responds more to labor market conditions compared with other components of inflation. We attribute this link between labor market tightness and rent inflation to greater demand for rental units afforded by job gains and wage growth. Although online measures of asking rents currently suggest official measures of rent inflation will decline, we caution that rent inflation is likely to remain above pre-pandemic levels so long as the labor market remains tight. (…

Growth in employment and wages, which vary with broader economic conditions, are key determinants of demand for shelter and hence rent inflation. The blue line in Chart 3 shows that rent inflation slows in economic recessions (gray shaded regions) and rises in economic expansions, albeit with a lag. This lagged response is largely due to the way that rents are measured.

The Bureau of Labor Statistics (BLS) measures rents across the universe of occupied housing each month, including both housing units that have a new lease and units whose rents are fixed under an existing lease. To remedy this measurement issue, the green series in Chart 3 infers from the BLS rent measure the rate of inflation for leases that have expired and had their rents reset.

Compared with the official BLS measure, this inferred reset rent measure exhibits larger and more timely changes in response to swings in the economy. Other measures of rent inflation on new leases, including Zillow’s measure of what landlords are asking on new leases (orange line), also appear more sensitive to changes in economic conditions than the BLS measure. (…)

After running well above the official BLS measure of rent inflation, the Zillow rent inflation metric has since turned down sharply. Some policymakers have interpreted the decline in the Zillow measure as an indication that BLS rent inflation measures will soon peak as well. However, a return to pre-pandemic rates of rent inflation could remain elusive. With labor markets still tight, historical patterns predict that rent inflation is likely to remain elevated even after the dust settles on pandemic-driven swings in rents.

Well, the Kansas City Fed concludes what a casual observation of rents and wages indicates: people pay, trade up or trade down, what their income affords them to pay.

Yes the pandemic contributed to a 16% jump in rents in 3 years. It also contributed to a 18.6% jump in average wages.

So, be careful with charts like this one:

Fed Set to Raise Interest Rates to 16-Year High and Debate a Pause Officials could keep their options open in crafting signals around the endgame for increases

Yellen Sees Default as Soon as June 1 Without Increase in U.S. Debt Ceiling President Biden invited the top Republicans and Democrats on Capitol Hill to meet next week to discuss raising the country’s roughly $31.4 trillion borrowing limit, the White House said.

Euro-Zone Core Inflation Slows, Supporting Smaller ECB Hike

Consumer prices stripping out volatile items like fuel and food costs rose 5.6% from a year ago in April — down from March’s record 5.7% advance and in line with the median estimate in a Bloomberg poll of economists.

Headline inflation, meanwhile, ticked up to 7% — a touch more than the 6.9% analysts anticipated and still far above the 2% target. Services prices and a less favorable annual comparison for energy costs than in March drove the acceleration. (…)

Money-market wagers see only a 20% chance of the bigger increase materializing — down from more than 30% last week. A Bloomberg poll showed the deposit rate, currently at 3%, may peak at 3.75% in July. (…)

• ECB Says Euro-Area Banks Curbed Credit by More Than Expected

Credit standards “tightened further substantially” in the first quarter, according to the ECB’s Bank Lending Survey, published Tuesday. “The tightening for loans to firms and for house purchase was stronger than banks had expected in the previous quarter and points to a persistent weakening of loan dynamics.” (…

The backdrop for this week’s ECB’s meeting will become more complete at 11 a.m., when Eurostat releases April inflation figures for the 20-nation euro area. Core inflation — currently the preferred measure for policymakers — is expected to ease slightly while the headline number holds steady. (…)

At Milken, investors praise bank rescue but brace for more drama Policymakers, executives and investors at the conference said constrained lending as a result of banking sector regulation could choke off credit to the economy.

(…) Shares of several regional lenders fell on Monday, a sign that investor nerves were still on edge after First Republic’s collapse, the third major casualty of the biggest crisis to hit the U.S. banking sector since 2008.

Senior banking executives said they were gauging how aggressive short-sellers might be in coming weeks and which of the regional banks might be burdened with significant loans for office real estate at a time many buildings are standing empty as employees continue to work from home.

“The real estate we’re more worried about is more of the bottom end of the stack of CMBS (commercial mortgage-backed securities),” Citigroup Chief Executive Jane Fraser told a panel. “It will be a stress point for sure.” (…)

Morgan Stanley plans to cut another 3,000 jobs

AI ‘godfather’ Geoffrey Hinton warns of dangers as he quits Google

(…) In the New York Times article, Dr Hinton referred to “bad actors” who would try to use AI for “bad things”.

When asked by the BBC to elaborate on this, he replied: “This is just a kind of worst-case scenario, kind of a nightmare scenario.

“You can imagine, for example, some bad actor like [Russian President Vladimir] Putin decided to give robots the ability to create their own sub-goals.”

The scientist warned that this eventually might “create sub-goals like ‘I need to get more power'”.

He added: “I’ve come to the conclusion that the kind of intelligence we’re developing is very different from the intelligence we have.

“We’re biological systems and these are digital systems. And the big difference is that with digital systems, you have many copies of the same set of weights, the same model of the world.

“And all these copies can learn separately but share their knowledge instantly. So it’s as if you had 10,000 people and whenever one person learnt something, everybody automatically knew it. And that’s how these chatbots can know so much more than any one person.” (…)