Month: June 2024

Labor, including wages, are the most crucial stats to gauge at this point.

Confidence Survey Shows Jobs Are Still Relatively Plentiful

The first available monthly indicator of the labor market is the “jobs plentiful” series in the Consumer Confidence Index (CCI) survey. Today, June’s reading showed that 38.1% of respondents said so. That’s a slight uptick from May, and a relatively high reading. The “jobs hard to get response” ticked down to 14.1%, which is a very low reading.

The latter series is highly correlated with weekly initial unemployment claims and continuing claims. These two weekly series edged up a bit in June raising concerns that the unemployment rate may be heading higher. However, the CCI survey data suggest that the unemployment rate probably remained at 4.0% during June.

The jobs plentiful series is highly correlated with the more widely followed job openings series. Fed Chair Jerome Powell has alluded to it in some of his pressers over the past couple of years. Job openings probably remained above their pre-pandemic level during both May and June. We expect initial unemployment claims to remain below 250,000 over the remainder of this year.

Bottom line: There’s no recession in the labor market, nor is one looming.

Indeed Job Postings through June 21 are down 5.1% since the latest JOLTS data (April).  That could take Job Openings down to the 7.6M range, only 7% above January 2020.

But May’s BLS job report was strong and last Friday’s S&P Global’s Flash PMI survey said that employment recorded its largest gain for 9 months.

Do Firms Expect Growth in Prices to Persist

In the most recent CFO Survey, we explore expectations for price growth by asking financial leaders nationwide for their anticipated growth in prices in 2024 and how this anticipated growth compares to prepandemic growth rates. We find that most CFOs expect price growth to remain above normal through at least 2024.

The combination of higher input costs and wages in the aftermath of the COVID-19 pandemic led to higher price growth. While growth in unit costs, wages, and prices has moderated from their peaks in 2021 and 2022, price growth expectations among surveyed financial leaders have not returned to their prepandemic levels, suggesting that elevated price growth may be more persistent than initially thought despite a restrictive stance of monetary policy.

In the second quarter CFO Survey, monetary policy was listed as the top concern among CFOs, though nearly as many cited cost pressures and inflation, as well as hiring and retaining qualified employees. The fact that concerns about cost pressures and inflation remain so prominent—and these concerns even increased in the most recent quarter—supports the notion that despite more moderate inflation, price growth remains a foremost concern among CFOs.

To better understand whether CFOs expect growth in pricing to return closer to normal during 2024, the CFO Survey asked firms to compare their 2024 expected annual growth in prices—specifically, the price of the product/product line or service responsible for the largest share of their firm’s domestic revenue—to growth rates prior to the COVID-19 pandemic. For the past three quarters, nearly 60 percent of respondents expect growth in prices during 2024 to remain higher than prepandemic price growth

CONSUMER WATCH

Sunday was a new all-time daily high at 3 million travelers. The 7-day average is also a new all-time high. — Nothing is more discretionary than personal travel. When things turn down, it is the first thing to be cut. So, what does this say about the economy? (@biancoresearch)

Chicago Fed: Economic Growth Increased in May

The Chicago Fed’s National Activity Index is a monthly indicator designed to gauge overall economic activity and related inflationary pressure. It is a composite of 85 monthly indicators as explained in this background PDF file on the Chicago Fed’s website. (…) The CFNAI rose to +0.18 in May from -0.26 in April. Three of the four broad categories of indicators used to construct the index increased from April and two categories made positive contributions in May. (…)

RENTFLATION

KKR Makes Its Biggest Foray Into Apartments, Betting on Rising Rents Private-equity firm pays $2.1 billion for more than 5,200 apartment units across the country

KKR has completed its largest-ever purchase of apartment buildings, the latest in a string of big-ticket deals, signaling that some of the most prominent investment firms are betting on a broad rebound for multifamily housing.

The New York-based private-equity firm paid $2.1 billion for more than 5,200 apartment units across the country, from California and Texas to New Jersey, KKR said. The deal for the multifamily properties, which are 18 new mid- and high-rise buildings, closed Tuesday. (…)

KKR’s acquisition and other recent major purchases could indicate a growing confidence among large investors that rents and values for apartments will soon begin rising again. Rent is already starting to pick up in several Midwest and Northeast cities.

In April, Blackstone agreed to pay $10 billion for the landlord Apartment Income REIT, while last month Brookfield bought a portfolio of 7,000 apartments for $1.55 billion.

Investors say they are encouraged by the falling number of construction starts for new apartment buildings, portending lower levels of new supply and faster-moving rents by 2026. (…)

David Rosenberg:

We keep hearing about how booming demand for apartment units has begun to cause a reversal in rental rates. Funny how narratives today are more believed than the actual data. The U.S. rental vacancy rate has climbed to 6.7% from 6.0% a year ago and the highest since August 2020 (the pre-COVID-19 level was 6.2% when nobody was lamenting over rental inflation). Rent measures in the multi-family space have begun to flatten out and the YoY trend has been negative now for twelve months running.

While rental demand is running well over 400k annually, the problem is multi-family units that are under construction and about to be completed are double that number at 898k (more than double the historical norm). If the absorption rates were rising at or ahead of the supply, then we wouldn’t be seeing the vacancy rate continue to trend higher. We are not buyers of this newly-found view that we are on the precipice of seeing a revival in rental rate inflation. Not a bit.

Rosie’s chart stops in 2017. Here’s one going back to 1957. In reality, rental vacancies are merely back to 2019 which was historically low.

Wells Fargo:

• Adverse single-family affordability has helped boost multifamily demand, but multifamily development remains on the downswing as robust incoming supply and high interest rates have prompted developers to hold off on starting new projects.
  

• To that effect, multifamily permits fell 5.6% in May to a 437K-unit pace, the lowest level since April 2020. Multifamily starts, which are more volatile month-to-month, fell 6.6% to a 295K-unit pace.
  

• The long downdraft in apartment construction is more apparent when looking at the annual growth numbers. Multifamily starts are running nearly 50% below their year-ago pace, and permits are down 29% over the year.
  

• We expect multifamily construction will likely weaken further in the back half of this year. Longer term, better balance in the apartment market, lower financing costs and easier access to credit should help multifamily development rebound.

  

Canada Inflation Picks Up in May, Rising 2.9% The surprise spike in Canadian inflation last month throws up a possible hurdle for the central bank to offer up back-to-back rate cuts

The consumer-price index, a measure of goods and services prices across the economy, rose 2.9% in May from a year earlier, Statistics Canada said Tuesday, faster than the 2.6% advance economists had forecast and after inflation eased to 2.7% in April.

While it marks a fifth straight month that the index has been inside the 1% to 3% window the Bank of Canada targets, the quickening pace of inflation casts doubts on what many economists have expected would be a second round of rate relief late next month. The Canadian dollar and domestic bond yields both rose after the data was released, suggesting traders are less confident in a July cut.

Gains in core prices excluding volatile food and energy matched the headline CPI pace for the month and annually, while key indicators of underlying inflation preferred by the central bank also picked up. On a monthly basis, headline inflation rose 0.6% in May, double the pace economists anticipated. (…)

What is expected to stand out for policymakers is the speeding up in May of two measures of underlying inflation the central bank closely monitors. Weighted median and trimmed mean CPI rose an average 2.85% last month from a year earlier compared with 2.70% growth in April, though that is still cooler than March’s 2.95% pace. (…)

The biggest drivers of consumer price growth in Canada last month remained mortgage-interest costs and rent in the higher rate environment. (…)

Overall, prices for services in Canada rose 4.6% in May after a 4.2% boost the prior month, while prices for goods for a second straight month grew 1.0%.

• Excluding food and energy, the index rose 2.9 per cent from a year ago, up from 2.7 per cent.
• Seasonally adjusted core cpi increased +0.4% from +0.2% in April (revised from +0.1%).
• Rent inflation was 8.9% YoY in May, its highest level since the early 1980’s.
• Excluding shelter costs, the consumer price index rose 1.5 per cent from a year ago, versus 1.2 per cent in April.
• On a month-over-month annualized basis, CPI-Trim and CPI-Median were both at +4.1%.

Reuters Graphics

NBF:

Does this morning’s data suggest that the Bank of Canada acted prematurely in cutting rates in June? We don’t think so. (…) On a 6-month horizon, both the CPI-trim (2.5%) and the CPI-median (2.3%) are rising at annualized rates just above the Bank of Canada’s target with only 24 categories running above target. This slight overshoot would be worrisome if the economy were showing strength, but it’s quite the opposite at the moment. GDP per capita continued to fall in the first quarter and should continue to do so, given high inventories and the ongoing interest payment shock.

Unemployment already rose sharply and we expect it to rise further. The decline in corporate profits in the first quarter could be a harbinger of further deterioration. Businesses claim they are no longer experiencing labor shortages and may have too many workers relative to economic activity, as evidenced by the declining trend in output per worker since 2022. Given the current restrictive monetary policy and the lag in the transmission, we continue to believe that the Canadian economy needs further rate cuts.

Economists Raise China Growth Forecasts as Exports Improve Economists upgrade forecasts for 2024 exports and GDP growth

Exports are expected to climb 4.3% this year from a year ago, according to the median forecast of 22 economists surveyed over June 17-24. That’s a jump from the 2.8% gain forecast in a May survey. China’s economy may expand 5%, up from the 4.9% projected in May, according to the median of 68 estimates. (…)

China’s exports beat expectations in April and May, reflecting strong demand from overseas and the increasing competitiveness of Chinese producers. While this supports Beijing’s strategy of relying on exports to spur growth and offset weak spending by Chinese households, risks are mounting as its companies start to face more trade barriers from the US and Europe. (…)

Economists have pared back their expectations for retail sales growth — a key gauge of consumer spending — as well as consumer and factory-gate price inflation this year, reflecting pessimism over demand as a sharp housing contraction continues, according to the Bloomberg survey. (…)

China is unlikely to shake off deflationary pressures this year, with economists becoming more downbeat about the prospects. They expect consumer price index to rise only 0.6% this year, while producer price index is forecast to drop 1%, both weakening from the estimates in May.

This reflects consumers’ reluctance to spend money amid concerns about their job security, income prospects and falling property values. (…)

U.S. Flash PMI: Output growth hits 26-month high in June, price pressures cool

The headline S&P Global Flash US PMI Composite Output Index edged higher from 54.5 in May to 54.6 in June, its highest since April 2022. Output has now risen continually for 17 consecutive months, with the pace of expansion having improved markedly in May and June.

June’s expansion was led by the service sector, where business activity grew at a rate not seen for 26 months. Services activity has now risen for 17 straight months, recovering strongly in the year to date after the near-stalled picture seen in late 2023, buoyed by rising demand. Inflows of new work into the service sector rose at the sharpest rate for a year in June, driven mainly by rising domestic demand. Export orders for services, which includes spending by non-residents in the US, meanwhile fell at the slowest rate seen over the past five months.

The sustained services sector upturn was accompanied by manufacturing output expanding for a fifth successive month in June, though the rate of growth of factory output slowed to the second-weakest seen over this period. While new order inflows hit a three-month high to indicate a modest firming of demand growth, the overall rise remained below than seen earlier in the year, in part due to only marginal growth of export orders.

Optimism about output in the year ahead edged up to a three-month high in June, running only marginally below the survey’s long-run average. Future prospects brightened in the service sector, reaching a five-month high and rising above the long-run average to signal relatively elevated levels of optimism. Service providers often reported improved sentiment on the back of cooling cost-of-living pressures and the anticipation of lower interest rates.

However, prospects were seen to have darkened in manufacturing, with optimism sliding to its lowest for just over one-and-a-half years and running well below the long-run average. Manufacturers’ commonly cited concerns over the demand environment in the months ahead as well as election-related uncertainty, notably relating to policy.

Employment rose for the first time in three months, reviving after declines seen in April and May to register the largest gain for nine months. Service sector payrolls rose to the greatest extent for five months, helping reverse some of the declines seen in the sector over the prior two months, and manufacturing payrolls were increased at the sharpest rate for 21 months.

Despite the rise in employment, backlogs of work rose for the first time since January. Higher backlogs were often blamed on insufficient capacity relative to demand growth, especially in the service sector. These higher backlogs were in turn often associated with labor supply difficulties, which continued to thwart hiring in some cases

Selling price inflation cooled to a five-month low in June, though continued to run above pre-pandemic ten-year averages in both manufacturing and services to point to some stubbornness of price pressures. The rate of increase nevertheless fell to a five-month low in the services sector, where the rise was among the lowest seen over the past four years, and a six-month low in manufacturing.

Input price inflation also slowed, having ticked higher in May, running below the average seen over the past year (albeit still above the pre-pandemic ten-year average) to hint at a modest cooling trend of cost growth. Rates of input cost inflation moderated in both manufacturing and services. Manufacturers commonly reported higher raw material costs related to shipping, with supplier delivery times also lengthening (albeit only marginally) for the first time in five months to hint at some supply chain pressures, while wage growth remained a major driver of higher costs in the service sector

The S&P Global Flash US Manufacturing PMI rose from 51.3 in May to 51.7 in June to signal an improvement in business conditions within the goods-producing sector for a second successive month, and for the fifth time in the past six months. Although below readings seen in February and March, the latest PMI is the third-highest recorded over the past 21 months.

New orders and employment made increasingly positive contributions to the PMI compared to May, and suppliers’ delivery times and inventories moved from being drags to providing positive support to the PMI. The positive contribution from production moderated, however, offsetting some of the gains from the other four components.

Commenting on the data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:

“The early PMI data signal the fastest economic expansion for over two years in June, hinting at an encouragingly robust end to the second quarter while at the same time inflation pressures have cooled.

“The PMI is running at a level broadly consistent with the economy growing at an annualized rate of just under 2.5%. The upturn is broad-based, as rising demand continues to filter through the economy. Although led by the service sector, reflecting strong domestic spending, the expansion is being supported by an ongoing recovery in manufacturing, which so far this year is enjoying its best growth spell for two years.

“The survey also brings welcome news in terms of job gains, with a renewed appetite to hire being driven by improved business optimism about the outlook.

“Selling price inflation has meanwhile cooled again after ticking higher in May, down to one of the lowest levels seen over the past four years. Historical comparisons indicate that the latest decline brings the survey’s price gauge into line with the Fed’s 2% inflation target.”

In April 2023, I wrote Economic Perspectives: Re-Acceleration! after the flash PMI reached 53.5 with “solid growth in activity seen across both the manufacturing and service sectors. (…) The rise in new business was solid overall (…).”

The Citigroup Economic Surprise Index jumped from mid-May 2023 and U.S. GDP growth accelerated from 2.1% in Q2’23 to 4.9% in Q3 and 3.4% in Q4.

To repeat S&P Global’s summary of this June 2024 flash PMI: “The upturn is broad-based, as rising demand continues to filter through the economy. Although led by the service sector, reflecting strong domestic spending, the expansion is being supported by an ongoing recovery in manufacturing, which so far this year is enjoying its best growth spell for two years.”

Employment jumped 272k in May, exceeding even the most optimistic forecast, bringing the 3-month average to May to +249k. Employment growth averaged 225k in H2’23 and 247k after 5 months in 2024. Many pundits suggest that May’s employment jump was a one-off after April’s +165k but it now seems that April was the outlier.

The flash PMI reveals that May employment showed “the largest gain for nine months” and that “service sector payrolls rose to the greatest extent for five months (…) and manufacturing payrolls were increased at the sharpest rate for 21 months.”

Services employment, 6 times larger than the rest, is actually on the way back to its longer term trend which, if reached by mid-2025, would require 275k additional monthly service jobs on average. Employment in other occupations is already well above 2019 levels.

JOLTS data show that current job openings in services are 25% above their pre-pandemic levels while non-services openings are where they were at the end of 2019. Another way to look at it: openings in services are down only 2.3% YtD vs -16.7% for all other openings.

Variant Perception shows that the largest weight components of service employment are also the fastest rising.

Governments are also contributing with well above trend expenditures and a rising share of employment since the end of 2022. Strong government spending is also felt in construction thanks to the CHIPS Act and the Inflation Reduction Act.

  

Since the pandemic, total employment rose 4.1% while the labor force (black) only grew 2.0%. As a result, the number of employed Americans, which represented 92.5% of the labor force pre-pandemic, now represents 94.5% of the labor force. The highest this ratio had ever been was in December 1999 at 93.3%. Note how the labor force has flattened since mid-2023 while employment rose 2.1 million jobs or 235k per month on average.

By that measure, the “employment slack” was 12.9 million people in December 2019, 11.2 million in April 2023 when the PMI reached 53.0 and 10.1 million in December 2023 with a PMI at 51.0. The June flash PMI reached 54.6, this when the “employment slack” dropped to 9.2 million, 29% lower than in December 2019 when the unemployment rate was 3.5%.

Watch the Citigroup Economic Surprise Index in coming months.

The unemployment rate rose to its current 4.0% level not because jobs declined, quite the contrary, but mainly because the denominator, the labor force, has stopped rising.

After jacking rates up 500 bps, the Fed can only realize that the labor market got tighter. Wages are rising 4.7% YoY (switchers at 5.2%), well above the 3% pre-pandemic range. Let’s hope productivity compensates.

Many FOMC participants are having serious doubts they have done enough:

Investors as well:

BEAR FEED

This chart showing rising unemployment claims is prime meat for economic bears.

But even though the series claims to be seasonally adjusted, other perspectives suggest to fade the recent SA uptick. Top chart from the Department of Labor, bottom from The Daily Shot:

Speaking of bears, famed investor Felix Zulauf is positively negative:

• In the US, we continue to see a bifurcated economy. The upper class who benefits from rising asset prices is well off and does not realize how the middle and lower class suffer. Those who depend on income and have no assets working for them in a bull trend are falling behind.
• We believe that the Labor Department’s recent employment number is somehow biased to the upside due to the computed birth/death statistics that are iffy if not outright wrong, while the household survey showed a stagnating employment picture. Moreover, if one used the pre-Covid seasonal adjustment factor, the jump in employment as reported disappears in total. Thus, there is some fake news element, whether intended or not.
• Several business indicators are pointing to a continued slowing US economy. The Conference Board’s expectations for business conditions as an example. Moreover, the combined index for monetary, fiscal and currency policy is restrictive and also points down. In addition, the consumer has spent the extra money received from the government during Covid and the savings rate is far below trend. Moreover, the commercial real estate problem is unresolved and some recent transactions in Manhattan with the price of a building down 67% is telling.
• Liquidity in the system will at some point begin to deteriorate and then trigger weakness in the stock market and in consumer spending among the upper class that will then join the middle and lower classes and lead the economy into recession.
• We not only disagree with the consensus view that sees China’s economy rebounding in a sustainable way but rather we believe that China is likely in recession and will slide into deeper trouble towards a major calamity that will then trigger a necessary and powerful policy response.

  A true China calamity will have implications for the rest of the world’s economies.

  First, China’s trading partners will suffer from weaker demand from China, the second largest economy and the largest economy of the world in volume terms. Moreover, China will try to escape its economic calamity by decreasing imports and increasing exports to create growing corporate cash-flow. Thus, increasing Chinese exports of all sorts of products will compete on price with the rest of the world, which will hurt corporate cash-flows in the Western world. But it could be a blessing for inflation rates. All of this will lead to an intensifying trade conflict, which is hardly beneficial for economic growth in the Western world.

  Finally, if China eases aggressively, it will weaken its currency, which will magnify the trade conflict. We expect these problems to intensify and surface over the next 6-12 months.

Economists disagree on how restrictive policies are. Goldman Sachs’ measure suggest nothing is currently restrictive. 

About these “birth/death statistics that are iffy if not outright wrong”, Ed Yardeni explains:

The B/D Adjustment attempts to account for job gains attributable to new businesses and job losses due to business closures that don’t show up in the BLS survey of employers about the number of their payroll workers. Some say the BLS is underestimating the number of business failures due to the pandemic and the sharp increase in interest rates since early 2022. So the payroll employment series is too high, as confirmed by the much weaker household employment survey.

Here’s why we (and the markets) are not as concerned as the hard-landers:

(1) Payrolls. The B/D Adjustment added roughly 1.35 million payroll jobs in the past 12 months, accounting for a significant portion of the 2.76 increase in payroll employment over the same period. In the 12 months through February 2020, just before the pandemic, BLS added about 1.1 million jobs.

(The monthly B/D series is not seasonally adjusted (nsa) before it is added to the nsa survey-based series. The sum of the two is then seasonally adjusted. Our 12-month approach solves the seasonality issue.)

(2) Business Formation. Separate data collected by the Census Bureau on business formations tracks applications for Employer IDs. The Richmond Fed concluded last August that rising business formation reflected growing entrepreneurship after the pandemic, corroborating the higher B/D Adjustment!

(3) JOLTS. If the B/D Adjustment was masking a weak labor market, would the rest of the jobs picture look so strong? Initial unemployment claims remain very low. Job openings, from the JOLTS and the NFIB surveys, both show a slowing-but-growing labor market, not one that’s been getting weaker. In our opinion, the labor market is normalizing from the pandemic. (…)

Add to that Friday’s Flash PMI score on employment.

Zulauf omits another possible blurring factor to employment stats. Jay Powell mentioned last month that the the household survey may not fully account for the recent large inflow of foreign workers into the U.S., which may be easier to capture in the establishment survey. Economists say that higher estimates of immigration help close the gap between the two series.

PMI surveys may be soft data, but they may be more dependable, at least as to trends.

EARNINGS, VALUATION WATCH

Charts FYI:

Source:  @Callum_Thomas

• If small caps are to sustainably outperform vs large caps there’s going to need to be a shift in earnings performance — and that happens to be exactly what analysts are anticipating. While in 2024 large caps are set to significantly outperform small caps on earnings, small caps are set to outperform large in 2025-26 according to analyst consensus estimates… (Callum Thomas)

Source:  Small Caps: Value Trap or Timely Add?

According to Ed Yardeni data, this is not showing up just yet:

Not apples vs apples: sector weights