U.S. Small Business Optimism Strengthens

The National Federation of Independent Business reported that its Small Business Optimism Index increased 0.1% during July to 94.6 following an unrevised 0.7% June rise. Despite the gain, optimism remained down 1.1% versus last July.

An improved -5% of firms were expecting the economy to improve, the best reading in twelve months. A lessened 1% were expecting higher real sales in six months. A reduced 25% were planning to raise capital expenditures. A steady eight percent reported that now was a good time to expand the business, but that was down from 15% in December 2014.

Employment prospects were mixed. Twelve percent of firms expected to increase employment, up slightly m/m. A lessened 46% of respondents found few or no qualified candidates to fill job openings while a reduced 26% of firms had positions they were not able to fill right now, equaling the most of the economic expansion. Twenty-four percent of firms raised worker compensation over the last three months, steady with the first half, while 15% were expecting to raise it in the next three months, steady with Q1.

  

From the survey:

This…

…with that…

…results in that:

U.S. Wholesale Inventories Increase; Sales Strengthen

  

U.S. Productivity Fell for Third Straight Quarter The longest slide in worker productivity since the late 1970s is haunting the U.S. economy’s long-term prospects, a force that could prompt Fed officials to keep interest rates low for years.

Nonfarm business productivity—the goods and services produced each hour by American workers—decreased at a 0.5% seasonally adjusted annual rate in the second quarter as hours worked increased faster than output, the Labor Department said Tuesday.

It was the third consecutive quarter of falling productivity, the longest streak since 1979. Productivity in the second quarter was down 0.4% from a year earlier, the first annual decline in three years. That was a further step down from already tepid average annual productivity growth of 1.3% in 2007 through 2015, itself just half the pace seen in 2000 through 2007, and the trend shows little sign of reversing. (…)

The economy’s potential future growth will be slower than previously expected unless productivity recovers, and their economic projections suggest Fed officials “see current policy as less accommodative, the labor market as less tight and inflationary pressures as more limited,” former Fed Chairman Ben Bernanke said Monday on his blog.

The policy implications, Mr. Bernanke said, “are generally dovish, helping to explain the downward shifts in recent years in the Fed’s anticipated trajectory of rates.” (…)

Fed Chairwoman Janet Yellen in June described the outlook for productivity growth as a “key uncertainty for the U.S. economy” and a “very difficult question” that has divided the economics profession.

“Some are relatively optimistic, pointing to the continuing pace of innovations that promise revolutionary technologies, from genetically tailored medical therapies to self-driving cars,” she said. “Others believe that the low-hanging fruit of innovation largely has been picked and that there is simply less scope for further gains.”

Ms. Yellen described herself as “cautiously optimistic” but said it “would be helpful to adopt public policies designed to boost productivity,” such as promoting investment. (…)

Another uncertainty for Mrs. Yellen. As an economist, she is right. More investment would likely boost productivity. Business people look at this other chart and ask why they should be investing any more in physical capacity? That is the last thing they need. What they need is revenues. More on this in CETERIS NON PARIBUS.

BTW, this is not just an American phenomenon as RBC Capital illustrates:

Meanwhile, unit labor costs are creeping up: +1.7% YoY in manufacturing and +2.1% in total in Q2 (charts from Haver Analytics)

  

In recovering housing market, the starter home remains elusive

(…) Nationwide, the inventory of homes costing $250,000 or less fell more than 12 percent between June 2015 and June 2016, according to the National Association of Realtors.

The shortage stems from higher labor, land and building permit costs that have caused construction companies to focus on higher-end homes that bring more profit. In addition, institutional investors are snapping up affordable homes by the thousands in select markets nationwide and converting them to rentals.

For a graphic showing the declining number of starter homes for sale in key markets, see:tmsnrt.rs/2aZWkJ8 (…)

Over the past four years, the number of entry-level homes for sale – defined as those priced in the lower third of a local market – has fallen by 34 percent, according to a Reuters analysis of data compiled by listings firm Trulia. (…)

Corporations or companies now own nearly one fifth of all homes priced under $300,000 that are not occupied by their owners, according to property data firm ATTOM Data Solutions, though investor purchases have slowed since peaking in 2013. (…)

Young adults aged 18 to 34 earn $2,000 less per year today than they did in 1980, after adjusting for inflation, according to the Census Bureau, and they have amassed record levels of student debt.

Outstanding student loan debt totaled $1.2 trillion in the fourth quarter of 2015 – trailing only mortgage debt among all consumer debt categories, according to the New York Fed. The average student loan monthly payment has jumped 50 percent in constant dollars, to $351, over the last 10 years. (…)

Average residential land values are up about 79 percent over the last four years, to a level last seen when the housing market peaked in 2007 and 2008, according to the Lincoln Institute for Land Policy.

The cost of building a new home, including permit fees, labor and materials, meanwhile, has jumped to 61.8 percent of the cost of an average single-family home, compared with 48.1 percent in 2007. (…)

U.K. Retail Sales Defy Brexit Vote Rise in July sales counters earlier surveys signaling a slowdown in consumer activity

(…) The British Retail Consortium said Tuesday that like-for-like sales—stripping out stores that have opened or closed—rose 1.1% in the four-week period from July 3 to July 30, compared with the same period a year earlier. In July 2015, sales increased 1.2%. The July sales rebounded from a fall in June, when like-for-like sales dropped 0.5%.

The BRC, which conducted the survey with accountancy firm KMPG, said sales were boosted by promotional activity and warm weather. Sales for all stores rose 1.9% compared with a 2.2% gain in July 2015 and a 0.2% increase in June. (…)

In its own survey of consumer spending Tuesday, analysts at Barclays had a cloudier view. It found spending rose 2.6% year-on-year in July, a softer rate than the 3.6% in June and May. The bank’s so-called underlying spending growth index—which targets categories less affected by weather, the timing of holidays and geopolitical events—fell 5.3% in July, its lowest level since June 2014.

Barclays measures spending on U.K.-issued Barclaycard credit and debit cards, which include retail sales but also other purchases like travel and entertainment, both at home and abroad. (…)

UK government bonds turn negative in historic rally Gilt prices surge on Bank of England pledge over asset purchases

French Tourism Tumbles 10% On Average Following Terrorist Attacks

Saudi Oil Output Sets Record Despite Global Glut OPEC says the kingdom’s July output rose to nearly 11 million barrels as it focused on market share over prices, which are in the midst of a two-year slump.

Top oil exporter Saudi Arabia told OPEC that its July crude production hit a record of 10.67 million barrels as it meets seasonally higher domestic demand and focuses on maintaining market share rather than trimming supply to boost prices.

According to figures submitted by the kingdom to the Organization of the Petroleum Exporting Countries, its previous production high was 10.56 million barrels a day in June 2015.

The group’s kingpin saw its production rise in July by 30,100 barrels a day to 10.48 million barrels a day, based on OPEC’s secondary sources such as shippers, analysts and industry executives. The figures were released in the OPEC’s monthly report Wednesday. (…)

OPEC, which controls more than a third of the world’s oil supply, said its July crude production inched up 46,000 barrels a day to 33.11 million barrels a day on higher output from Iraq and Saudi Arabia. The cartel now has 14 members since Gabon was added in June.

The organization said in its report that it raised oil demand growth in 2016 to 1.22 million barrels a day, some 30,000 barrels a day higher than last month. For 2017, world oil demand is forecast to grow by 1.15 million barrels a day, unchanged from last month’s report. (…)

Non-OPEC oil supply is expected to contract by 79,000 barrels a day this year, an upward revision of 90,000 barrels a day on higher-than-expected output in the second quarter from the U.S. and U.K. In 2017, non-OPEC supply is expected to decline by 150,000 barrels a day, following a downward revision of 40,000 barrels from last month.

OPEC said demand for its crude this year is still expected to reach 31.9 million barrels a day. For 2017, Demand for OPEC crude is forecast at 33 million barrels a day.

SENTIMENT WATCH

A rather compelling indicator that should make equity investors cautious is in the next chart. It shows speculative accounts’ net VIX exposure. Shorting VIX has become a massive (and very profitable) carry trade, indicating heightened risk appetite. (The Daily Shot)

CETERIS NON PARIBUS

• German angst over Chinese M&A

(…) The Iiwa — or intelligent industrial work assistant — is produced by Kuka, one of Germany’s most innovative engineering companies. But it will not be entirely German for long. Less than a month after the fair, a Chinese appliance-maker called Midea offered to buy Kuka for €4.5bn, in the largest ever Chinese takeover of a German company. (…)

(…) Transactions with a total value of $10.8bn were announced in the first half of this year, according to EY, the professional services firm — more than all previous years combined. Chinese investors acquired 37 German companies in that period, EY says — compared with 39 in the whole of 2015. (…)

The range of targets has been wide. Last month, Osram, one of the most venerable names in German business, sold its lamp unit to a consortium led by Chinese LED specialist MLS for more than €400m. In February, Beijing Enterprises bought EEW, the German waste management company, for €1.44bn. Also this year, ChemChinaagreed a €925m deal to buy German machinery maker KraussMaffei Group. (…)

German technology firms are a key focus, but the Chinese net has widened to include everything from pharma and biotech companies to clinics and care homes. (…)

• China’s Overseas M&A Spree Comes at Lowest Costs Since 2012

BTW: remember this?

Renminbi shock a distant memory for currency markets

UNINTENDED CONSEQUENCES

UK corporate pensions’ deficit continues to rise as interest rates collapse. (The Daily Shot)

With the above as the backdrop, something unusual happened. The Bank of England’s QE ran into trouble trying to purchase bonds because institutional investors (including corporate pensions and insurance firms) have nothing to replace these securities with – even if they make a significant profit. These organizations need a yield that covers their liabilities and cash is not going to get them there.

Source: @FT