Based on a WardsAuto estimate, light vehicle sales were at a 17.05 million SAAR in March. That is up 3.8% from March 2014, and up 5.5% from the 16.2 million annual sales rate last month.
Good, but still not rising through previous cycle highs:
On March 18, I observed that spring is coming. Just as I predicted, it started two days later on March 20. On the other hand, the latest batch of economic indicators for March suggests that I may have been too optimistic when I wrote: “I agree with Chauncey Gardiner’s prediction: ‘In the spring, there will be growth.’”
I argued that the economy’s weakness during the first two months of the year reflected an ice patch rather than a soft patch. There are still grounds for optimism as the ground thaws. However, the latest data suggest that it could be a cold spring:
(1) Business surveys. Yesterday we learned that the latest survey of manufacturing purchasing managers showed a decline in the M-PMI to 51.5 during March from 52.9 during February. I wasn’t surprised since the overall index is highly correlated with the average of the composite indexes for the six available regional business surveys. This average fell to -0.1 during March, the lowest since April 2013.
The same can be said for the orders and employment components of the national and average regional surveys. The average regional orders index was especially weak in March, falling to -9.6, the lowest since May 2009. The national orders index (51.8) wasn’t as weak, but it was down from February (52.5). The national employment index (50.0) was weaker than suggested by the regional average, which edged higher during March.
It’s getting harder to blame the weather. Of course, other factors are working to slow the economy. The strong dollar’s negative impact is visible in the M-PMI’s new exports component, which dropped to 47.5 in March, the lowest reading since November 2012. The plunge in oil prices may be depressing energy-related new orders as well as production.
(2) Employment. Yesterday, we also learned that the ADP measure of private payroll employment rose 189,000, the weakest since January 2014. It may be that energy-related employment is taking a hit from the drop in oil prices. The four-week average of jobless claims in North Dakota, Ohio, Pennsylvania, and Texas has spiked up recently from 41,210 near the end of last year to 54,408 in mid-March.
Downside misses (relative to consensus) on ADP and the manufacturing ISM present a compelling reason to believe that at least some weakness may be evident in the March payroll data. The manufacturing sector is a major downdraft on the U.S. economy due to the strong dollar. If payrolls are indeed weak, analysts will look for confirmation that it is factory-driven in the details of the report.
Two of the leading inputs for forecasting payrolls are sending diverging signals in March. Jobless claims point to steady momentum, while the ADP employment survey suggests that momentum may be ebbing. Sub-300k readings on initial jobless claims in March look consistent with nonfarm payrolls not far below 300k — which is consistent with the six-month moving average of 293k on nonfarm payrolls. While there was a slight backup of 9k in claims between the February survey week and the March survey week, given the heightened volatility that appeared to be largely attributable to winter weather, Bloomberg Economics does not believe the move in claims is statistically meaningful.
ADP’s disappointing 189k print, on the other hand, potentially signals a downshift in the pace of hiring. The manufacturing sector is a particular concern since job growth at goods-producing firms (5k versus 22k) decelerated relative to services-producing firms (184k versus 192k). While that implies downside risk to tomorrow’s number, it would still be consistent with nonfarm payrolls growth in the vicinity of 200k — even if not quite at the 245k anticipated by the Bloomberg consensus forecast. ADP has underestimated private payroll growth by an average of 22k in the past 12 months. (…)
McDonald’s Joins Trend in Raising Pay McDonald’s plans to raise pay by more than 10% for 90,000 workers and add benefits like paid vacation at U.S. restaurants it operates.
Starting July 1, McDonald’s will pay at least $1 an hour more than the local minimum wage for employees at the roughly 1,500 restaurants it owns in the U.S. (…)
The increase doesn’t apply to employees of franchisees, which operate nearly 90% of the 14,350 U.S. McDonald’s stores—a fact critics seized on. But it applies to some 90,000 workers at all levels of experience and rank at company-owned restaurants and it will lift the average hourly rate to $9.90 on July 1 and more than $10 by the end of 2016, from $9.01 currently. (…)
Average hourly earnings for nonmanager employees at limited-service restaurants like McDonald’s rose to $9.54 an hour in January, up 3.5% from a year earlier, according to Labor Department data, well above the 2.2% pace for all private-sector workers. (…)
(…) Fair Isaac, also known as FICO for its trademark credit scores, is expected to announce a new approach as soon as this week that uses alternative data, including payment history with cable bills, cellphone bills, utility payments and other factors.
Of the 53 million Americans who don’t have traditional FICO scores, 15 million already can be scored with the new approach, which isn’t yet named, FICO says. And some one-third of those individuals have a score under the new system that is above 620, the company says.
The new FICO score, like the traditional ones, ranges from 300 to 850. Lenders, including credit-card issuers, car-loan lenders and a growing number of mortgage lenders, often approve applicants with traditional FICO scores above 620. That suggests that the new score could help identify people who can handle debt responsibly but have previously been shut out of getting financing. (…)
Nationally, average rents rose 0.6% to $1,131.72 during the first quarter, down slightly from a 0.8% rise in the first quarter a year ago, according to data from Reis Inc., a real-estate research firm. Over the last 12 months, rents increased 3.5%. (…)
San Francisco saw the biggest increase in rents over the fourth quarter of 2014, up 1.8% to $2,277.88. Warm areas that are destinations for retirees also saw strong rent growth, with Fort Lauderdale showing the third biggest rise, up 1.5% to $1,197.18. (…)
Across the country, the apartment vacancy rate declined slightly to 4.1% from 4.2%, the first decline since the beginning of 2014. (…) New construction declined during the quarter to 28,812 units, the lowest level of completions since the first quarter of 2013. (…) (Chart from CalculatedRisk)
The National Association of Realtors estimates that vacation-home sales amounted to 1.13 million properties last year, up a robust 57.4% from 2013, which itself marked a 30% increase from 2012.
Last year’s estimated tally topped the previous high from 2006 to become the biggest year for vacation-home sales volume since the Realtor association started tracking the market in 2003. Vacation homes accounted for 21% of all sales last year, the highest share since the survey’s inception.
The small sample size of the Realtor group’s survey, which was based on responses by just 1,971 people who bought U.S. homes in 2014, led some economists to posit that the results might be exaggerated. Mark Zandi, chief economist for Moody’s Analytics, suggested that the gains in the report might “overstate the strength” of that market.
Still, Mr. Zandi noted that vacation-home sales account for one-fifth of all home sales and “that should more or less rise over the next five to 10 years” as the income and number of vacation-home buyers increases.
The Realtor association’s survey found that buyers last year had median household income of $94,380, up from $85,600 in 2013.
The number of buyers is likely to grow in the years ahead as 76 million-plus baby boomers advance in age and buy vacation homes that eventually will become retirement homes. (…)
Inflation in Developed Economies Rose in February After seven months of decline, the annual rate of inflation across the world’s developed economies rose slightly in February, and picked up across the Group of 20 largest economies.
The Organization for Economic Cooperation and Development Thursday said the annual rate of inflation in its 34 members rose to 0.6% in February from 0.5% in February last year, having fallen since July 2014.
(…) the core rate of inflation for the OECD area—which excludes energy and food—was unchanged at 1.7% in February.
Across the Group of 20 largest economies, which account for 85% of world economic output, the annual rate of inflation rose to 2.7% from 2.5% in January, but remained well below the 2014 high of 3.2% reached in May. Inflation rates picked up in China, Russia and Brazil, but eased in India, Indonesia and South Africa. (…)
Japan on Brink of Another GDP Contraction Japan’s economy contracted by 2.1% in February, meaning it could have shrunk yet again during the first quarter of the year, according to the independent Japan Center for Economic Research.
(…) If gross domestic product indeed shrinks in the first quarter, it would be the third contraction in the past four quarters–quite a lackluster performance given Prime Minister Shinzo Abe’s vow to revive strong growth and decisively defeat deflation.
What’s to blame? Weak private consumption, said Tetsuaki Takano, an economist with the institute. Household spending fell from the previous month in December, January and February, surprising economists given a relatively benign external environment. Private consumption accounts for 60% of Japan’s economy.
Same surprising trend as in the U.S.!
South Korea’s economy hit a snag in March as exports fell the most in two years and inflation hit a 16-year low, adding to pressure on policy makers to come up with additional stimulus measures.
Exports fell 4.2 per cent in March from a year earlier, the biggest drop since February 2013, while imports plunged 15.3 per cent, taking the trade surplus to a record $8.4bn.
The trade ministry blamed the poor imports on lower oil prices, but overseas sales excluding oil products and petrochemicals rose just 0.2 per cent, due to weak demand from China and Europe.
Exports to China and Europe fell 2.4 per cent and 9.7 per cent respectively, while those to the US surged 17 per cent.
California Orders First-Ever Water Cuts California Gov. Jerry Brown ordered unprecedented mandatory water cuts across the drought-plagued Golden State due to a bleak outlook for the state’s water supply.
Under the governor’s order Wednesday, state officials said household rationing will likely be implemented by some local water agencies to meet Mr. Brown’s goal of reducing overall water use in the state by 25% over the next nine months, the equivalent of enough water for a city of six million people for one year.
Much of the crackdown will focus on irrigation of lawns and other outdoor landscapes, which account for a large amount of water use, state officials said. In his order, the Democratic governor singled out large campuses, golf courses and cemeteries as places where restrictions would be required. (…)
Electronic readings showed the water equivalent of the snow in the Sierra and other California mountains at 5% of normal, the lowest on record for that date, setting off alarm bells in the state capital of Sacramento. Roughly one-third of the state’s water supplies come from snow that blankets mountain ranges each winter. (…)
With California’s dry season approaching, the cutbacks will mean a deepening of the pain that some sectors of the economy have already felt.
Agriculture, in particular has been hard hit, as imported water supplies have been cut to zero in some cases.
The state’s farmers left 400,000 acres of fields unplanted in 2014, resulting in a loss of 17,000 jobs, and they will likely forgo planting on hundreds of thousands more acres this year, said Karen Ross, secretary of the California Department of Food and Agriculture. (…)
State officials said the governor’s new order won’t require farmers to fallow more fields, although they will be asked to step up water efficiency measures.
SENTIMENT WATCH
GoDaddy: stop, daddy Company does not expect to be profitable in the ‘near future”
Add 10 investment banks to three private equity firms and one tech IPO, and the result is complex, indebted and expensive. So please welcome GoDaddy to the stock market. This is no early stage start-up. It has been selling domain names and web support services for nearly two decades. Yet it is lossmaking, turning $1.4bn of revenue in 2014 into a $143m net loss.
The IPO is a complex affair, featuring a so-called Up-C structure, partly with tax in mind. The upshot is that those who have bought shares in the IPO have a 14 per cent economic interest, and a 14 per cent voting interest. But they arrive at those interests by two different routes. Existing shareholders keep control. One can only hope that the structure is eventually cleaned up.
And GoDaddy’s debt looks hefty, partly thanks to a $350m dividend that the owners paid themselves last year. The bulk of the $440m in IPO proceeds will be used to repay a loan from the company’s founder. Even after that, net debt will be roughly four times adjusted earnings before interest, tax depreciation and amortisation.
As for valuation, at the $20 IPO price, GoDaddy’s enterprise value is 15 times historic adjusted ebitda. (Its ebitda adjustments are generous, adding in items such as change in deferred revenue.) Using revenues, the IPO price implies an enterprise value of less than three times 2014 sales. That might look cheap next to competitor Endurance International, which trades at nearly six times sales. Yet GoDaddy’s shares jumped 30 per cent on Wednesday, its first day of trading.
Justifying this exalted valuation depends on the speed with which GoDaddy can turn revenue growth (23 per cent last year) into profits for its shareholders. This will be tough, given that the company’s growth has relied on hefty marketing spend ($656m over the past five years) and technology investment ($976m in the same period). The company does not expect to be profitable in the “near future”. Daddy may be waiting a while.
A key question for oil investors is how the Organization of the Petroleum Exporting Countries, a cartel of 12 oil-producing nations that includes Iran, would react to any additional Iranian production. OPEC opted in November to maintain its production quota of 30 million barrels a day, a decision that sent prices plunging. The group next meets in June.