Fed’s Powell Says Rate Cuts Can Sustain Soft Landing, but Sees No Need to Rush Central-bank leader calls the economy solid; ‘we intend to use our tools to keep it there’

Federal Reserve Chair Jerome Powell said officials would continue to reduce interest rates from a two-decade high to maintain solid economic growth, but they didn’t currently see a reason to lower rates as aggressively as they did at their most recent meeting.

“Overall, the economy is in solid shape; we intend to use our tools to keep it there,” Powell said Monday afternoon at a conference in Nashville, Tenn. Because officials have a relatively favorable economic outlook, “this is not a committee that feels like it’s in a hurry to cut rates quickly,” he added. (…)

“If the economy performs as expected, that would mean two more [quarter-point] cuts this year,” Powell said during a moderated discussion. Rates could move “over time” toward a more neutral stance if economic activity remained healthy, though he said rates weren’t on a preset path, meaning bigger cuts were possible if the job market shows greater deterioration. (…)

Policymakers are facing a puzzle because consumer spending and economic output have expanded steadily this year, but labor market data have shown a pronounced cooling trend. Revisions to government data last week suggested income growth, which had lagged behind measures of economic output, has been better than initially reported.

Those revisions mean personal savings rates have been higher than previously thought, and they provided some reasons for policymakers to be less anxious than they might have been about the economic outlook, Powell said.

At the same time, he cautioned that the latest revisions hadn’t resolved the recent tension between data pointing to solid spending but cooler hiring. The better news on recent years’ household income growth “is not going to stop us from looking really carefully at the labor market data,” Powell said.

BlackRock’s Fink Says Market Is Wrong on Fed Rate-Cut Bets Larry sees no landing, says US economy continues to grow

“I don’t see any landing,” Fink told Bloomberg Television’s Francine Lacqua in an interview Tuesday on the sidelines of the Berlin Global Dialogue 2024 conference. “The amount of easing that’s in the forward curve is crazy. I do believe there’s room for easing more, but not as much as the forward curve would indicate.”

Money markets imply a one-in-three chance the Fed will deliver another half-point cut in November, and price a total of about 190 basis points of easing by the end of next year. But Fink said it’s hard for him to see that materializing, as most government policies at the moment are more inflationary than deflationary. (…)

“There are segments of the economy that are struggling. There are segments of the economy that are doing really well,” said Fink. “We spend so much time focusing on the segments that are doing poorly.”

The CEO at BlackRock, the world’s largest asset manager, also said despite assets valuations and some geopolitical issues, the market isn’t facing any real systemic risk and sees corporate earnings continuing to do well.

“I would argue today that because of the expansion of the global capital markets, we’re diffusing more risk than ever,” he said. “There is actually less systemic risk today than ever before.”

MANUFACTURING PMIs

Euro area manufacturing production falls at steepest pace in 2024 to date

After three successive months of no change, the HCOB Eurozone Manufacturing PMI fell in September to 45.0, from 45.8 in August, to signal a marked and accelerated deterioration in the health of the euro area’s goods-producing economy. Notably, the survey’s headline index fell to its lowest level in the year-to-date and was below the average seen across the current 27-month downturn.

As per the general trend in 2024, pockets of growth appeared in the south of the eurozone. National PMI survey data revealed Spain as having the strongest-performing manufacturing economy in September, with growth here quickening to a four-month high. Greece also continued its expansion sequence, although the upturn cooled markedly to its weakest in a year. Improvements in the south were strongly offset by sustained weakness elsewhere, particularly in the euro area’s largest manufacturing sector, Germany, which recorded its most pronounced worsening of factory conditions for 12 months.

Goods production across the eurozone as a whole continued to decline at the end of the third quarter. Moreover, the pace of contraction was the quickest in the year-to-date. Lower output volumes were a response to the prevailing demand environment, which deteriorated further during September. The latest drop in new orders was sharp and the fastest since December last year. Sales performances were also adversely impacted by conditions overseas, with the latest survey data signalling an accelerated decrease in new business from abroad.

The HCOB PMI figures for September also indicated broad-based retrenchment by eurozone factories during the latest survey period. For example, purchasing activity shrank at the quickest pace since last December, while inventories of both pre- and post-production items were depleted more rapidly than in August. Furthermore, staffing capacity continued to be cut and the overall pace of job shedding was the most pronounced since October 2012, excluding pandemic-hit months.

With the level of incoming new orders shrinking further, eurozone goods producers made additional inroads to their backlogs of work at the end of the third quarter. The rate of depletion was sharp overall and the steepest in the year-to-date.

Meanwhile, the recent trend of shortening delivery times came to an end in September, latest HCOB PMI data indicated, as eurozone manufacturers reported minor delays from vendors. Nevertheless, input costs declined for the first time since May. The price of goods leaving the factory gate across the euro area also decreased in the final month of the third quarter. This contrasted with August, where selling prices were raised for the first time since April 2023. Overall, the extent to which charges were discounted was marginal, but the most pronounced in four months.

Looking ahead, eurozone manufacturers remained slightly optimistic on balance, with those forecasting growth over the next 12 months still outnumbering those predicting contraction. Nevertheless, the overall level of positive sentiment was its weakest in ten months and markedly below the series long-run average.

Japan: Manufacturing business conditions deteriorate slightly in September

At 49.7 in September, the headline au Jibun Bank Japan Manufacturing Purchasing Managers’ Index™ (PMI) dipped fractionally lower from 49.8 in August to indicate a slight decline in overall operating conditions.

Output fell for the second time in three months at the end of the third quarter, with the respective seasonally adjusted index only fractionally below the neutral 50.0 threshold. Firms often indicated a lack of incoming new business as a result of economic weaknesses. However, this was partially offset by firms opting to complete outstanding orders. As a result, backlogs of work fell at moderate pace that extended the current sequence of depletion to two years.

The level of new orders placed with Japanese manufacturers also fell in September, and at a moderate pace that was little-changed from that in August. Where sales fell, firms mentioned a stagnating economy and staff shortages were behind the reduction. International demand was also subdued, as new export sales contacted at a solid rate that was the strongest since March.

Japanese manufacturers continued to raise employment levels during the latest survey period. That said, the rate of job creation was fractional and the softest in the current seven-month sequence.

Input inventories were also raised in September, following two consecutive monthly reductions as firms held pre-production inventories in preparation for an eventual demand recovery. (…)

The survey’s price indices showed that inflationary pressures remained elevated across Japan’s manufacturing industry. Firms mentioned higher labour, logistics and raw material prices had been key factors behind higher cost burdens. Positively, the rate of inflation eased from August to reach the lowest for five months.

Firms opted to partially pass these higher costs to clients in the form of raised output charges. The rate of output price inflation eased however and was the slowest seen since June 2021.

China: Soft and softer

• Manufacturing new orders decline at fastest pace in two years

The headline seasonally adjusted Purchasing Managers’ Index™ (PMI®) fell to 49.3 in September, down from 50.4 in August. Falling past the 50.0 neutral mark, the latest data signalled that conditions in the manufacturing sector deteriorated following a brief improvement in August. While marginal, the rate of decline was the fastest since July 2023.

Incoming new orders for Chinese manufactured goods declined at the fastest pace since September 2022, attributed to falling underlying demand, heightening competition and subdued market conditions, according to panellists. This included export orders, with softening economic conditions abroad negatively affecting foreign demand. Firms in the investment goods sector recorded the fastest fall in overall new work.

Chinese manufacturers nevertheless worked through existing orders to support production, though the rate at which output expanded eased to the joint slowest in the current sequence, matched only by July’s marginal pace. The volume of unfinished work also shrank for the first time since February.

Overall confidence was affected by concerns over the global economic and trade outlooks. Optimism levels at Chinese manufacturers slipped to the second lowest recorded since data collection for this series began in April 2012. Firms also lowered headcounts amid reduced workloads and cost concerns.

Purchasing activity meanwhile declined amid reduced new work inflows and with adequate inventory holdings. In fact, the slowdown in production growth resulted in pre-production inventory holdings rising for a second successive month in September. Stocks of finished goods accumulated as well owing to outbound shipping delays and as new orders fell. Supply constraints and shipment delays notably led to another slight lengthening of lead times for the delivery of inputs to Chinese manufacturers.

The broad reduction in market demand also affected prices. Anecdotal evidence suggested that average input prices declined as orders fell. This included raw material such as metals. Manufacturers thereby lowered selling prices, including export charges, both to reflect lower input costs and to support sales as competition intensified. The rates at which input costs and output prices fell were the most pronounced in 15 and six months respectively.

This is weak!

• Service sector expansion close to stagnation in September

The seasonally adjusted headline Caixin China General Services Business Activity Index posted 50.3 in September, down from 51.6 in August. (…)

New business inflows for services firms in China expanded for a twenty-first straight month in September as underlying demand conditions improved. New product launches were often mentioned as reasons supporting higher demand as well. That said, the rate of expansion decelerated to the slowest in nearly a year. That was despite a solid expansion of export business. Anecdotal evidence suggested that a widening of sales channels and marketing efforts enabled exporters to bring in higher foreign orders.

Backlogs increased for a second successive monthly as a result of rising new work inflows. Firms therefore hired additional staff to cope with ongoing workloads. While marginal, the latest rise in employment marked only the third rise in staffing levels in the past eight months.

Turning to prices, average input costs increased in September,attributed to higher input material, labour and energy costs according to panellists. Furthermore, the rate of inflation posted above the series average to the highest in nearly two-and-a-half years.

However, firms were hesitant to raise prices despite the intensification of cost pressures. Average output prices fell for a second successive month. Although marginal, this was only the fourth time that selling prices have declined in the past three years. According to survey respondents, prices were lowered, and discounts were offered in an attempt to support sales amid heightened competition.

Finally, overall confidence fell in the latest survey period to the lowest since March 2020. While firms were broadly hopeful that better market conditions and promotional efforts can boost sales in the year ahead,some raised concerns over rising competition and the global economic outlook.

Commenting on the China General Composite PMI® data, Dr. WangZhe, Senior Economist at Caixin Insight Group said:

“In September, the Caixin China General Composite PMI measured 50.3, down 0.9 points from the previous month. Supply in both the manufacturing and services sectors expanded slightly, with a notable contraction in manufacturing demand. The shrunken labor market in manufacturing dragged on employment at the composite level. Moreover, output prices declined in both sectors by different degrees, while service providers faced significantly increased input costs.Notably, market optimism at the composite level fell to a record low.

“Across the board, the latest macroeconomic data have fallen short of market expectations. Insufficient effective domestic demand remains a prominent issue, with significant pressure on employment and weak optimism constraining people’s willingness and ability to spend.

“Meanwhile, a complex and severe external environment creates greater uncertainty for overseas demand. The economy grew 5% year-on-year in the first half of this year, and the recovery momentum in the third quarter was weak, making it challenging to achieve the annual growth target.

“On the policy front, measures currently in the works should be sped up to take effect sooner, while the need for additional policies has only grown more urgent. Currently, there is relatively sufficient policy space. Fiscal and monetary policies should play a greater role in safeguarding people’s livelihoods, improving the job market and stimulating demand.”

China’s official services PMI is weaker than Caixin’s as Ed Yardeni illustrates. This is weak!

ASEAN manufacturing output dips into contraction for the first time in three years

The headline S&P Global ASEAN Manufacturing Purchasing Managers’ Index™ (PMI®) slipped to 50.5 in September, from 51.1 in August. While posting above the neutral 50.0 threshold for a ninth straight month, the latest reading signalled only a fractional improvement in ASEAN manufacturing operating conditions, and one that was the weakest since February.

The slowdown was largely owed to cooling underlying demand trends. Growth in new orders eased, with the latest uptick the softest recorded in seven months. The upturn was hindered by consistently underperforming trade volumes, which have been declining since June 2022. Moreover, the latest drop in new export sales was sharp and the most marked in over three years.

Weaker demand trends led to a fresh decline in output, with ASEAN goods producers experiencing their first drop in three years. However, the overall rate of contraction was minimal. Whilst manufacturers continued to increase their purchasing, the rate of growth also softened from August and was only mild.

More positively, a fresh rise in payroll numbers was noted in September. Months of improving sales volumes supported the modest rise in employment, which was also the joint-strongest (along with February’s reading) in two years.

The rate of input price inflation cooled since August, with cost burdens rising at the weakest pace in 13 months. The rate of charge inflation also softened and was marginal overall.

Lastly, confidence in the outlook for output registered an improvement, with optimism reaching its highest level since the start of the year. ASEAN manufacturers are hopeful that output will grow over the next 12 months.

China’s Housing Glut Collides With Its Shrinking Population Many cities are stuck with empty homes that they will likely never fill, adding to the country’s economic woes

The country could have as many as 90 million empty housing units, according to a tally of economists’ estimates. Assuming three people per household, that’s enough for the entire population of Brazil.

Filling those homes would be hard enough even if China’s population were growing, but it’s not. Because of the country’s one-child policy, it is expected to fall by 204 million people over the next 30 years.

“Fundamentally, there are not enough people to fill the homes,” said Tianlei Huang, a research fellow at the Peterson Institute for International Economics.

Some unused real estate will be bought up and lived in, especially if more government support—which economists have been calling for—convinces Chinese buyers that values will rise again. Big cities like Beijing, Shanghai and Shenzhen will almost certainly absorb their excess housing, given their dynamic economies and migrant inflows, which have helped keep their populations growing.

The problem is much harder to solve in smaller cities, which often have weaker economic prospects and declining populations. In China, researchers informally group cities into tiers, and many of the nearly 340 cities classified as third-, fourth- and fifth-tier—with populations from few hundred thousand to several million people—are struggling economically.

At least 60% of China’s third-, fourth- and fifth-tier cities saw their populations shrink from 2020 to 2023, according to Wall Street Journal calculations based on official data.

Those cities have more than 60% of China’s housing inventory, according to Harvard economics professor Kenneth Rogoff. Many encouraged developers to build more—even when their populations were falling—because land sales and construction boosted economic growth and fattened local governments’ wallets. (…)

Many will become long-term burdens to cities and investors who get saddled with assets they can’t sell and which have lost their value, yet still must be maintained. Some will just wither away, economists say. (…)

In such places, “it is very hard to maintain law and order, even probably in China,” he said. “I think it’s going to be a big social and governance problem in the future.” (…)

Of the up to 90 million units that are unoccupied, as many as 31 million were fully or partially built but never sold. Such properties could be bulldozed, but many are tied up in litigation related to developers’ bankruptcies. In many cases, cities and developers hope to finish them.

Another 50 to 60 million units were bought but remain empty. (…)

Approximately 74% of Chinese households in first- and second-tier cities owned more than one home across China, while nearly 20% owned three homes or more, according to a recent survey by Citi Research.

These homes are potentially more difficult to deal with because their owners still hope for appreciation. Many are in partially occupied buildings that can’t be torn down.

An additional 20 million units were sold but were left largely unbuilt by developers due to cash-flow problems and poor market conditions. The owners still want them, but developers don’t have money to finish them. (…)

In China, many owners of empty properties are likely to keep maintaining their units, since management fees in China are low and property taxes are only levied in special cases. Tough personal-bankruptcy rules in China make it hard to walk away from properties, and many want to hang on to them for a possible market rebound.

Still, some economists fear a negative spiral in which declining home prices spur more owners to try to unload empty units, depressing values for everyone. (…)

Property prices in most cities have returned to 2017 and 2018 levels, said Yi Wang, head of China real-estate research at Goldman Sachs. If prices drop to 2015 levels, many more owners might choose to sell unoccupied properties. That’s because 2015 was the beginning of the last boom, and owners who bought early won’t want to see their units’ values fall below what they paid, Wang said.

That might be inevitable, though, given China’s falling population.

“I don’t think the housing oversupply problem has a solution, really,” said Huang, of the Peterson Institute. “Fundamentally, it’s the problem of declining demographics. Ghost cities will remain ghostly.”

STRONG AND STRONGER

If it ever felt like the consumer spending numbers this year were too good to be true, brace yourself…real PCE was just revised UP every month of this year. In level terms real PCE for July is now 1.2% higher than previously reported. Real disposable income was revised higher as well and now looks more supportive of spending. (…)

The upward income revision is about more than just higher employee compensation. All other components of income including proprietors’ income, rental receipts, investment returns, jobless benefits and Medicare benefits were all revised higher. (…)

With upward revisions to income being greater than those to spending, the data now suggest households have been saving a bit more each month than previously thought. As seen in the nearby chart, the personal saving rate is now significantly higher at just under 5% rather than the south of 3% readings we had been seeing prior to today’s revisions. This suggests households may have a bit more gas in the tank to support consumption. (…) (Wells Fargo)

A bit more! A savings rate of 4.9% rather than 2.9% (dash) is a much more comfortable cushion against economic or financial shocks, not to mention the wealth cushion from higher house and equity prices now 14% above trend.

Americans’ capacity to spend is not diminishing. The 4th line in Wells Fargo’s table shows Wages & Salaries Income up 0.5% MoM in August, +4.9% a.r. in the last 2 months. Labor income is the main driver for expenditures, pointing to ~5% growth in total spending with inflation below 2.5% (2.2% in August and +1.2% annualized in the last 4 months).

In fact, lately inflation has been slowing faster than income. This is also true for inflation on essentials (food, energy, shelter) which printed at +3.4% YoY in August, down from +5.4% one year ago, freeing more disposable spending power.

• PCE price index +0.09% (MoM) in August after +0.15% in July (+1.5% a.r. in the last 2 months)
• Core PCE price index +0.13% (MoM) in August after +0.16% in July (+1.8% a.r. in the last 2 months)
• WTI prices dropped 15% since early July, not only releasing disposable dollars but helping ease inflation throughout the economy but particularly in sticky services prices, still up 3.7% YoY but slowing sequentially to +2.4% a.r. in the last 2 months.

The Fed is happy seeing inflation near targets. The risk is that sustained real wage growth is fueling demand which could put unwanted pressure on prices.

From the September flash U.S. PMI:

The September survey also showed average prices charged for goods and services rising at the fastest rate since March, representing the first acceleration of selling price inflation for four months. The upturn lifted the rate of inflation further above the pre-pandemic long-run average.

Rates of selling price inflation moved up to six-month highs in both manufacturing and services, in both cases running above pre-pandemic long-run averages to point to elevated rates of increase.

Higher charges were driven by increased costs, with input costs rising at fastest pace for a year in September. A one-year high rate of cost inflation in the service sector was often linked to the need to raise pay rates for staff.

In contrast, manufacturing input cost growth cooled to a six-month low thanks to lower energy prices and fewer supply chain price pressures. Delivery times quickened for a second month running as supplier were less busy amid weakened demand.

Not happening in the eurozone where demand is weak …

A weakening demand environment contributed to softer inflationary pressures in September. The rate of input cost inflation slowed sharply, easing to the lowest since November 2020. Manufacturing input prices decreased for the first time in four months, while service providers posted the weakest rise in their cost burdens for three-and-a-half years.

In turn, output prices increased only slightly, and to the least extent since February 2021 when the current sequence of inflation began. A slower rise in services charges was accompanied by a renewed fall in manufacturing selling prices.

… nor in Japan where “the rate of input cost inflation for input costs eased in September to reach the lowest for 6 months and output prices eased on the month.”

A Dockworkers Walkout Could Batter the American Economy and Tie Up U.S. Trade The International Longshoremen’s Association, which represents 45,000 dockworkers from Maine to Texas, is pushing for a 77% pay increase.

Dockworkers are preparing to strike at midnight across dozens of ports from Maine to Texas, threatening to block the movement of a swath of U.S. trade and rattle the American economy five weeks ahead of the presidential election. (…)

JP Morgan equity analysts estimate a ports strike would cost the U.S. economy between $3.8 billion and $4.5 billion a day, some of which would be recovered once normal operations resume. (…)

A person familiar with the administration efforts said the White House believes the country’s supply chains are resilient and that the economy could weather a short strike of up to about a week. (…)

According to a person familiar with the matter, Daggett has said he won’t negotiate until employers agree to a 77% increase in wages over six years. Talks then would cover thorny subjects such as the use of automation.

Port employers and ocean carriers, represented by the United States Maritime Alliance, have offered an almost 40% wage increase, an offer that Daggett last week called “insulting.” (…)

Shipping and energy industry officials say they expect exports of oil and liquefied natural gas at Gulf Coast ports to be unaffected because the ILA has little or no involvement in those operations. The union’s bulk-ship operations, which handle industrial commodities such as coal and grain, are covered under a separate contract. Most containership movements at the two coasts are expected to stop. (…)

Because of strike fears, many retailers rushed in items early this year and rerouted goods to West Coast ports, pushing import volumes to the highest levels since the peak of the Covid-19 pandemic. 

(…) dockworkers’ base hourly rate of $39 commonly translates into a six-figure annual salary because of work rules and overtime requirements.

In the financial year that ended in 2020, more than half of 3,726 dockworkers at the Port of New York and New Jersey earned over $150,000, according to a report by the port’s regulator. Some 665 dockworkers that year earned more than $250,000.

Canada GDP Fades After Rising 0.2% in July Tracks below the central bank’s target and leaves open the possibility of even deeper cuts in interest rates

Preliminary data suggest industry-level gross domestic product was essentially unchanged in August, Statistics Canada said Friday. That follows a 0.2% expansion in July GDP to 2.234 trillion Canadian dollars, the equivalent of $1.733 trillion. Compared with a year earlier, GDP in July increased 1.5%.

The recovery in July from a flat economy the month before was led by retail sales and came despite the hit to several industries from wildfires, including those that tore through the Rocky Mountains and Jasper National Park. The resiliency appears to have been short lived, as the data agency pointed to declines last month in manufacturing and transportation, with the economy likely dented by a staged shutdown of freight rail amid labor unrest.

Output by industry has been lackluster since May and the latest readings indicate growth for the quarter is shaping up to be less than half the 2.8% annualized advance forecast by the Bank of Canada for the third quarter. Following rapid population growth in recent years, another soft month also reinforces economist expectations GDP on a per-capita basis will contract for sixth straight quarter.

Economists see a clear case for the central bank to continue cutting rates, building on successive quarter-percentage-point moves at each of the last three policy meetings and with a possibility of a bigger half-point cut from at least one of the two remaining meetings this year. (…)

Bank of Canada Gov. Tiff Macklem this week again said a bigger rate cut is possible if inflation and the economy slow faster than expected, but that decision would continue to hang on incoming data. Markets currently are pricing in a 60% probability of a half-point cut in October, economists say. (…)

China Cries Uncle With Big Pledge on Property Crisis

(…) China’s property slump—now in its fourth year—has weighed on consumer confidence and hurt domestic spending, so a real bailout would be a game-changer. The latest set of data showcased that, despite many announcements by both Beijing and local governments stretching back at least two years, housing remains mired in an epic slump.

The value of new-home sales by the top 100 developers tumbled almost 27% in August from a year before. Last August, they were down about 34%. In August 2022, sales slumped 33% year-on-year. In other words, the market has been cratering for some time now.

Perhaps as important, prices continue to decline, and the pace has accelerated. That’s after a powerful upsurge in prices during China’s period of rapid economic growth. Falling property values undermine household confidence, particularly against a backdrop where real estate makes up a notable share of wealth. (…)

But most economists aren’t yet rushing to rewrite their economic growth forecasts until it’s clear what sort of fiscal resources Beijing is prepared to deploy.

Market speculation has centered on the potential for a 2 trillion yuan ($285 billion) injection. But one thing to keep in mind is the context of a contraction in budget spending (as noted in last week’s edition) so far this year. Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis SA, estimated China may need to unleash over 3 trillion yuan just to fill fiscal gaps. (…)

Ed Yardeni:

Regulators directly targeted the real estate market by lowering the down payment required on second homes from 25% to 15%. It will also offer better terms on loans to state-owned enterprises that are buying unsold apartment inventory from property developers. (The program launched in May has seen slow adoption, with local governments borrowing only Rmb24.7 billion out of the Rmb500 billion local banks made available, according to an August 20 FT article.)

The good that these policies do may be offset by Chinese government actions that chill the willingness of consumers and companies to spend and invest in the country.

China’s recent threat to put Tommy Hilfiger’s parent on the national security blacklist for not purchasing cotton from its western Xinjiang region doesn’t scream “come and invest in our country.” Neither does the detainment of an economist who criticized leaders in a private online chat.

Five other companies are on China’s national security blacklist, including Lockheed Martin and Raytheon Technologies due to their sale of weapons to Taiwan. But they have no business in China at risk. PVH, on the other hand, has stores and warehouses in China. If placed on the list, the company could “face fines, have its activities in China restricted, or face other unspecified penalties,” a September 24 FT article reported.

A senior executive from Taiwan’s Formosa Plastics Group has been banned from leaving Mainland China since arriving in Shanghai earlier this month, a South China Morning Post article reported on September 19. The head of China Evergrande’s electric vehicle unit was detained earlier this year. In 2023, more than a dozen senior executives went missing, faced detention, or were subject to corruption probes, a November 10 CNN article reported. When Jack Ma, perhaps China’s most high-profile tech entrepreneur, disappeared from public view and underwent “supervisory interviews” in 2020 after criticizing the country’s regulators and state-owned banks in a speech, it became instantly clear that no one was immune.

And China’s plan to increase its retirement age certainly won’t improve consumer confidence or encourage people to start spending. It’s almost as if China were writing a guidebook for economies on how to be one’s own worst enemy.

EARNINSG WATCH

The U.S. economy is arguably the strongest in the world, yet companies deriving more than 50% of their revenues outside the U.S. (41% of S&P 500 companies) grew their earnings 25.9% in Q2 while U.S. centric companies’ earnings only rose 4.6%.

  

(Factset)

If analysts prove right, IT and Comm. Services will grow their earnings 19.7% in 2025. Earnings for the rest of the S&P 500 are seen jumping 12.9% boosted by cyclicals and Health Care where analysts expect meaningful margins improvements.

AI CORNER

On the heels of my Sept. 23 post Power Play:

AI Data Center Boom Spurs Race to Find Power

Tech companies scouring the country for electricity to power artificial intelligence are increasingly finding there is a waiting list.

In many places the nation’s high-voltage electric wires are running out of room, their connection points locked up by data centers for AI, new factories or charging infrastructure for electric vehicles.

A mad dash to lock up available power has ensued.

The tech industry is pinballing from one market to the next looking for places with the capacity to connect campuses that would consume up to a gigawatt of power—about as much as San Francisco uses. Some requests are as much as four to five times as large as that.

But wires are getting so crowded that some prospective data center customers—which request far more power than other users—are being told they may have to wait until the next decade to get the power they are seeking. Others are receiving less power than they expected.

In Salt Lake City, there is a moratorium on larger power requests. The data center industry considers it closed for business. (…)

The growing pains are also sparking fights over how to pay for potentially billions of dollars in upgrades to the grid.

In central Ohio, the biggest power line in the Midwest will run out of transmission capacity in 2028. American Electric Power, which owns the line, has proposed a new, higher electricity rate for data centers and cryptocurrency miners that would lock them in as customers for a decade. The companies are balking. (…)

AI is a fast-growing source of spending by tech companies that say they are on the cusp of the biggest boom since the internet, with implications for national security and the economy. But a search on a generative AI platform such as ChatGPT can use at least 10 times the amount of energy as a google search. Data centers could use as much as 9% of U.S. electricity by 2030, according to the Electric Power Research Institute.

AI arrives in tandem with other new strains on the grid: manufacturing plants spurred by tax policies under the Inflation Reduction Act, and a push in some states for more electric power for transportation, heat and heavy industry. It is the first meaningful demand growth this century for the electricity industry. (…)

Transmission constraints are the first pinch point that many utilities are flagging as those kinds of upgrades can take several years. But there are calls for added power generation. Goldman Sachs estimates around 47 gigawatts of new power generation capacity will be required to support U.S. data center power demand growth through 2030.

Analysts at Fitch Ratings say utilities also risk overestimating the demand from data centers and overbuilding, given the inconsistent ways that the industry tallies future demand.

In the heart of Ohio, American Electric Power’s 765-kilovolt bulk transmission system provides a backbone of reliable power that has vacuumed in new data centers. The amount of electricity used in the region will roughly double by 2028, which AEP can accommodate.

After 2028, AEP says it has three New York Cities worth of data centers asking to connect to the grid, but no way to discern which are serious customers or just looky-loos shopping multiple markets. It halted new service requests from data centers more than a year ago.

AEP’s Reitter said long-term contracts and higher rates would protect customers such as homeowners and other businesses in case the tech companies leave later.

Companies of all kinds are fighting the idea. (…)

The Ohio Consumers’ Counsel, meanwhile, has argued that residential customers “should not be forced to subsidize utility investment to accommodate data centers operated by multibillion and trillion-dollar companies.” (…)

Xcel Energy has a peak demand of around 22 gigawatts across its multistate system but around 6.7 gigawatts of new data center requests, largely in Colorado and Minnesota. Executives say the system will need transmission upgrades and new power generation, as well as a way to be fair to all customers.

Chief Financial Officer Brian Van Abel said in an August earnings call the company would consider things such as “take-or-pay” contracts that require data centers to pay for a minimum amount of power no matter how much is used. (…)

There is much more in Power Play.

Also, if you have time and don’t mind some yaddi-yaddi-yadda: The Hidden Flaw in the $2T Energy Transition Plan | Mark Mills 

BTW: The Energy Department announced this morning it had finalized a $1.5 billion loan to stake the revival of the Holtec Palisades nuclear plant in Michigan. It’d be the first American nuclear plant to be restarted. The news comes a week after tech giant Microsoft reached a deal to restart a dormant reactor at Pennsylvania’s Three Mile Island plant in 2028. (Axios)

How the US Lost the Solar Power Race to China Bloomberg Opinion’s climate columnist visited Michigan, the former heart of the solar industry, and China to learn how good, old-fashioned capitalism won out.

(…) Nowadays, the US is barely in the game, and more than 90% of the total comes from China. That country’s clean-technology exports “threaten to significantly harm American workers, businesses and communities,” President Joe Biden said May 14, announcing 50% tariffs on Chinese solar cells.

Washington blames China’s dominance of the solar industry on what are routinely dubbed “unfair trade practices.” But that’s just a comforting myth. China’s edge doesn’t come from a conspiratorial plot hatched by an authoritarian government. It hasn’t been driven by state-owned manufacturers, subsidized loans to factories, tariffs on imported modules or theft of foreign technological expertise. Instead, it’s come from private businesses convinced of a bright future, investing aggressively and luring global talent to a booming industry — exactly the entrepreneurial mix that made the US an industrial powerhouse.

The fall of America as a solar superpower is a tragedy of errors where myopic corporate leadership, timid financing, oligopolistic complacency and policy chaos allowed the US and Europe to neglect their own clean-tech industries. That left a yawning gap that was filled by Chinese start-ups, sprouting like saplings in a forest clearing. If rich democracies are playing to win the clean technology revolution, they need to learn the lessons of what went wrong, rather than just comfort themselves with fairy tales. (…)

Until the mid-2000s, the raw material for all the chips and solar panels on the planet was produced at just 10 facilities in the US, Europe and Japan. They were under the control of seven companies, of which Hemlock [Michigan] was comfortably the largest. This provided the kind of cartel-like price security enjoyed by the Organization of the Petroleum Exporting Countries (OPEC).

The solar panel-makers who depended on the seven companies for their polysilicon hated the situation — as did anyone who wanted to see the costs of solar power fall and its scale increase. “The supply of feedstock has lagged far behind the demands of the industry,” lamented one 2007 report on the sector, which blamed the shortage on oligopolistic behavior by big producers. (…)

Like Hemlock, Leshan lies atop a prehistoric sea, making it rich in brine and a natural home for a chemicals industry. Unlike Hemlock, it is blessed with a superabundance of cheap electricity. Sichuan is where the tributaries of the Yangtze tumble down from the foothills of the Himalayas in a precipitous drop, before starting a meander to the sea.

(…) downriver from Leshan, a chemicals plant producing PVC plastic was looking for ways to utilize its waste materials. Liu, who’d been curious about the semiconductor industry for years, saw an opportunity to break the dominance of Western polysilicon producers while mopping up these chemical byproducts. He invested $428 million (3 billion yuan) in the facility in 2007 and then signed up Trina Solar Co., a US-listed panel maker with headquarters near Shanghai, as a cornerstone customer.

He wasn’t the only one with that idea. China’s trade boom during the 2000s was driven by vast factories assembling electronics for foreign companies at rock-bottom prices. PV panel makers saw an opportunity to take advantage of globalization, in the same way that contract manufacturers like Taiwan-based Hon Hai Precision Industry Co., or Foxconn, were cornering the market in assembling iPhones.

Like everyone else who was making solar panels, these companies quickly grew unhappy with the oligopoly producing polysilicon. With prices soaring in the late 2000s, there was good money to be made by anyone who could undercut Hemlock and its rivals.

The result was a land grab. Small-scale, high-cost solar poly plants sprouted in towns and cities across China. At one point, the country had as many as 80 manufacturers, many of them with lax attitudes toward pollution. That was far more than the country, or the world, needed. In 2008,China had 20,000 tons of polysilicon production capacity and a further 80,000 under construction, according to government data. But just 4,000 tons were produced that year, indicating supply far in excess of demand.

A crash was inevitable. In the long hangover from the 2008 financial crisis, cash-strapped governments in Europe started pulling the subsidies they’d used to kickstart the continent’s solar industry in the earlier part of the decade. China’s polysilicon producers were high-cost and dependent on exports. All but the most efficient were closed. Even as demand from panel producers waned, more silicon flooded into the market as cash-strapped manufacturers sought to sell off their inventory at any price.

Between August and December 2011, spot prices for solar poly roughly halved, from around $50 a kilogram to just over $25. That was already below the levels Hemlock considered reasonable. But a year later, they had fallen another 40%, to about $15. (Currently, they’re running below $6.) Major customers pulled their orders or went into bankruptcy. It looked like the solar boom was ending before it had even really begun. (…)

Some thought the best defense against the solar boom and bust of the late 2000s was to quit polysilicon’s rollercoaster ride altogether. In Tempe, Arizona, First Solar Inc. focused on a promising alternative technology that printed a thin layer of a different semiconductor, cadmium telluride, onto glass. Another company, Solyndra Inc., had a similar idea, spraying a mixture of copper and several rare metals onto tubes, and received a $535 million loan guarantee from the US Department of Energy to scale up. Solyndra’s bankruptcy in September 2011 tainted the idea of federal support for the industry for years to come. (…)

The chaos in the industry put Asbeck’s [German] empire into jeopardy. SolarWorld was manufacturing its own panels at plants in Germany, South Korea, California and Oregon, at prices well above rival products coming out of China. But his US-based facilities gave Asbeck a card to play.

That allowed him to approach the Department of Commerce in October 2011 with a claim that China was not just selling cheap solar panels but dumping them on overseas markets at costs below what they were charging domestically. The US found in favor of SolarWorld six months later and imposed duties on China-made panels ranging as high as 250%. It would be the first of several waves of trade restrictions imposed against Chinese photovoltaics.

Claims of dumping are contentious and hugely consequential. They’re often brought by oligopolists who have had their comfortable hegemony disrupted by cheaper foreign rivals. If they win, they will gain government protection against their own inability to compete. (…)

It’s conventional for insiders to act as if such decisions are made on sound objective criteria, but in truth it’s almost always a political mess built on a shaky foundation of low-quality data. When reviewing antidumping cases, “economists overwhelmingly reach the conclusion that the investigations are distorted and biased” in favor of manufacturers, according to one 2016 study of the solar dispute.

Meanwhile, the core questions are often almost impossible to answer. Is Tongwei’s cheap electricity from a state-owned utility a form of government subsidy? What about Hemlock’s tax credits protecting it from high power prices? Chinese businesses can often get cheap land in industrial parks, something that’s often considered a subsidy. But does zoning US land for industrial usage count as a subsidy too? Most countries have tax credits for research and development and compete to lower their corporate tax rates to encourage investment. The factor that determines whether such initiatives are considered statist industrial policy (bad), or building a business-friendly environment (good), is usually whether they’re being done by a foreign government, or our own.

What’s clear in retrospect, however, is that Asbeck’s claims had little solid basis. The telltale sign of a subsidized industry is that prices spring back up once competitors have been squeezed out and the government withdraws support — but the opposite has happened with solar panels, which now sell for roughly 5% of what they cost in 2011. (…)

A separate WTO panel in 2014 found the US antidumping decision resulting from Asbeck’s complaint went against the trade body’s own rules.

Still, one might have expected American solar-panel manufacturers to have responded with jubilation to Washington’s trade broadside against Beijing. In fact, the effect was much more like fear. The US in 2011 was making more money selling polysilicon and solar machinery to China than it was spending buying completed panels. That meant it was highly vulnerable to retaliation. In July 2012, two months after Washington found in favor of Asbeck, the counterattack began: China’s Ministry of Commerce announced an investigation into whether the US was dumping polysilicon into the mainland market.

Chinese panel producers didn’t wait for their government’s ruling to act. With spot prices slumping well below the long-term contracts preferred by incumbent polysilicon producers, they canceled purchases en masse. By the end of the year, the decline in Hemlock’s sales into China had “reached dire levels,” Corning’s CFO Jim Flaws told a January 2013 earnings call. “The market for solar grade polysilicon is almost non-existent now.”

The European Union, where Asbeck had been at work bringing more antidumping cases, was in a similar situation, but officials there struck a compromise agreement in 2013 that helped the main local polysilicon producer, Wacker Chemie AG, maintain access to China. Despite concerted lobbying, the US failed to do the same. The result was a direct hit on Hemlock, with tariffs of 57% on American polysilicon imports.

That was just what China’s nascent polysilicon industry needed. “At that time, Chinese polysilicon producers were not cost competitive,” says Johannes Bernreuter, an analyst who’s studied the solar poly market since the early 2000s. “That gave them a protection wall to develop. It was no coincidence that six Chinese manufacturers returned from a dormant state to production in the course of 2013 when the antidumping duties were introduced.”

The opposite happened in the US. Taking fright, Mitsubishi sold out of the Hemlock venture in 2013. The following year, about six months after Beachy took over as Hemlock’s chairman, she had to announce the closure of the promised Tennessee plant. “It was pretty painful to be honest,” she recalls.

In Pasadena, Texas, a polysilicon factory owned by solar developer SunEdison Inc. was shuttered in 2016 when the company went bankrupt, blaming Beijing’s retaliatory tariffs. Its innovative technology was bought by GCL Technology Holdings Ltd., a Chinese rival. (…)

At a time when the solar industry was scaling new heights, America’s manufacturing sector had quit the field.

Today, Tongwei has expanded beyond recognition.

It now has facilities dotted across China’s renewables-rich outlying regions, where power is cheap: in Sichuan; in tropical, hydro-fueled Yunnan; and in Inner Mongolia, rich in sunshine and wind, as well as dirty coal. Even its Leshan operations have long outgrown their original site. (…)

[Tongwei’s strategic development director] describes a business not only lacking state support, but largely left to its own devices by its corporate parent. (The Leshan facility is technically run by Sichuan Yongxiang Co., a subsidiary of the fish food-to-solar Tongwei Co. parent.) By Ding’s account, it’s as likely to compete as collaborate with Tongwei’s polysilicon facilities in other Chinese provinces.

That image of pure independence isn’t 100% accurate. Tongwei Co.’s own accounts list a total of 2.19 billion yuan ($301 million) in government grants and tax concessions to the parent company since 2009, with more than half the total accrued last year as its capacity expansion went into overdrive. At the same time, the financials provide precious little evidence of the sort of comprehensive backing that’s usually assumed to explain the low cost of Chinese photovoltaic panels, especially when benchmarked against First Solar, the only US rival with comparable accounts that’s remained in operation throughout the past decade.

Far from benefiting from cheap land, tax discounts and below-market loans, the Chinese company, if anything, is notable for how closely its business resembles its smaller US rival. The value of its land rights as a share of property, plant and equipment is about 4.9%, compared with a 0.8% share for the land on First Solar’s balance sheet. That suggests that — far from receiving benefits — Tongwei is spending more on land. Since the start of 2009, taxes on its income have amounted to about 30% of the pre-tax total; First Solar managed a dramatically lower 12.8%. Tongwei’s weighted average cost of capital — a proxy for any advantage it’s getting from low-cost loans — was 11.9%, almost identical to the 11.8% at First Solar.

As for subsidies, First Solar’s since 2009 have amounted to about three times the amount reported by Tongwei — $967 million in grants, tax credits, loan guarantees — according to a database compiled by corporate accountability lobby Good Jobs First. About 90% of the total was development and export financing for projects in Chile, Canada and India. (Thanks to its complex ownership structure, Hemlock Semiconductor doesn’t provide comparable financial data, although data from the company and the Good Jobs First database indicates $618 million in subsidies since 2008.)

The real support that Tongwei has received has been something far more indirect: the certainty of robust government backing for renewable power. Long after Germany and Spain canceled the subsidies that encouraged the renewables industry to grow so fast during the 2000s, China’s program was still active. It didn’t provide any direct support for manufacturers but ensured a level of demand from utilities that allowed solar factories to grow beyond their troubled infancy to their current profitable status. (The Chinese subsidy program was closed at the end of 2021.)

By providing policy certainty and an investment-friendly environment — two things that businesses lobby for in every country on the planet — China has built a solar industry whose lead is by now likely to be unassailable. Polysilicon is the bedrock of the solar supply chain. If it can’t be produced at competitive prices, the domestic industry is at best going to be assembling photovoltaic products manufactured elsewhere. That’s now the only plausible path for the rest of the world, according to Bernreuter. (…)

The secret? Economies of scale. A small factory in a stable market is unlikely to reduce costs very much. However, when building to epic proportions in a market growing at heroic rates, relatively minor tweaks to the manufacturing process will compound over time to drive ever-shrinking prices. (…)

China’s support for solar developers is so unwavering, in part, because — unlike the US (which is currently pumping more oil and gas than any nation in history) — it’s desperately short of domestic energy sources, other than coal reserves whose costs are ever-rising and whose fumes threaten to choke its cities. (…)

If US and European subsidies to solar hadn’t been cut because of the bad political smell from Solyndra and the wave of austerity that followed the 2008 financial crisis, then local renewable developers would have been more active and manufacturers would have seen more demand for their products. If a charismatic German hadn’t bounced the US into an accidental tariff war with China in the early 2010s, those proposed American polysilicon plants might have been built. The process innovation that’s happened over the past decade in Leshan might have occurred in Hemlock, Clarksville, Moses Lake and Pasadena instead. (…)

A US law passed in 2022 banned the import of products produced in China’s Xinjiang region unless there’s clear evidence that there was no forced labor in their supply chain. In theory, that shouldn’t be an insurmountable issue for Tongwei, which doesn’t operate in Xinjiang and appears to be “the safest bet in the Chinese polysilicon market,” according to a 2021 study by researchers at Sheffield Hallam University. In practice, however, the ban has acted as a de facto block on all polysilicon produced in China.

That law inspired Hemlock Semiconductor to restart sales and production for the solar industry in 2021. (…)

It’s not clear how much of Hemlock’s new production will go to the solar industry, and how much to semiconductors — but if you were making a bet, you still wouldn’t put it on PV. What the US really cares about is the ultra-pure polysilicon for microchips that’s central to America’s desire to make computing power — not solar power — a key national security advantage against China. The CHIPS Act, signed by Biden in 2022, provides around $52 billion in subsidies to the US microprocessor industry, sums beyond the imagination of what the solar sector has enjoyed anywhere. (…)

To have a functioning PV sector you need every piece of the supply chain — from polysilicon, ingot production and wafer slicing to cell manufacturing and finally module assembly. There’s precious little sign that’s going to emerge on a sufficient scale in the US, not least because China’s production efficiencies are so much greater.

Successive waves of tariffs have done little more than create a Potemkin solar industry, while putting a tax on clean power as the climate crisis festers. The US installed about half as many solar panels in 2023 as the European Union, despite a far richer natural endowment of clear skies and bright sunlight. (…)

China Has Broken the ‘Critical Minerals’ Market A slump in cobalt and lithium prices doesn’t guarantee security of the supply of these elements essential to the energy transition.

Billionaire Elon Musk called them the “new oil,” complaining about their “insane” cost. The White House dangled subsidies to whoever could boost supply. European politicians scrambled for a response, also promising financial support for projects. Only a few months ago, the prospect of shortages of elements including cobalt, lithium and a few other metals stoked apprehension as prices of the elements needed to make the batteries crucial for the energy transition climbed.

Not anymore. China has broken the market for these so-called critical minerals.

From their most recent peak in 2022-2023, prices of cobalt and lithium have plunged more than 75% after Chinese miners boosted production to levels that were previously unimaginable. Cobalt, long considered a commodity at risk of perennial shortages, is now so abundant that its price is hovering near a 20-year low. (…)

More than ever, China dominates production of cobalt and lithium, reinforcing its enormous influence on the batteries essential for electric vehicles and other gadgets. Worse, prices have fallen so low that non-Chinese miners would struggle to make a profit, reducing the incentive for Western investors to build their own sources. The price crash is another strike against one of the most hyped commodity narratives — that the energy transition to cleaner electricity from fossil fuels makes sky-high metals prices inevitable. (…)

From the demand side, critical minerals are the envy of the commodities industry. Supply, though, has also expanded at breakneck speeds.

Cobalt is paradigmatic. For many years, Glencore Plc., the London-listed commodity giant, dominated the market. But Chinese companies soon followed it into the Democratic Republic of Congo, home of the world’s largest reserves. There, a Chinese company known today as CMOC Group Ltd. has boosted output beyond what many in the industry thought was possible in such a short timeframe. (…)

In the process, the Chinese mining giant, which counts battery maker Contemporary Amperex Technology Co. as one of its shareholders, has become the world’s top cobalt miner, outpacing Glencore. (…)

Shouldn’t production respond quickly to low prices, as in a typical boom-bust commodity cycle? The problem is that cobalt isn’t your typical commodity. Virtually no one digs solely for cobalt; instead, about 98% of the world’s output is a byproduct of copper and nickel mining. Hence, the price that really matters isn’t what cobalt fetches, but rather what copper and nickel do. And both command high enough prices that miners have every incentive to keep digging. Thus, low prices aren’t the cure for cobalt overproduction.

The result has been the collapse in cobalt prices. From the most recent peak of more than $80 per kilogram in mid-2022, it has fallen to about $25 recently, hovering near its lowest level in two decades. (…)

It doesn’t help that sales of electric vehicles have disappointed so far this year everywhere except China, reducing demand for batteries. (…)

The market for lithium has followed a similar pattern, with Chinese companies boosting supply so quickly that they overwhelmed the market. Not only is more of the metal being dug up, Chinese companies are also getting very good at recycling old batteries, creating an extra layer of supply. The result has been the same as with cobalt: The market has cratered. Benchmark lithium prices have fallen to about $11,000 per metric ton, down from the most recent peak of almost $70,000 per ton in early 2023.

As with many other commodities, China inflated a bubble in critical minerals. Its domestic demand for batteries was strong — and its dominance of the supply chain was so large that many outside China were prompted to stockpile cobalt and lithium, spurred on by ominous warnings from US and European policymakers. For a brief period, demand overwhelmed supply.

But what China did, China has also undone. It went all in on boosting supply, and the result has been a mighty crash. But don’t be fooled by the current low prices; while they may not recover anytime soon, China’s absolute dominance of critical minerals pose a clear and persistent danger to the future production of the batteries needed to wean the world off fossil fuels.