Small Business Optimism On the Upswing Greater Sales Expectations Lift Outlooks in July
The NFIB Small Business Optimism Index rose to 93.7 in July, its highest reading since February 2022. It’s hard to mistake this four-month string of upticks for anything other than a trend improvement in sentiment. Although the index remains below its 50-year average of 98, the outlook for business conditions shot up 18 points in July, driven by brighter sales expectations.
Yet, the underlying details continue to reveal hesitancy about the demand outlook amid a cloudy economic and political landscape. The clearest takeaways from July’s survey are vital for the Fed: labor demand continues to ease and price pressures continue to fade. These soft elements of the survey measures, in concert with hard data on inflation and nonfarm payrolls, support our view that the Federal Reserve will begin cutting its policy rate next month at the September meeting.
(…) the share of respondents planning price hikes over the coming months fell to a net 24%, the lowest figure since April 2023. Although the percentage of firms raising prices remained elevated compared to pre-pandemic levels, it similarly dropped five points over the month to a net 22%. (…)
Despite a one-point uptick in July, the net percent of small businesses with outstanding job openings continued to decline on trend. Hiring plans have not budged for three months.
(…) the uncertainty index jumped to its highest point since November 2020, likely driven by the upcoming presidential election. (…)
The percentage of firms expecting higher sales volumes over the next three months, although still a net negative, rose four points to its highest reading this year. Concurrently, reports of greater actual sales fell four points to its lowest reading this year. (…)
The portion of small businesses adding to their inventories dropped six points to a net -9%, the lowest reading since August 2020. (…)
Job postings on Indeed stopped declining at the end of June:
EARNINGS WATCH
From JPM:
S&P500 companies so far have surprised on earnings by 3.7% (vs. 4.1% last 4Qs, and 2.0% ex-Financials). If adjusted for JPM’s significant one-time gain on sale of its Visa stake, the earnings surprise was much closer to 2.4%.
For companies that have reported, 2Q revenue growth is 5.0% y/y and net income growth is 12.1% (vs. 10.7% ex-Financials).
As it relates to the Mag7, earnings surprise was well ahead of the S&P 493 (6.1% vs. 3.0%), though the revenue surprise has been more in line (1.1% vs. 1.3%). Mag7 companies continued to exhibit far stronger earnings growth (26.1% vs. 8.6%) and revenue growth (10.9% vs. 4.2%) compared to S&P 493 companies that have reported so far.
Since the beginning of the earnings season (i.e., 7/11), 2Q24 EPS have been revised up 1.8% to $59.73 (+10% y/y), with 2024E EPS flat at $243.45 (+10% y/y). Note, 2H24 expected earnings have been revised down -1.5% (+10% y/y). Looking to 2025, EPS estimates have been revised up 0.3% since the beginning of the earnings season to $279.57 (+15% y/y).
China’s Loan Drop Stokes Fears of ‘Balance Sheet’ Recession Key lending gauge contracted for first time since 2005 in July
China’s first bank loan contraction in nearly two decades has fanned fears the world’s No. 2 economy is careening toward a “balance sheet recession” as Japan did decades ago.
A plunge in new corporate borrowing combined with households preferring to repay debt saw bank loans shrink last month for the first time since July 2005. That deepened China’s years-long battle with weak credit demand, as a property slump spurs caution on buying homes and expanding investment.
Determination among consumers and businesses to pay down debt following real estate collapse is seen as a hallmark of Japan’s stumble into decades of deflation in the 1990s.
Economists have long debated whether China is also facing a similar “balance-sheet recession,” a concept Richard Koo, chief economist at Nomura Research, used to explain Japan’s “lost years.” His theory is families and businesses, spooked by falling asset prices in Japan, focused on clearing debts and stopped spending in the economy. (…)
The problems are being felt across the economy. China’s steel industry is now facing a crisis more serious than the downturns of 2008 and 2015, the world’s biggest producer warned in a statement, as the property downturn and weaker factory activity push prices to multi-year lows. (…)
China’s bond markets are reflecting concerns the country faces a period of stagnation, subdued inflation and low interest rates. Yields have fallen to record lows across the curve and corporate bond spreads have narrowed as investors flocked to fixed income in favor of stocks, despite pushback from Chinese authorities. (…)
The People’s Bank of China has intervened repeatedly with verbal warnings and regulatory action in the government bond market in recent weeks. Policymakers are concerns about a negative feedback loop between falling yields and weakening expectations for the economy.
(…) economists have pointed to some differences that suggest China may not sleepwalk into Japan-style stagnation anytime soon.
For one, the debt-to-gross domestic product ratio for the household sector has largely flat-lined since the pandemic, while that debt level for the corporate sector — which includes state-owned enterprises that are less sensitive to demand shifts — has kept rising.
China’s real-estate price collapse has also been less severe than what was seen in Japan during its prolonged crisis in the 1990s.
The Plaza Accord, signed by major economies in 1985 to weaken the US dollar, caused the yen to appreciate and shattered Japan’s export competitiveness. That shock also contributed to Japan’s lost decade, said ING’s Song, who noted China’s foreign exchange policy is more flexible.
To determine a balance sheet recession, “we need to at least see that companies are deleveraging,” said Larry Hu, head of China economics at Macquarie Group Ltd, noting another distinction. “There isn’t a significant contraction in liabilities.”
- World’s Top Steel Producer Warns of ‘Severe’ Industry Crisis Iron ore collapses to lowest since last year on demand outlook
Conditions in China’s steel sector are like a “harsh winter” that will be “longer, colder and more difficult to endure than we expected,” China Baowu Steel Group Corp. chairman Hu Wangming told staff at company’s half-year meeting, warning of worse challenge than major traumas in 2008 and 2015. (…)
For commodities including steel, the warning from Baowu underscores risks to demand and prices, as well as what ArcelorMittal SA, the industry No. 2, called an “aggressive” surge of exports from China.
China’s steel market — by far the world’s largest — is flashing multiple warning signs as the protracted property downturn shows no signs of ending, while factory activity remains subdued. (…)
Baowu didn’t offer much on the causes of the current downturn, focusing on how employees should respond: by preserving cash and minimizing risks. (…)
US Considers a Rare Antitrust Move: Breaking Up Google Antitrust enforcers soliciting input from outside companies
A bid to break up Alphabet Inc.’s Google is one of the options being considered by the Justice Department after a landmark court ruling found that the company monopolized the online search market, according to people with knowledge of the deliberations.
The move would be Washington’s first push to dismantle a company for illegal monopolization since unsuccessful efforts to break up Microsoft Corp. two decades ago. Less severe options include forcing Google to share more data with competitors and measures to prevent it from gaining an unfair advantage in AI products, said the people, who asked not to be identified discussing private conversations.
Regardless, the government will likely seek a ban on the type of exclusive contracts that were at the center of its case against Google. If the Justice Department pushes ahead with a breakup plan, the most likely units for divestment are the Android operating system and Google’s web browser Chrome, said the people. Officials are also looking at trying to force a possible sale of AdWords, the platform the company uses to sell text advertising, one of the people said.
The Justice Department discussions have intensified in the wake of Judge Amit Mehta’s Aug. 5 ruling that Google illegally monopolized the markets of online search and search text ads. Google has said it will appeal that decision, but Mehta has ordered both sides to begin plans for the second phase of the case, which will involve the government’s proposals for restoring competition, including a possible breakup request. (…)
Divesting the Android operating system, used on about 2.5 billion devices worldwide, is one of the remedies that’s been most frequently discussed by Justice Department attorneys, according to the people. In his decision, Mehta found that Google requires device makers to sign agreements to gain access to its apps like Gmail and the Google Play Store.
Those agreements also require that Google’s search widget and Chrome browser be installed on devices in such a way they can’t be deleted, effectively preventing other search engines from competing, he found. (…)
Google paid as much as $26 billion to companies to make its search engine the default on devices and in web browsers, with $20 billion of that going to Apple Inc. (…)
Mehta’s ruling also found Google monopolized the advertisements that appear at the top of a search results page to draw users to websites, known as search text ads. Those are sold via Google Ads, which was rebranded from AdWords in 2018 and offers marketers a way to run ads against certain search keywords related to their business. About two-thirds of Google’s total revenue comes from search ads, amounting to more than $100 billion in 2020, according to testimony from last year’s trial. (…)
Another option would require Google to divest or license its data to rivals, such as Microsoft’s Bing or DuckDuckGo. Mehta’s ruling found that Google’s contracts ensure not only that its search engine gets the most user data – 16 times as much as its next closest competitor — but that data stream also keeps its rivals from improving their search results and competing effectively.
For years, websites have allowed Google’s web crawler access to ensure they appear in the company’s search results. But more recently some of that data has been used to help Google develop its AI.
Last fall, Google created a tool to allow websites to block scraping for AI, after companies complained. But that opt-out doesn’t apply to everything. In May, Google announced that some searches will now come with “AI Overviews,” narrative responses that spare people the task of clicking through various links. The AI-powered panel appears underneath queries, presenting summarized information drawn from Google search results from across the web.
Google doesn’t allow website publishers to opt-out of appearing in AI Overviews, since those are a “feature” of search, not a separate product. Websites can block Google from using snippets, but that applies to both search and the AI Overviews. (…)
