NY Fed Services Activity Survey

Activity declined significantly in the region’s service sector, according to firms responding to the Federal Reserve Bank of New York’s May 2023 Business Leaders Survey. The survey’s headline business activity index fell seven points to -16.8. The business climate index was little changed at -45.8, suggesting the business climate remains much worse than normal.

Employment edged slightly higher despite the decline in activity. Wages and input prices increased at about the same pace as last month, while selling price increases picked up.

Looking ahead, firms expect conditions to improve only somewhat over the next six months.

Fed Poised for Big Upgrade to Outlook Despite Swirling Risks

(…) “They are going to have to raise GDP and lower unemployment for the year,” said Julia Coronado, president of MacroPolicy Perspectives LLC and a former Fed economist. “It definitely reinforces higher for longer. The Fed isn’t going to be turning around and cutting anytime soon.” (…)

That will likely prompt the Federal Open Market Committee to boost its 2023 economic growth forecast to around 1% from 0.4%, and cut its unemployment rate expected late this year to around 4% from its prior estimate of 4.5%, said Stephen Stanley, chief US economist at Santander US Capital Markets in New York. (…)

Stanley said the FOMC’s March unemployment estimate – 1.1 percentage point higher than unemployment in April – seems impossible absent a “really severe” recession. “They’ve been way too pessimistic about 2023 and their projections all across the board,” he said. (…)

Growth averaged 1.1% in the first quarter and is tracking 2.9% so far for the second quarter, according to the Atlanta Fed’s gross domestic product tracker, and 2% per Goldman Sachs economists’ tracking. (…)

The strength could lead to a “hawkish pause” in June, in which the Fed won’t raise rates but will signal the possibility of future hikes, said Matt Colyar, Moody’s Analytics economist. (…)

April Housing Starts: Near Record Multi-Family Under Construction

Privately‐owned housing starts in April were at a seasonally adjusted annual rate of 1,401,000. This is 2.2 percent above the revised March estimate of 1,371,000, but is 22.3 percent below the April 2022 rate of 1,803,000. Single‐family housing starts in April were at a rate of 846,000; this is 1.6 percent above the revised March figure of 833,000. The April rate for units in buildings with five units or more was 542,000. (…)

Total housing starts in April were slightly above expectations, however, starts in February and March were revised down, combined. (…)

Currently there are 977 thousand multi-family units under construction.  This is the highest level since September 1973! This is close to the all-time record of 994 thousand in 1973 (being built for the baby-boom generation). For multi-family, construction delays are a significant factor. The completion of these units should help with rent pressure.

Combined, there are 1.675 million units under construction, just 35 thousand below the all-time record of 1.710 million set in October 2022. (…)

This chart combines single and multi family units by stage of construction. Permits and starts have declined from their recent peaks, which will bring “units under construction” down, but there is no collapse in construction despite the sharp rise in interest rates.

Also, even with the strength in multis, the weak single-family market means there is no tsunami of new housing units coming.

The first chart above shows that multis starts have flattened in the past year. Multis permits are down 31% since December 2021.

Interest in singles remains cyclically very low.

Commercial Real Estate Prices in the US Fall for First Time Since 2011

The less than 1% decline was led by drops in multifamily residences and office buildings, data culled by Moody’s from courthouse records of transactions showed.

“Lots more price declines are coming,” Mark Zandi, Moody’s Analytics chief economist, said.

The danger is that will compound the difficulties confronting many banks at a time when they are fighting to retain deposits in the face of a steep rise in interest rates over the past year. (…)

The price declines seen so far have been more marked for higher-priced properties, according to commercial property company CoStar Group. Its value-weighted price index has fallen for eight straight months and in March stood 5.2% lower than a year ago. (…)

The rise in employees working from home has driven some downtown retailers and restaurants out of business and forced owners of office buildings to reduce rents to retain tenants or to sell all together. (…)

Banks held more than $700 billion in loans on office buildings and downtown retailers in the fourth quarter of last year, according to the Fed. More than $500 billion of that was extended by smaller lenders. (…)

One potential bright spot: The big run-up in prices in past years has left many borrowers with substantial equity cushions in the properties they own. That reduces the dangers of defaults and limits the potential losses for lenders.

The loan-to-value ratio of mortgages backed by office buildings and downtown retail properties was in the range of 50% to 60% on average at the end of last year for credit extended by bigger banks, based on data collected by the Fed.

“Delinquencies and defaults will rise, but I don’t think we’ll see a lot of forced sales,” Zandi said.

He forecasts prices dropping about 10%, assuming the US skirts a recession. If it doesn’t, the declines could get a lot worse. (…)

• Overexposed US regional banks could sell commercial property loans

Many U.S. regional lenders may have to consider selling off commercial real estate (CRE) loans at a steep discount after breaching key regulatory thresholds for exposure to the troubled sector, according to new data and market sources.

(…) previously unreported data from New York-based real estate data provider Trepp, shared with Reuters, show many regional banks’ holdings exceed thresholds stipulated by regulators. (…)

A Trepp study of 4,760 banks’ public regulatory data published late Tuesday found that 763 have either a CRE or construction loan concentration ratio that exceeded these thresholds.

Some 30% of banks with $1 billion to $10 billion in assets had exceeded at least one ratio, while 23% of banks with assets of $10 billion to $50 billion exceeded at least one ratio.

While big banks have recently warned about CRE exposure, the new Trepp data underscores how acute and widespread the problem is across the banking sector. (…)

JPMorgan said in a March report it expects about 21% of outstanding office loans in commercial mortgage-backed securities will eventually default. (…)

• BlackRock to call staff back to office at least four days a week

(…) Last month, J.P.Morgan Chase & Co (JPM.N), the United States’ largest bank, asked its managing directors to work from office five days a week.

J.P.Morgan CEO Jamie Dimon, along with Wall Street counterparts at Goldman Sachs Group Inc (GS.N) and Morgan Stanley (MS.N), has been a strong advocate of in-office work.

Global debt on the rise, emerging markets cross $100 trillion mark, trade group says

A measure of debt across the globe rose in the first quarter to almost $305 trillion, and the rising cost to service that debt is triggering concern about the financial system’s leverage, a widely tracked study showed.

The Institute of International Finance, a financial services trade group, said on Wednesday global debt rose by $8.3 trillion in the first three months of this year compared to the end of 2022 to $304.9 trillion, the highest since the first quarter of last year and second-highest quarterly reading ever.

“Global debt is now $45 trillion higher than its pre-pandemic level and is expected to continue increasing rapidly,” said the IIF in its quarterly Global Debt Monitor.

After peaking near 360% in 2021 the debt-to-output ratio has stabilized around 335%, above pre-pandemic levels.

Aging populations and rising healthcare costs continue to put spending pressure on governments, while “heightened geopolitical tensions are also expected to drive further increases in national defense spending over the medium term,” wrote IIF researchers. (…)

“Shadow banks now account for more than 14% of financial markets, with the majority of growth stemming from a rapid expansion of U.S. investment funds and private debt markets.” (…)

The report showed 75% of the IIF’s emerging market (EM) universe saw an increase in debt levels in dollar terms in the first quarter, with the overall figure crossing over $100 trillion for the first time. China, Mexico, Brazil, India and Turkey posted the biggest increases, the data showed. (…)

• WE O U $17T

The New York Fed recently released its first-quarter report on household debt, revealing that American households now owe someone a staggering $17 trillion.

The majority of that is tied up in home mortgages, with the remainder split across student loans, car loans and credit cards — with the latter (and smallest) of those 3 categories particularly striking.

Credit card debt remained at a record level of $986 billion, defying the usual trend of post-holiday debt reduction. Indeed, this is the first time in over two decades that credit card balances haven’t decreased in the first quarter — a period when many cut back on spending after the holiday period of October-December.

All told, credit card debt rose 17% in the last 12 months, a potential sign that consumers are turning to credit cards to cope with mounting daily expenses as inflation continues to bite. Another concern is the rising delinquency rate, with ~4.6% of credit card debt transitioning into “serious delinquency” — where debt remains unpaid for 90+ days — up from just 3% during the same period last year.

This current situation stands in contrast to the pandemic, when US consumers, buoyed by stimulus checks and lockdown savings, managed to pay off $160bn of credit card debt between the end of 2019 and March 2021. (Chartr)

In reality, Americans have considerably deleveraged after the GFC and after the pandemic.

FYI:

• Target’s comparable sales were flat compared to the previous quarter, as executives pointed to increasingly cautious consumers. (WSJ) But it beat earnings expectations despite sluggish sales.
• TJX reported F1Q24 EPS of $0.76, ahead of GS/FactSet consensus at $0.72, with the beat primarily driven by stronger gross margins. Overall comp store sales were 3% vs. GS/consensus at 3.4%/2.7%.

Shoppers Boosted Retail Sales in April, Reversing Two Months of Declines Consumers spent more on autos, dining out and home projects last month after cutting spending earlier in the year

Retail sales—a measure of spending at stores, online and in restaurants—rose a seasonally adjusted 0.4% last month from the month before, after declining in February and March, the Commerce Department said Tuesday.

Consumers spent more on autos and dining out last month, while boosting online purchases. They cut spending on gasoline and on big-ticket purchases such as appliances and furniture. (…)

Retail sales rose 1.6% in April from a year earlier, below the 4.9% inflation rate for the same period. (…)

Home Depot said Tuesday it expects annual sales to decline for the first time in over a decade as households spend less on home improvement in favor of services. Chief Financial Officer Richard McPhail said customers are also balking at making big-ticket purchases that can be easily deferred. (…)

Auto purchases started to rebound in the first quarter as dealers built up inventories after supply-chain constraints faded, with many companies reporting higher sales. (…)

Retail sales (i.e. goods consumption) have flatlined in the past 12 months but remain 30.6% above their pre-pandemic level, substantially higher than total consumption expenditures (including services) at +22.4% and disposable income at +17.0%. The convergence will continue.

• US retail sales increased 0.5% over the last year, the lowest growth rate since May 2020 & well below the historical average of 4.8%. After adjusting for inflation, though, the story is far worse. Real retail sales fell 4.2% over the last year, the 6th consecutive YoY decline.

@charliebilello

Not so fast Charlie. If you want to adjust retail sales for inflation, you can’t use total CPI which is up 5.0% in April. You must use CPI-Goods, +2.0% in April. Real retail sales are thus down, but not quite as much as your measure suggests.

How Car Sales Could Keep the Economy Humming Retail spending is still growing and could soon get a boost for car sales

The Commerce Department on Tuesday reported that retail sales rose a seasonally adjusted 0.4% in April from a month earlier after slipping 0.7% in March. That was less than the 0.8% economists polled by The Wall Street Journal had expected. But sales excluding gasoline stations, car dealers, building-materials stores and food services—the so-called control group that economists use to track the underlying pace of consumer spending— rose 0.7%. That put control spending above its first-quarter average, setting the stage for another quarter of spending gains.

The report also showed how the contours of consumer spending continue to shift. Sales at furniture and home furnishing stores, department stores and electronics and appliance stores, all of which were pandemic beneficiaries, fell. Sales at food services and drinking places rose.

Sales at motor vehicle dealers also rose a bit, increasing by 0.1% from a month earlier. Gains there seem likely to continue, and strengthen, in the months ahead, providing support for spending and the economy. (…)

Last year, there were 13.75 million cars, pickup trucks and other light vehicles sold in the U.S., the fewest since 2011, when auto sales were still pulling out of the financial crisis. Lately, with supply chains steadier and vital semiconductor chips more widely available, sales have been making a comeback. Through the first four months of the year, Commerce Department figures show that 15.41 million light vehicles have been sold at a seasonally adjusted, annual rate. (…)

In 2019, 16.9 million light vehicles were sold. And considering how many people have been holding on to their cars longer than they usually would, sales could feasibly go higher than they were before the pandemic. (…)

Recent research from the Federal Reserve Bank of San Francisco suggests that the excess of savings households built up after the pandemic hit can continue to support spending through at least the fourth quarter of this year. (…)

And there is also the fact that cars are getting older:

Reproduced from S&P Global Mobility. Chart: Axios Visuals

Fed Officials Debate Whether to Pause Rate Rises Some central bankers are more worried about banking-sector stresses, while others haven’t seen enough inflation progress

(…) The Fed should raise and then hold rates at a level where the next move is equally as likely to be an increase or a decrease, and the central bank isn’t there yet because inflation isn’t showing enough signs of improvement, Cleveland Fed President Loretta Mester said Tuesday.

“The question in my mind is have we gotten to that rate yet? At this point, given the data we’ve gotten so far, I would say no,” she said during a question-and-answer session after a speech in Dublin. (…)

Two other Fed officials suggested they were leaning toward holding interest rates steady at the central bank’s June 13-14 meeting to study the effects of past moves as well as the impact of three bank failures since mid-March, which could further tighten credit conditions.

“You don’t land the plane nose down,” said Chicago Fed President Austan Goolsbee at a conference in Amelia Island, Fla., on Tuesday evening. (…)

Speaking on the same panel, Atlanta Fed President Raphael Bostic said he expected it would take time for inflation to come down, in part because interest rates had only recently reached levels that would restrict economic activity.

Mr. Bostic said he was inclined to pause rate rises next month because of his concern that continuing to raise rates without allowing more time to assess their impact would lead the central bank to overshoot. The Fed could decide after that whether to raise rates again or hold them steady, he said.

A fourth official, New York Fed President John Williams, didn’t tip his hand, but indicated he was comfortable with current market expectations of no increase at the June meeting. Investors in interest-rate futures markets on Tuesday saw a 22% chance of an increase next month, according to CME Group. (…)

On a YoY basis, total CPI was up 5.0% in April but its major components were all above that: core CPI was +5.5%, “CPI-essentials” was +6.1% and core services was 6.8%.

The bar chart shows the same categories on a MoM basis with the dash line indicating where we need to be to reach a 2% annualized rate. A hard grind, to say the least. And we have been lucky on energy, thanks to a very mild winter.

The big worry is that stubbornly high inflation gets transmitted to higher wages. The Atlanta Fed Wage Growth Tracker is seen as the gold standard on wages since it is composition-adjusted. Wage gains peaked last August at 6.7% but they have remained above 6% since. 

But this is a 3-month moving average. It so happens that the April number came in at -1.4% MoM bringing the non-smoothed April number to +5.1% YoY, down from +6.4% on average in the previous 3 months. The Daily Shot has the non-smoothed charts:

  

This gives more credibility to the non composition-adjusted BLS wage measures which were both below 5% in April.

• Americans Have Never Been So Unwilling to Relocate for a New Job

The share of job seekers who relocated to take up a new position fell to 1.6%, the lowest level on record, in the first quarter of 2023, according to a quarterly survey that’s been carried out by executive coaching firm Challenger, Gray & Christmas, Inc. for decades.

Behind the shift in attitudes lies a post-pandemic surge in remote and hybrid positions, which has made it possible for more workers to stay where they’re living even as they change jobs. What’s more, higher interest rates have made buying a house somewhere else more expensive — especially when it also requires people to sell an existing home that’s financed with a mortgage locked in at low costs. (…)

About one-third of US companies say most of their workers are in the office, according to Challenger — up from just 13% last fall. Still, many workers are digging in their heels and refusing to come back.

Fewer than half of workers went to the office in 10 of the largest US business districts in the week ended May 10, according to data from Kastle Systems, a office key-fob firm.

Canadian Inflation slowing

• Headline CPI inflation edged up 0.1% to +4.4% yoy in April.
• Core CPI edged down to +4.4% YoY in April (vs. +4.5% in March), and the average of the BoC-preferred CPI-trim and CPI-median edged down to +4.20% YoY from a downwardly revised average of +4.45% in March.
• On a three-month average annualized basis, CPI-Trim increased to +3.7% (vs. +3.3% in March) and CPI-Median increased to +3.8% (vs. +3.6%).
• On a seasonally adjusted MoM basis, headline CPI increased +0.6% in April. March was revised to +0.3%, up from the +0.1% published originally.
• Core CPI was unchanged at +0.3% MoM.

• Rents surge higher in April: ‘Virtually every area in Canada is experiencing an increase’

Europe Car Sales Up in April as Output Gains on Better Supply

New-car registrations increased 16% to 964,932, the European Automobile Manufacturers’ Association said Wednesday. While the recovery continues, deliveries during the first four months of the year remain roughly a fifth below pre-pandemic levels. (…)

Fully electric vehicles saw a nearly 50% increase in registrations compared to April last year, while sales of gas-fueled cars rose by 15%. Orders for diesel-powered vehicles declined slightly.

China’s Home-Price Growth Slows as Housing Rebound Fizzles

New-home prices in 70 cities, excluding state-subsidized housing, rose 0.32% last month from March, when they grew 0.44%, National Bureau of Statistics figures showed Wednesday. Price gains slowed to just 0.01% in the secondary market, after climbing 0.26% a month earlier. (…)

High-frequency indicators in recent weeks show momentum in home purchases has fizzled, despite Beijing’s effort to prop up the market. (…)

New household mid and long-term loans, a proxy for mortgages, posted the first decline in a year in April, suggesting residents repaid more than they borrowed.