2023 CFO Outlook: Weak Growth; Wages Trail Inflation U.S. financial executives are generally pessimistic about next year’s economy, saying they expect price growth to subside some in 2023 but still remain high. They also report that wages at their firms have not kept pace with inflation.

The CFO Survey panel includes firms that range from small operations to Fortune 500 companies across all major industries. The survey closed on December 2.

• CFOs expect real GDP to grow by only 0.7 percent in 2023, with 31 percent of CFOs expecting negative real growth.
• Most companies reported including a cost-of-living adjustment in the wages they pay their own employees. Among companies that include an explicit cost-of-living adjustment to wages, this adjustment will average 3.3 percent, in addition to merit increases [averaging 3.1%].
• CFOs anticipate their companies’ revenues to grow by only 5 percent in 2023, which is down from last quarter’s 2023 forecast and also less than anticipated 2022 revenue growth.

If revenues rise 4.7% and prices 5.2% = volume down 0.7%. With unit costs up 6.7% including a 6.9% increase in the wage bill, operating profits are set to decline.

Philly Fed: December 2022 Nonmanufacturing Business Outlook Survey

Nonmanufacturing activity in the region remained weak this month, according to the firms responding to the December Nonmanufacturing Business Outlook Survey. The index for general activity at the firm level turned positive but remained low. The new orders and sales/revenues indexes were negative, and the full-time employment index declined to a low but positive reading this month. The prices paid and prices received indexes both fell. Expectations for growth over the next six months were more widespread.

• Special question:How will your firm’s total sales/revenues for the fourth quarter of 2022 compare with that of the third quarter of 2022?

• 36.3% expect sales/revenues to decline YoY in Q4, 21.8% by more than 5%. Only 21.8% expect sales/revenues to rise by more than 5%.

U.S. Home Sales Post Record 10th Straight Month of Declines November existing-home sales fell 7.7% as Fed keeps raising interest rates

November sales fell 35.4% from a year earlier. The streak of declines is the longest on record in data going back to 1999, NAR said.

Existing-home sales have dropped about 37% from their recent peak in January. (…)

Excluding the early months of the Covid-19 pandemic, November’s existing-home sales rate was the lowest since November 2010, Mr. Yun said.

The median existing-home price rose 3.5% in November from a year earlier to $370,700, NAR said. Prices fell month-over-month for the fifth straight month after reaching a record $413,800 in June. (..)

Mortgage applications for home purchases rose 4% on a seasonally adjusted basis in the week ended Dec. 9 from the prior week, according to the Mortgage Bankers Association. Real-estate brokerage Redfin Corp.’s seasonally adjusted measure of home-buying demand, which tracks buyer inquiries, rose 5% in the four weeks ended Dec. 11 compared with a month earlier. (…)

The number of homes for sale has risen from a year ago because homes are sitting on the market longer, but prospective sellers are reluctant to list their homes. Many homeowners have rates on their mortgages below 4% and are unwilling to give up their current rate for a higher one on a new home.

The typical home sold in November was on the market for 24 days, up from 21 days from the prior month, NAR said.

Nationally, there were 1.14 million homes for sale or under contract at the end of November, down 6.6% from October and up 2.7% from November 2021, NAR said. (…)

The share of first-time buyers in the market was 28% in November, up from 26% a year earlier. About 26% of November existing-home sales were purchased in cash, up from 24% in the same month a year ago, NAR said. (…)

As low as it gets? Charts from CalculatedRisk:

  One year later at Starbucks: This month marks the one-year anniversary of the first U.S. Starbucks restaurant vote to unionize, Axios’ Hope writes.

Data: Starbucks Workers United; Chart: Erin Davis and Thomas Oide/Axios Visuals

High Commodity Prices Feed a Boom in the U.S. Farm Belt Net farm income is on track for a near 50-year high, thanks to increased prices for goods ranging from wheat to milk.

Tesla Dangles $7,500 Discount in Rare Move to Boost Deliveries The company is offering sales on the Model 3 and Y for US customers.

Tesla Inc. is offering US consumers $7,500 to take delivery of its two cheapest models before year-end, a move likely to foment more debate over the extent of the carmaker’s struggle with demand.

The discount Tesla is dangling on new Model 3 sedans and Model Y sport utility vehicles is double what the company was offering earlier this month, and likely has to do with changes to US tax credits that take effect in 2023.

Teslas were expected to be eligible for $3,750 credits starting in January as part of changes to federal electric vehicle incentives made by the Inflation Reduction Act. That changed this week when the US Treasury Department announced it was delaying guidance on how to meet new battery content requirements, which may make certain consumers eligible for a full $7,500 credit early next year.

It’s highly unusual for Tesla to offer such a perk, as Elon Musk has enforced a no-discount policy going back years. The incentive is the latest indication that the chief executive officer’s prediction for an “epic” end of the year isn’t panning out. Tesla has cut prices and production in China, and Musk has repeatedly criticized the Federal Reserve for raising interest rates.

Tesla already has said it expects to come up just short of its target to increase deliveries by 50% this year. The carmaker’s production exceeded deliveries by more than 22,000 vehicles during the third quarter, and it’s braced investors for there to be another mismatch at the end of the year.

I received this offer yesterday but it also included a 10,000 miles supercharger credit. The credit is available in the U.S. and also in Canada, a first.

Unrelated but eventually related (charts from the EIA FYI:

Notice the year axis on this chart:

Capex still below 2017-18 levels while cashflows are up 2.5x:

Canada’s Inflation:

Headline CPI inflation edged down to +6.8% yoy in November. Six out of eight categories accelerated on a year-over-year basis while transportation, and clothing and footwear slowed. CPI ex food and energy edged up to +5.4% yoy, and the average of the BoC-preferred CPI-trim and CPI-median edged up by one tenth to +5.15% yoy.

On a seasonally adjusted monthly basis, the CPI moved up by 0.4% in November. Seasonally adjusted CPI ex food and energy inflation edged up to +0.3% mom.

Sequential durable goods inflation slowed further to -0.4% mom GS sa (vs. -0.1% in October), but services inflation reaccelerated to +0.5% mom GS sa (vs. +0.3%). Within services, wage-sensitive categories were particularly strong. Rent inflation accelerated to +1.2% mom GS sa (the fastest pace since the current methodology was adopted in 2019) and boosted sequential services inflation by roughly 15bp, while inflation in other wage-sensitive categories—including personal care services and services related to household furnishings and operations—also increased. (Goldman Sachs)

This NBF Economics and Strategy’s chart illustrate that inflation is broadly receding in Canada…

…faster than in the U.S.:

  David Rosenberg: “If there is an asset class that has faced “capitulation,” it is the bond market: investors yanked $10.9 billion from fixed income mutual funds in the December 14th week — the 17th consecutive week of net outflow (and bringing the year-to-date redemption to nearly $500 billion!).”

History rhymes:

• ARKK vs QQQ: as low as it gets?

Source: Daily Shot

• “I think there could be a little more contagion from FTX. But my hope is that [everything moves] through the system in the next couple of months, or quarters at most. (…) I hope that FTX is a catalyst — just like after Enron we saw Sarbanes-Oxley, and after the 2008 financial crisis we saw Dodd-Frank.” (Brian Armstrong — co-founder and CEO of Coinbase, reported by Axios)

  Taliban Ban All Education for Girls The Taliban banned girls from attending elementary school, dealing one of the most dramatic blows yet to women’s freedoms since seizing power last year.

RECESSION WATCH

Savings only
temporary respite for US

From Fathom Consulting:

(…) As we show in the US GDP fan chart below, both our central path for US economic activity, and our mean path which takes all scenarios into account, lie substantially below the consensus among other economists, which is for stagnation rather than outright contraction. It is fair to say that US growth exceeded our expectations in Q3. While US consumer confidence has fallen dramatically, that fall has taken place over many months; and timely indicators of economic activity, such as non-farm payrolls, remained strong at least until November — when they rose by 263,000 on the month.

To a degree our views were guided by precedent. Levels of consumer confidence in the US, the euro area and the UK have fallen to levels from which recession has never been avoided since the data were first collected around 50 years ago. This relationship is understandable, with domestic households accounting for 68% of all expenditure in the US, 63% of all expenditure in the UK and 53% of all expenditure in the euro area. Moreover, while both the US and the UK have once managed to bring inflation down from today’s levels without triggering a recession, that was as long ago as 1952.

Fathom has other reasons for sticking to its gloomier-than-consensus view. Looking at the data on non-farm payrolls, we find these typically flip, after calibrating to the size of today’s workforce workforce, from an increase of around 240,000 in the month when activity peaks, to a decrease of around 200,000 in the month after activity peaks. The employment data, then, do not give us a lead on recession. They may at best tell us that a recession has not yet started, although like some other macroeconomic data they can be prone to pro-cyclical revisions, being revised down when growth is slowing and vice versa.

The chart below shows how US consumer confidence has typically behaved either side of a peak in economic activity. While each of the seven recessions in our chart is different, on average consumer confidence starts to fall nine to twelve months ahead of a peak in economic activity. Statistical tests confirm that levels of consumer confidence contain information that helps to predict future GDP growth, while the reverse is not true.

After staging a partial recovery from COVID-related lows, US consumer confidence peaked in April 2021, and has fallen significantly since then as inflation has continued to rise. Statistical tests suggest that respondents to consumer confidence surveys are affected to a degree by money illusion, with a percentage point increase in consumer price inflation lowering confidence by more than a percentage point increase in wage inflation raises it. Even if wage inflation had kept pace with consumer price inflation, which it has not, it is likely that confidence would nevertheless have fallen.

We might have expected that the fall in consumer confidence would feed through to a decline in consumer spending, and with that economic activity, within the first few months of 2022. But consumer spending has held up. The resolution to this puzzle almost certainly lies in the personal saving data. The chart below illustrates not just the scale of the savings that were built up during the pandemic — effectively the difference between the green line, representing the average saving ratio in the five years leading up to the pandemic, and the blue line — it also shows that recently a chunk of those savings has been unwound, as the blue line has fallen below the green line. It is perhaps significant that the saving ratio fell by 2.8 percentage points in January of this year, from 7.5% to 4.7%, one of the sharpest falls on record, and it has continued to decline. If US households had been either unwilling or unable to dip into their savings from the beginning of this year, that would have represented a significant decline in aggregate demand that would likely have pushed the US into recession within a few months.

That US households have had the resources to maintain their spending despite close to two years of falling real wages is undoubtedly a positive. But the question remains: for how long they will be willing to continue in this way in a period of rising interest rates, when broader measures of wealth, both financial and physical, have been falling? Predicting recessions is far from easy.

That is because they are often caused by a sudden switch in sentiment, which in turn can become self-fulfilling. If US households start to fear for their own job security, for example, they might all choose to save a little more, precipitating the economic downturn. My chart below shows the first-round impact on US GDP in a world where each US household chooses to save a little more each week. Starting from a position where the US economy was growing at trend, which we estimate to be a little over 1% per annum, it suggests a scenario where households choose to save an additional $50 per week could be enough to cause a period of stagnation, with larger increases threatening recession.

The idea that recessions can become self-fulfilling, when households (fearing difficult times ahead) choose to save more and spend less, is known as the paradox of thrift. Popularised by John Maynard Keynes, it is one argument that is often used in favour of increasing state spending during a recession. The difficulty just now is that government financing costs have risen sharply in many countries this year, in real terms and over long horizons. There is perhaps a perception that, with both the Federal Reserve and the Bank of England beginning outright sales of the assets they purchased during the GFC and the pandemic, and the ECB announcing its intention to implement a similar policy of Quantitative Tightening from next March, the one-way bet on yields has been removed as monetary policy concerns come to dominate, at least for now.

Housing Starts Decline Less Than Expected; Building Permits Decline More Than Expected

Housing starts decreased by 0.5% to 1,427k (saar) in November from an upwardly-revised October level, against consensus expectations for a larger decline. Single-family starts decreased (-4.1%), while the more volatile multi-family starts increased (+4.9%).

Building permits decreased by 11.2% to 1,342k (saar), a much larger decline than expected. Both single-family (-7.1%) and multi-family (-16.4%) permits decreased.

Housing units under construction have flatlined and must decline before permits and starts recover.

Business Leaders Survey (Covering service firms in New York, northern New Jersey, and southwestern Connecticut)

Activity in the region’s service sector declined for a third consecutive month, according to firms responding to the Federal Reserve Bank of New York’s December 2022 Business Leaders Survey. The survey’s headline business activity index fell six points to -17.6. (…) Employment growth slowed noticeably.

The wages index, while still elevated, continued to edge lower, a sign that wage growth moderated. After falling significantly last month, the wages index retreated a further 3 points to 44.1, signaling that wage growth continued to moderate.

The prices paid index remained elevated but fell seven points to 72.2, pointing to a deceleration in input price increases.

The prices received index moved down seven points to 26.8, its third consecutive monthly decline and its lowest level since mid-2021.

• At least two-thirds of CEOs of the biggest companies surveyed said they expected the next six months to bring worsening customer demand, industry conditions, access to capital, and domestic and global growth, the survey from CEO advisory firm Teneo Holdings LLC found. (…)

Overall, CEOs based in the U.S. are significantly more bullish, with about three-quarters expecting improvement over the next six months, fueled by the relative optimism among chief executives of midsize firms. Meanwhile majorities in Europe and Asia expect conditions to worsen, the survey found.

Industries with more optimistic CEOs globally include financial and professional services, technology and consumer goods, Teneo found. CEOs in manufacturing and energy were more likely to be pessimistic. (WSJ)

• Yesterday, Evercore analyst Mark Mahaney slashed his revenue and earnings estimates [for AMZN] by 4% and 9%, respectively, for 2023. Supporting that conclusion: A survey conducted by the brokerage identified broad-based “belt-tightening” among consumers during the vital holiday season, highlighted by a “deceleration” in discretionary sales since the end of November. (…) Evercore’s Mahaney also flagged “several proprietary datapoints that suggest ongoing softness in . . . cloud computing demand.” (Almost Daily Grant’s)

FYI (video): Former central bank insider William White & Danielle DiMartino Booth, Quill Intelligence

China To Correct Past ‘Mistaken’ Housing Policies: Top Economist Top officials including President Xi Jinping pledged at a policy meeting last week to support housing demand in 2023. “That is a codeword for promoting the housing sector again,” Yao said.

China’s Workers Are Calling In Sick With Covid After Beijing’s U-Turn An abrupt end to harsh pandemic rules has left factories and businesses with little insulation from fast-spreading infections.

• Chinese Cities, Factories Tell People With Covid to Go Back to Work 

(…) Allowing Covid-positive people to work, especially in factories, will no doubt fuel the spread. Yet, some companies are willing to run that gauntlet, especially if their younger workforces don’t get too sick. (…)

“If they self-report, we will recommend they stay at home and recover. But the real situation is that many workers are infected, they don’t have serious symptoms, they choose to continue to work and not report their cases.” (…)

Now, with the initial case explosion appearing to ease off, Beijing is telling workers they don’t need to prove they are negative to return to the workplace, as long as they’ve done a week of home isolation.

Other businesses in China are still trying to limit spread within their factories, with crucial year-end production targets in sight. German carmaking giant Volkswagen AG is asking Covid-free workers to work longer hours at one of its factories in southern China, with a raft of employees out sick with Covid. (…)

To keep the site running, SES is splitting workers’ shifts, with Covid-infected employees going to work on Mondays, Wednesdays and Fridays and non-infected staff working Tuesdays and Thursdays.

Companies such as Apple Inc supplier, Foxconn Technology Co., and carmaker Geely are keeping their workers in closed loops as the Covid wave spreads. The systems see employees confined to the factory campus and tested regularly to keep the virus out.

Reopening has been accompanied by staff shortages and reduced output for businesses in other parts of the world, and the expectation is that China will have a similar experience, at a much greater scale, as it scraps Covid Zero. Mass absenteeism and delays in the world’s second-largest economy could have significant implications for supply chains and global growth. (…)

Xi Tells Russia’s Medvedev That China Wants Talks on Ukraine

Postal Service Outlines Plans to Convert Fleet to Electric Vehicles The agency said that of 106,000 delivery vehicles it expects to acquire between now and 2028, at least 66,000 will be electric.

Taliban Ban Women From Universities A new decree has broadened a ban on female education that has drawn international condemnation and isolated Afghanistan’s hardline government.