Powell Signals Fed Ready to Slow Rate Rises in December The Fed chair says a labor-market slowdown will be needed to bring inflation back to the central bank’s 2% target.

Federal Reserve Chair Jerome Powell provided a clear signal that the central bank is on track to raise interest rates by a half percentage point at its next meeting, stepping down from an unprecedented series of four 0.75-point rate rises aimed at combating high inflation.

Mr. Powell, in a speech Wednesday, said an overheated labor market needed to cool more for the Fed to be confident that inflation would decline toward its 2% goal.(…)

“My colleagues and I do not want to overtighten because…cutting rates is not something we want to do soon,” he said. “That’s why we’re slowing down and going to try to find our way to what that right level is.”

(…) he said that declines in rents and goods prices might be insufficient if firms don’t slow their hiring to bring the strong demand for labor into better balance with a shortfall in the supply of workers. (…)

The labor market “shows only tentative signs of rebalancing, and wage growth remains well above levels that would be consistent with 2% inflation,” Mr. Powell said. “Despite some promising developments, we have a long way to go in restoring price stability.” (…)

Mr. Powell repeated his earlier view that officials were likely to raise rates to a somewhat higher level early next year than they had anticipated in projections released after their September meeting, when most officials saw their benchmark rate rising to between 4.5% and 5%. (…)

The upshot is that Fed policy will seek to slow inflation and wage growth by reducing demand for workers, a subject that Mr. Powell addressed delicately on Wednesday. “For the near term, a moderation of labor demand growth will be required to restore balance to the labor market,” he said. (…)

FYI, during the Q&A, Powell said that a soft landing scenario is “very plausible”. “If we get good inflation data and we get evidence that — of all the things that I talked about, if all those things start to swing the other way, then we could very much achieve this.”

Powell obviously does not care of Rob Arnott’s findings (see yesterday’s Daily Edge):

• An inflation jump to 4% is often temporary, but when inflation crosses 8%, it proceeds to higher levels over 70% of the time.

• If inflation is cresting, inflation levels of 4 or 6% revert by half in about a year. If inflation is accelerating, 6% inflation reverts to 3% in a median of about seven years, threatening an extended period of high inflation.

• Reverting to 3% inflation, which we view as the upper bound for benign sustained inflation, is easy from 4%, hard from 6%, and very hard from 8% or more. Above 8%, reverting to 3% usually takes 6 to 20 years, with a median of over 10 years.

U.S. Growth Slowed in Fall, Beige Book Says Central bank’s business contacts saw greater economic uncertainty amid inflation and higher interest rates

(…) U.S. economic activity was “about flat or up slightly,” compared with a moderate average pace of growth cited in the prior report. The Fed said five districts reported slight or modest gains in activity and the other seven experienced either no change or slight-to-modest declines in activity.

Improving supply chains and weakening demand lead to a slowing pace of price increases. Consumers also increasingly sought discounts, the report said. (…)

Some layoffs were reported in the technology, finance and real-estate sectors but employment grew modestly in most of the country. Some businesses said they were reluctant to lay off workers because of recent hiring difficulties.

The Philadelphia Fed said wage growth had subsided but remained elevated with wage inflation becoming somewhat less widespread.

JOLTS: Job Openings Decrease Moderately in October; Hiring Eases Again

Job openings decreased 353,000 in October (-6.9% y/y) to 10.334 million, basically reversing their September increase of 407,000, according to the Job Openings and Labor Turnover Survey (JOLTS) from the Bureau of Labor Statistics. The September increase reflected a revision from a 437,000 increase reported last month. (…)

The decrease in job openings extended across several industries during the last year, largely reversing the increases seen in September. Construction job openings decreased (-5.3% y/y), as did manufacturing (-19.1%), trade, transportation & utilities (-16.5%), professional & business services (-12.2% y/y), and leisure & hospitality (-3.3% y/y). Even government job openings decreased year-on-year (-1.3%) The only major sector with a year-to-year increase was education & health services (+3.6% y/y), driven by an advance in health care and social assistance, (+4.8% y/y).

New hires declined 84,000 month-on-month (-6.9% y/y) in October after falling 238,000 in September, revised from 252,000. The latest decline was again widespread across industries including construction (-8.3% y/y), manufacturing (-10.8% y/y), trade, transportation & utilities (-7.9% y/y), professional & business services (-14.3% y/y), education & health services (-1.2% y/y) and leisure & hospitality (-4.2% y/y). Government hiring did increase (+9.6% y/y). (…)

Quits declined modestly, by 34,000 (-2.6% y/y), in October, the fifth decline in six months. The quit rate (number of quits as a percent of total employment) fell to 2.6% from 2.7% during the prior three months. (…)

Layoffs & discharges rose 58,000 (+3.4% y/y) to 1.387 million following a decline of 161,000 in September.(…)

MANUFACTURING PMIs

Eurozone manufacturing downturn continues in November but inflationary pressures ease further

The downturn in the eurozone goods-producing sector continued in November, although rates of decline in output and new orders were less aggressive when compared to the near two-and-a-half year records seen in October. There was also a further easing of inflationary pressures, in part due to weaker demand and reduced strain on suppliers.

Nevertheless, November survey data pointed to a solid reduction in output volumes. The level of incoming new orders also fell sharply once again as client demand in markets across the eurozone and other parts of the globe deteriorated. Input purchasing was subsequently reduced to the quickest extent since May 2020 and firms remained pessimistic in their outlook for the next 12 months.

The S&P Global Eurozone Manufacturing PMI® moved slightly higher in November to 47.1, from 46.4 in October. However, by posting another sub-50.0 reading – the fifth in as many months – the headline index signalled a further deterioration in the health of the goods-producing sector.

All of the monitored eurozone nations (which combined account for roughly 90% of manufacturing activity in the euro area) recorded Manufacturing PMI readings below the crucial 50.0 mark. (…)

Manufacturing output levels fell in November for a sixth straight month. Deteriorating order books were a key reason for lower production, according to surveyed companies. While the rate of decline was solid, it was weaker than October’s 29-month record.

A similar trend was seen in new orders midway through the fourth quarter as the slump in demand for eurozone goods eased in severity. Nevertheless, the respective index was well below the 50.0 no-change mark and indicative of a sharp monthly fall. Survey respondents noted a hesitancy among their clients to place orders due to economic uncertainty, sufficient stock levels and high selling prices.

New orders fell at a much quicker pace than output, freeing up resources at eurozone manufacturers to clear work pending completion. This was evidenced by a decrease in the amount of orders outstanding in November, and one that was sharp overall. Still, eurozone manufacturers saw their stocks of unsold goods rise, and at a slightly faster rate. Some customers reportedly postponed orders.

To accommodate reduced production requirements, euro area manufacturers cut their purchasing activity at the sharpest rate in two-and-a-half years. However, this didn’t prevent an accumulation of input stocks, which rose for the fourteenth month running. In some cases, warehouses were filled due to the delayed delivery of previously purchased items.

As a consequence of falling input demand, pressure on suppliers eased in November. Delays on deliveries from vendors were at their least marked since August 2020 amid reports of improving material availability.

Easing supply-chain frictions helped alleviate cost pressures for eurozone manufacturers in November. The rate of input price inflation softened notably to its weakest in almost two years. Nonetheless, operating expenses were still elevated as factories grappled with high energy costs.

Softer input cost inflation fed through to output charges, with euro area manufacturers taking a less aggressive approach to their price setting. The overall rate of output price inflation, albeit sharp, was the weakest since March 2021.

Looking ahead, the latest survey data highlighted pessimism towards the 12-month outlook for eurozone manufacturers. Subdued demand conditions, high inflation, the European energy crisis and recession fears weighed on business sentiment. However, this didn’t deter companies from expanding their workforces, albeit to the weakest extent since February 2021.

China: Manufacturing conditions deteriorate slightly in November

Ongoing COVID-19 containment measures continued to weigh on the performance of China’s manufacturing sector during November. Firms registered a further fall in output, with the rate of contraction picking up slightly from October, amid a sustained reduction in sales. That said, the latest drop in new work was the weakest recorded in four months.

Pandemic restrictions and reduced production requirements also led firms to cut back on purchasing activity and contributed to a further drop in staff numbers. At the same time, there was a notable deterioration in supplier performance, which declined at the fastest rate since May. Looking ahead, optimism around the 12-month outlook for production remained subdued in the context of historical data, but improved to a three-month high. Prices data meanwhile signalled a slight acceleration in the rate of input cost inflation, while output charges fell fractionally.

The headline seasonally adjusted Purchasing Managers’ Index™ (PMI™) rose from 49.2 in October to 49.4 in November, to signal a deterioration in the health of the manufacturing sector for the fourth month in a row. That said, the rate of decline was the slowest seen since August and only slight.

Factory output in China fell for the third month running in November, with the rate of reduction quickening from October, but remaining mild overall. Companies frequently linked the decline to the impact of COVID-19 restrictions on operations and customer demand.

New orders likewise fell further, though the rate of contraction eased to a marginal pace that was the weakest in four months. The pandemic, and subsequent difficulties in transporting goods, also weighed on foreign demand, which fell for the fourth month in a row. There were also reports that softer global economic conditions had dampened export sales. The rate of reduction was only slight, however.

Softer demand conditions and containment measures also weighed on employment in November. Though modest, the rate of job shedding was the quickest seen since the initial wave of the pandemic in February 2020, with some companies highlighting that workers were unable to return to work due to restrictions. Backlogs were stable, however, as muted sales helped to ease capacity pressures.

The latest survey also showed a renewed fall in buying activity, as firms looked to cut back on purchasing due to lower production requirements. Inventories of inputs subsequently declined slightly, while stocks of finished items fell fractionally.

Average vendor performance deteriorated at a solid and accelerated rate, with companies often blaming longer lead times on transportation delays and low inventory levels at suppliers.

At the same time, the rate of input cost inflation picked up in November. Though mild, the latest upturn in expenses was the quickest seen since June amid reports of higher costs for some raw materials such as metals and oil. Selling prices meanwhile declined at the slowest rate for seven months and only slightly, as firms tried to remain competitive.

Companies generally anticipate output to rise in the next year, with optimism underpinned by expectations that the pandemic will recede, allowing operations to normalise and a subsequent rebound in customer demand. Notably, the degree of positive sentiment reached a three-month high.

Japan: Renewed contraction in Japan’s manufacturing sector

For the first time since January 2021, overall business conditions in Japan’s manufacturing sector deteriorated in November amid strong drops in output and new orders, according to latest S&P Global PMI® data. Negative demand trends subsequently led firms to downwardly revise levels of buying activity and also focus on working through backlogged work: the rates of decline signalled by each index dipped to 26- and 25-month lows, respectively.

Despite easing from October, cost pressures remained severe in November, as indicated by a rate of selling price inflation that was among the strongest on record. Overall business sentiment, meanwhile, remained positive but weakened from October amid ongoing concerns surrounding future price hikes and global economic conditions. (…)

Reflective of the trends in output was a further contraction in order books. The decline was the fastest since August 2020 amid reports of cooling market demand and ongoing price pressures. Foreign demand also declined and at a pace that was the sharpest since July 2020. Panel members suggested that overseas clients were looking to downwardly adjust inventory levels.

The U.S. PMI is out later this morning. But yesterday, we learned that the Chicago Business Barometer, considered a leading indicator of the U.S. economy, collapsed in November.:

U.S. Chicago Business Barometer Tumbles in November

The ISM-Chicago Purchasing Managers Business Barometer declined to 37.2 in November after easing to 45.2 in October. An index level of 46.4 had been expected in the Action Economics Forecast Survey. (…)

The new orders measure declined to 30.7, the lowest level since June 2020 and down from 79.0 in May 2021. The production index weakened 35.9, the lowest level since June 2020 and roughly half the April 2021 high of 70.0. (…) The order backlog measure weakened to 36.1 from 47.3, also nearly a two-year low.

To the upside, the employment index rose to 47.1, its highest level in three months. (…) The inventories measure increased to 59.8 from 56.9. It was the highest level in three months but below the March 2022 high of 68.7.

Inflation pressures weakened in November. The prices paid index fell sharply to 66.2 from 74.8 in October. The reading stood far below its high of 94.1 in October 2021. A lessened 40% (NSA) of respondents reported higher prices paid while a steady 10% reported price declines.

Advisor Perspectives has a 50 year chart showing that such low levels only happen during recessions:

U.S. Pending Home Sales Continue to Fall in October

The Pending Home Sales Index produced by the National Association of Realtors fell 4.6% (-37.0% y/y) to 77.1 in October following an 8.7% September decline. The latest decline was the eleventh in twelve months. Pending home sales have fallen 39.8% since their August 2020 high.

Pending home sales declined in most regions of the country last month. Sales in the Northeast fell 4.3% (-29.5% y/y), following a 6.3% September shortfall. In the South, sales declined 6.4% (-38.2% y/y), after weakening 8.2% in September. Sales in the West declined 11.3% last month (-46.2% y/y), about as they did in September. Working higher were sales in the Midwest by 3.3% (-32.1% y/y), after an 8.7% September decline.

Advisor Perspectives produces a population-adjusted variant of YoY growth rates:

The actual level of home sales is back to its 2010 level:

OPEC+ Favors Maintaining Flat Production, Delegates Say Covid-19 lockdown measures in China, Russian oil sanctions worry the producer group

The 13-member Organization of the Petroleum Exporting Countries and a separate group of producers led by Russia—collectively as OPEC+—are leaning toward approving the same production levels agreed to in October, when they greenlighted a 2 million barrels a day output cut, the delegates said.

The move represents a shift in OPEC’s internal deliberations and comes after Saudi Energy Minister Prince Abdulaziz bin Salman raced to shore up unity in OPEC after some members clamored for a production increase of up to 500,000 barrels a day earlier this month, delegates said. Several OPEC producers, including Iraq and the United Arab Emirates, issued statements supporting the current production plan after hearing from Prince Abdulaziz, the delegates said. (…)

Still, OPEC members are likely to maintain flat production Sunday instead of increasing output as widespread lockdowns imposed across China to contain the country’s largest Covid-19 outbreak threaten to dim the prospects for world economic growth. OPEC delegates said Covid’s continued threat helped shift the debate away from a production increase. (…)

J.P.Morgan cuts 2023 S&P 500 earnings forecast by 9%

J.P.Morgan on Thursday cut its 2023 earnings forecast for S&P 500 (.SPX) companies, citing weaker demand and pricing power, margin compression, and limited buy-backs.

JPM strategists now estimate S&P 500 earnings per share for next year to be $205, down 9% from an earlier forecast of $225.

They also flagged that the S&P 500 index could “re-test” this year’s low of 3,491.58 in the first six months of 2023, as the U.S. Federal Reserve’s monetary policy tightening weakens fundamentals.

“This sell-off combined with disinflation, rising unemployment, and declining corporate sentiment should be enough for the Fed to start signaling a pivot, subsequently driving an asset recovery,” they said, adding that the index could claw back up to 4,200 by year-end, to reflect a near 3% upside from current levels.

Rising Tether Loans Add Risk to Stablecoin, Crypto Tether reports hadn’t disclosed that loans it issues are denominated and payable in the token. The rise in Tether’s lending add risk to the crypto world.

(…) In the most recent report, they reached $6.1 billion as of Sept. 30, or 9% of the company’s total assets. They were $4.1 billion, or 5% of total assets, at the end of 2021.

Tether calls them “secured loans” and discloses little about the borrowers or the collateral accepted. Alex Welch, a Tether spokeswoman, confirmed that all of the secured loans listed in the reports were issued and denominated in tether. The company said the loans were short-term and that Tether holds the collateral. (…)

The rise in Tether’s lending represents a broad risk to the crypto world. Stablecoins such as tether are anchors in the system. They are vital for trading many cryptocurrencies and are widely held by traders. The premise of tether—and other stablecoins—is that the issuer always will redeem one coin for $1. Issuers take pains to demonstrate they have ample funds available to do so.

The company’s reports show only U.S. dollar amounts for the loans and don’t say the loans were made in tether tokens. The reports also say the loans were “fully collateralized by liquid assets.” (…)

“If you do have reserves, why wouldn’t you show them?” (…)

The lending of tether tokens is at odds with some of the company’s other disclosures. Its website suggests that it only issues tether tokens when buyers hand over a currency such as the dollar. “Tether only issues new tether tokens when they are requested and purchased by customers,” the website says. It also says all tokens are backed 100% by Tether’s reserves. (…)

The big declines in crypto markets, exacerbated by the recent bankruptcy filing of cryptocurrency exchange FTX, mean that some collateral held by Tether could be worth less than it was when the loans were made. Celsius used bitcoin as collateral for its loan from Tether, according to Tether’s statement at the time. Bitcoin has fallen 63% this year. Tether doesn’t say what the loans’ market value is, or whether the collateral includes cryptocurrencies. (…)

Tether has also left it unclear whether any of its loans are to related parties, which can be a red flag for investors. Tether’s reports used to say that none of the loans were to affiliated entities. However, it dropped that language starting with its report for the second quarter of 2022. (…)

Because Tether’s loans are denominated in tether, their market value fluctuates with the price of tether—and thus so does the market value of the company’s reserves. “If tether falls, and they have loans that can be repaid in tether, then by definition it’s not backed up by a dollar,” said William VanDenburgh, an accounting professor at College of Charleston in South Carolina, who has written about Tether and followed it closely. (…)

In addition to loans, Tether’s report showed $2.6 billion of “other investments” as of Sept. 30, which it reported with no accompanying disclosure of market value. In its Dec. 31 report, Tether showed $5 billion of “other investments (including digital tokens),” without providing a breakdown.

“They should be giving the fair value on all the underlying assets,” Mr. VanDenburgh said. “We don’t know if they can pay off dollar-for-dollar based on all their claims against them if they had a major run on the funds.”

Hmmm…

Americans Support U.S. Backing Ukraine, Despite Risk of Wider War, Survey Finds 57% of respondents said the U.S. must continue to support Ukraine, while 33% said America should focus on its internal problems and avoid provoking Russia.

RECESSION WATCH

More states are reporting declining economic activity, which typically occurs around recessions. (The Daily Shot)

Source: Simon White, Bloomberg Markets Live Blog

• US Banks Are Tightening Lending Standards, Raising the Risk of a Recession

(…) The industry set aside $13.05 billion in the third quarter for expected credit losses, up from $10.95 billion in the second quarter, according to S&P Global Market Intelligence data. It was the sixth straight quarter that provisions for loan losses were increased, S&P said.

History Lessons: How “Transitory” Is Inflation? (By Rob Arnott, Omid Shakernia)

• The US Federal Reserve Bank’s expectations for the speed of reverting to 2% inflation levels remains dangerously optimistic.

• An inflation jump to 4% is often temporary, but when inflation crosses 8%, it proceeds to higher levels over 70% of the time.

• If inflation is cresting, inflation levels of 4 or 6% revert by half in about a year. If inflation is accelerating, 6% inflation reverts to 3% in a median of about seven years, threatening an extended period of high inflation.

• Reverting to 3% inflation, which we view as the upper bound for benign sustained inflation, is easy from 4%, hard from 6%, and very hard from 8% or more. Above 8%, reverting to 3% usually takes 6 to 20 years, with a median of over 10 years.

History tells us that once the inflation genie is out of the bottle, it can take far longer to return to normal levels than most people realize. (…) Those who expect inflation to fall rapidly in the coming year may well be correct. But, history suggests that’s a “best quintile” outcome. Few acknowledge the “worst quintile” possibility, in which inflation remains elevated for a decade. Our work suggests that both tails are equally likely, at about 20% odds for each. (…)

We observe a useful pattern. When inflation first crosses the 4% threshold, often caused by a temporary exogenous shock, it usually reverses course; in 32 out of 52 cases; over 60% of the time inflation never reaches the next threshold of 6%. We call any case where inflation fails to reach the next threshold cresting inflation. That is the good news.

The bad news is at 6% and higher inflation, cresting inflation is the exception, not the rule: inflation usually marches to the next threshold. When inflation subsequently rises to the next threshold, we call these cases accelerating inflation.

Indeed, once the 8% threshold is surpassed, as happened this year in the United States and much of Europe, inflation marched to the next threshold, and often well beyond, over 70% of the time.

The lesson we should take from this is not that inflation is destined to move to new highs in the months ahead (after all, nearly 30% of the time, it is, in fact, cresting!), but that we dismiss that possibility at our peril. (…)

Given the recent US inflation rate, which has been above 6% for the last 12 months and above 8% for the last 7 months, history tells us that the median number of years to reduce inflation below 3% is 10 years, with a 20^th to 80^th percentile range of 6 to 19 years. How many economists—let alone pundits and policy “experts”—have suggested we may have elevated inflation for six years, much less the longer outliers? (…)

Curiously, this Indeed & Glassdoor’s Hiring and Workplace Trends Report 2023 and the BlackRock piece also reached me yesterday:

Tight Labor Supply Will Continue to Impact Hiring

It is a fundamental error to think that as COVID recedes, hiring difficulties will evaporate. Deep-seated and long-term supply dynamics will continue to be a major force that creates a persistent gap between employer demand for new hires and the supply of candidates. That means the hiring difficulties seen today will continue beyond the short-run impacts of the pandemic.

To be sure, the economies of many countries could slow or even fall into recession as central banks work to lower inflation. But even if employers’ hiring appetites fade, the supply of workers seems likely to remain tight in the long run.

But the tight supply of workers has a fundamental impact on the workplace as a whole. Not only will hiring be more difficult, but workers will have more power to demand changes. The following trends in this report will be persistent because of this supply and demand gap within the labor force.

The principal reason for this can be summed up in one word: demographics. Over the next decade, the number of people of working age (between 15 and 65), will decline in a variety of countries, according to World Bank projections:

Fewer people of working age mean the supply of workers will dwindle. Combine this aging population with other trends, such as reduced immigration, and the stage is set for chronic recruiting challenges. Of course, this will play out differently from country to country:

• US and UK population growth will be driven solely by net migration. In the UK, deaths are projected to exceed births by 2025.
• In Canada and Australia, populations will continue to grow—in Canada thanks largely to migration. But the share of people over 65 will rise rapidly in both countries.
• In Germany, the population is aging and the labor force is shrinking. Migration is still not back to pre-pandemic levels.
• The French labor force is expected to expand slowly until 2040 and then contract.
• Japan’s demographic prospects are particularly stark, with the population forecasted to fall from 128 million in 2010 to below 100 million by 2050, while the share of those ages 65 and older soars.
• A shrinking population is projected in a variety of other countries, including China, which is poised to overtake the US as the world’s biggest economy sometime in the next decade.

Workers will continue to have the leverage to press for higher pay, stronger benefits, scheduling flexibility, and a variety of other perquisites. (…)

BlackRock: Aging raises cost of curbing inflation

The share of the U.S. population in work or seeking a job is still below pre-Covid levels. This shortfall won’t be made up: A bigger share of people are older than the normal retirement age – a major constraint. That makes it hard for the economy to operate at current activity levels without fueling inflation. The Fed would need to crush activity to push inflation back to its target. We see the Fed causing recession, with persistent inflation.

A smaller share of the U.S. population is in the workforce than pre-Covid. That’s unlikely to change, we think. Why? The participation rate, or the share of people aged 16 and over that have or are looking for work, nosedived when the pandemic hit and people left the workforce (orange line in chart). Some of that sharp decline has been made up as people return. But we don’t see it recovering further because the effects of an aging population account for most of the remaining shortfall.

More people have hit 64 years old, the age at which most retire. That’s taken 1.3 million out of the workforce as of October, we find. Another 630, 000 left as the pandemic caused fewer people to work past retirement age and hastened retirement for people coming up to 64. An aging population is increasingly cutting into the participation rate (yellow line) and shrinking the labor force.

These trends explain why the U.S. participation rate is below its pre-Covid level and yet unemployment is still at a 50-year low. The share of the population aged over 64 has been increasing since 2010 and it’s set to keep rising. The effect of this demographic shift on participation won’t reverse without massive structural changes in workforce behavior over time, in our view. That implies the workforce will keep shrinking relative to the population. Economic activity will need to run at a lower level to avoid persistent wage and price inflation, especially in the labor-heavy services sector, in our view.

Interest rate hikes can’t cure production constraints like labor shortages. So the Fed today faces a sharp trade-off betweenv either creating a recession to slam economic activity down to levels that the economy can more comfortably sustain or living with more persistent inflation. For now, the Fed seems to be trying to do the first, we think, with its “whatever it takes” stance trying to quickly stomp inflation down to its 2% target. In the face of production constraints, bringing inflation down to target would require a deep recession, in our view – a roughly 2% hit to activity.

That’s why we think a recession is foretold. Yet we think the Fed will ultimately stop as the damage from rate hikes becomes clearer and before generating a deep recession. We think that means the U.S. will be in a recession and still living with inflation persistently above target. (…)

GDP growth is labor force (employed persons) x productivity (output per employed). During the 9 years before the pandemic, U.S. GDP grew 2.0% per year, thanks to a 0.8% growth rate in its labor force and 1.0% productivity growth. Since 2020, the labor force is unchanged but productivity rose 1.4%.

However, the 2022 reopening brought productivity (blue below) sharply lower while the labor force (red) flattened.

Looking ahead, the key uncertainty is whether productivity follows its more recent path (since 2018, post tax reform, +1.7%/yr) or returns to its 2011-2017 trend (+0.7%/yr). Given that labor force growth will surely be held low, perhaps even negative, by demographics, the U.S. economy looks set to grow at a 1.0-2.0% annual rate in the coming decade.

BlackRock: “Demographic trends also suggest the labor pool will expand much more slowly in the next 20 years than it did in the past 20. If individual worker productivity keeps rising at the same rate, annual GDP growth would average just 1.8% – about two-thirds the average from 1980-2020 and the slowest 20-year period since data began.”

How will that play on wages and inflation?

Small Business Employment Watch

The rate of job growth and hourly earnings growth held relatively steady at U.S. small businesses in November, according to the latest Paychex | IHS Markit Small Business Employment Watch. The Small Business Jobs Index moderated slightly -0.05 percent from the previous month and stands at 99.38. At 5.04 percent, the pace of hourly earnings growth was unchanged over the previous month.

“While there was little to no change in hiring rates and hourly earnings growth in November, this month’s data reveals interesting trends in hours worked. One-month annualized weekly hours worked growth was positive for the third consecutive month, increasing 0.50 percent, possibly signaling that small businesses are adapting to the current labor market and are leveraging existing staff,” said James Diffley, chief regional economist at IHS Markit. (…)

• Hourly earnings growth moderated to 5.01 percent in October from a revised 5.02 percent in September. One-month annualized growth remained below 4 percent.
• One-month weekly hours worked growth increased to 1.49 percent in October, nearing its highest level in more than two years. Construction led sectors in weekly hours-worked growth, up 0.31 percent year-over-year.

Apartment List National Rent Report

Our national index fell by 1 percent over the course of November, marking the third straight month-over-month decline, and the largest single month dip in the history of our index, going back to 2017. The timing of the recent cooldown in the rental market is consistent with the typical seasonal trend, but its magnitude has been notably sharper than what we’ve seen in the past, suggesting that the recent swing to falling rents is reflective of a broader shift in market conditions beyond seasonality alone. Going forward it is likely that rents will continue to dip further in the coming months as we move through the winter slow season for the rental market. (…)

From January through November of this year, rents are up by a total of 4.7 percent, which is much closer to the growth rates we saw in 2018 and 2019 than it is to the astronomical 18 percent growth that we saw at this point last year. Year-over-year growth has decelerated rapidly since the start of the year, and is quickly converging back to pre-pandemic levels. (…)

Our vacancy index now stands at 5.7 percent, after more than a year of gradual increases from a low of 4.1 percent last fall. And in the past three months, this easing of the vacancy rate has picked up steam again, after plateauing a bit over the summer. Today’s vacancy rate still remains below the pre-pandemic norm, but could get back to that benchmark as early as next spring, if the current rate of easing continues.

Eurozone Inflation Eases for First Time Since 2021 Consumer prices in November were 10% higher than a year earlier but down from the 10.6% annual rate of inflation recorded in October as energy prices fell.

(…) The rate of inflation last fell in June 2021, but that proved to be a brief interruption in its long climb. According to ECB President Christine Lagarde, the same is likely true of the November drop.

“We don’t see the components or the direction that would lead me to believe that we have reached peak inflation and that it is going to decline in short order,” she told European lawmakers Monday. (…)

From the NYT since most other media provide few details (chart via Twitter).

Although it remained the strongest driver behind eurozone inflation, the annual increase in the price of energy was 39.4 percent in November, down from a rate of 41.5 percent a month earlier. The price of food, however, climbed slightly, to 13.6 percent in the year through November.

Overall, the so-called core inflation rate, which excludes food and energy, remained steady at 5 percent.

In Europe’s largest economy, Germany, (11.3 percent, down from 11.6) and Spain (6.6 percent, down from 7.3), annual inflation rates cooled in November, thanks to easing energy prices. Consumer prices in France, the currency bloc’s second-largest economy, rose 7.1 percent from a year earlier, matching October’s increase. Baltic countries, which remain heavily dependent on natural gas, continued to have the bloc’s highest rates of inflation, topped by Latvia at 21.7 percent. (…)

@jsblokland

• #FRANCE OCT. CONSUMER SPENDING FALLS 2.8% M/M; EST. -1% – BBG *FRANCE OCT. CONSUMER SPENDING FALLS 5.9% Y/Y; EST. -5.5% (@C_Barraud)

EARNINGS WATCH

Note the typo in the headline (“Learning” instead of Leading)

Morgan Stanley

THE CHINESE PLAGUE

Covid Controls Hit Chinese Factories, Adding Risks to Global Growth Surveys point to a broad pullback in activity as authorities wrestle with rising cases and protests.

(…) The purchasing managers index for China’s manufacturing sector fell to 48 in November, from 49.2 in October, China’s National Bureau of Statistics said Wednesday. (…) A similar index that covers activity in services and construction also fell, tumbling to 46.7 from 48.7, the NBS said. (…)

From @Sino_Market:

• The new orders sub-index decreased to 46.4 from 48.1.
• Production and demand continue to slow down on both ends. The pandemic has cast negative impacts on the operations of some enterprises, with production activities slowing down and product orders decreasing.
• #China‘s November #Steel Industry PMI drops by 4.2 percentage points to 40.1%. New Order Subindex drops by 8.9 percentage points to 34.5%. The terminal market for steel rebar in Shanghai has contracted.
• Non-Manufacturing PMI 46.7 [Est.48.1 Prev.48.7]
• 46% of surveyed medium-sized enterprises and 58.8% of small enterprises are reflecting financial constraints and lack of market demand, with 0.8 and 1.9 PPS higher than in October, reflecting greater pressures on SMEs.

Half of China Firms Had Covid Cases This Month, Beige Books Says That was more than double the 24% who reported a case in October and the highest level in data back through January last year

(…) China’s economy was “barely treading water” this month, with every business indicator deteriorating, according to the report. The first quarter could be worse still, as November is not typically the peak of Covid outbreaks and cases might continue to rise through the winter, the report said.

Company revenue and profits both had double-digit declines from last year this month, according to the survey of more than 2,400 firms conducted November 17-27. Factory output “slowed significantly,” as did domestic and export orders. 

China Mulls Rolling Out Fourth Covid Shot on Reopening Pressure

Officials are making plans for the rollout, though a final decision on timing and vaccine candidates still has to be made, the people said, asking not to be identified discussing government business. Elderly people, which have some of the lowest vaccination rates in China, will be prioritized for fourth shots, one of the people said.

The move is aimed at raising protection levels in its population, the vast majority of whom have never contracted the virus. China appears to be laying the groundwork for accepting wider Covid spread, and a potential reopening after three years of trying to keep the virus out. A fourth shot, already commonplace in other countries, would aid that transition. (…)

In China, only 69% of those aged 60 and above and just 40% of over 80-year-olds have had booster shots. In the US, over 70% of those over 65 have received a first booster, while 44% have already received a second. (…)

Meanwhile, state media and official rhetoric on Covid has softened, with stories of people surviving infection being highlighted publicly and the phrase “dynamic Covid Zero” appearing less often in government briefings. 

While officials have refrained from acknowledging the protests, health authorities struck a conciliatory tone on Tuesday, saying that people’s “reasonable” concerns must be resolved in a timely manner. (…)

On Tuesday, a media outlet supervised by the Propaganda Department of Beijing’s Communist Party Committee published interviews with people who were infected with Covid and recovered, a rare topic in the country of 1.4 billion people where many fear the disease. The patients relayed their infection experiences and shared details, a potential sign that propaganda officials are trying to normalize infection. (…)

China’s Failed Covid Vaccine Nationalism Beijing rejected foreign mRNA shots, putting its citizens at greater risk.

The WSJ Editorial Board:

(…) A Brazil BMJ study of those over age 70 found that Sinovac was only 61% protective against death and 55% against hospitalization. That compares to upward of 90% protection against hospitalization for Moderna and Pfizer for seniors. (…)

Another study, in The Lancet, found that Sinovac produces a much inferior memory T-cell response and neutralizing antibodies against the Omicron variant. The memory T-cell response is what protects people against severe illness as variants evolve.

Tens of millions of China’s elderly still aren’t vaccinated, perhaps because word has spread that its vaccines are less effective. Some countries also refused to recognize Sinovac as an accepted vaccine, and have suggested that those who received the Chinese shot consider getting an mRNA booster.

Beijing responded with propaganda casting doubt on the safety of the Pfizer shots while boosting homegrown vaccines. In January 2021, as Chinese vaccines were distributed to other countries, the Communist Party mouthpiece Global Times ran news stories and editorials suggesting that Western vaccines were killing people.

In Hong Kong, where both Sinovac and Western vaccines were available, the choice between shots was influenced by whisper campaigns in the Chinese community that the Western shots were less safe. In March 2021, China announced that the Chinese border would be open to foreigners who received the Sinovac shots, but not for those getting the Western jab. (…)

When Moderna sought to sell its vaccine in China, Beijing tried to extort the U.S. biotech leader by demanding it hand over its intellectual property, according to a Financial Times report last month. Moderna wisely declined. (…)

In June Hong Kong’s South China Morning Post gushed that China’s AWcorna mRNA vaccine provided a four times stronger immune response than traditional vaccines. But the vaccine still hasn’t arrived, though it has been approved in Indonesia. Could China be using that country as a testing ground in case there are safety problems?

This is one reason that Germany’s chief government spokesperson, Steffen Hebestreit, suggested Monday that China revisit its rejection of foreign mRNA vaccines. “Perhaps after three years of the pandemic, it must be said that Europe and Germany have had very good experience with administering mRNA vaccinations,” Mr. Hebestreit said.

Good idea, but that means Beijing’s commissars would have to admit their mistake. Instead they are endangering the world again—and especially their own citizens.

• World Cup 2022: Chinese state TV accused of censoring maskless fans as they grapple with ‘zero-COVID’ protests
• World Cup Fans Without Masks Pose Dilemma for Chinese TV Amid Protests

Footage of maskless fans packed into Qatar’s stadiums for the World Cup is putting China — facing rising discontent over its continuing strict Covid protocols — in a bind.

Footage reviewed by Bloomberg News and shared on social media appear to show state broadcaster China Central Television pulling back on footage of the stadium crowds compared to other international networks. While not removing them completely, CCTV often substitutes crowd close-ups with video of coaches, the team bench or anything other than the thousands of jubilant or despondent fans. (…)

The tournament’s opening ceremony on Nov. 20 prompted a surge of comments to popular messaging platform WeChat about the lack of masks. On Weibo, a Twitter-like platform, topics related to a recent match were among the top trending topics Monday morning, after posts about protests in China were scrubbed overnight. (…)

Last week, a viral post was censored on WeChat after the unidentified author asked why the crowds in Qatar — where masking is not mandatory — don’t need to follow rules still commonplace in China. “Aren’t they on the same planet we live? Doesn’t the Covid virus hurt them?” the unidentified person wrote. (…)

That gave viewers opportunities to discuss more than just the players’ performances, often with a heavy dose of sarcasm. 

“You can’t see anyone wearing a mask at the World Cup, since everyone in China knows that all the foreigners are dead, we should just keep doing Covid tests and keep locking down then,” one Weibo user wrote.

Another said that “After watching the World Cup, I didn’t expect the Qataris to be unable to afford masks. I wonder how long they would need to quarantine after the World Cup to eliminate the virus.”

• Behind Chinese Covid Protests, Economic Worries Simmer Among Youth Demonstrations, while mainly about Covid controls, also reflected young people’s anxiety over job prospects, raising stakes for Beijing to reignite growth

(…) The outlook is particularly gloomy for young Chinese. The official unemployment rate for urban youths between 16 and 24 is hovering around 18%, near a record high.

More than 11.58 million students, a record, will graduate next summer. Yet many jobs for young people and college graduates—especially in China’s internet, education and service sectors—have disappeared because of Covid controls and the government’s regulatory crackdowns on private companies over the past year. (…)

“What’s really dangerous for Xi is if people start to question the leadership’s competence,” said Mark Williams, chief Asia economist at Capital Economics. “The endless cycle of testing and quarantines required by the zero-Covid policy has put the spotlight on that.” (…)

Youths with economic complaints have long been a concern for China’s ruling Communist Party, which resorted to a bloody crackdown on student protesters at Tiananmen Square in 1989. Economists widely attribute inflation, which rose by 18% that year, as a key factor that fueled that unrest. (…)

In Hangzhou, Jiang Lin, an undergraduate student in accounting, said she was pressured by her parents to apply for graduate studies instead this year. More than 5.4 million people registered for exams to enter graduate schools next year, a record high and nearly double the 2.9 million applicants in 2019. (…)

Jiang Huiwen, a third-year graduate student in philosophy at a university in Beijing, abandoned applying for further studies due to what she described as an oversupply of people with doctorate degrees. (…)

Unlike their parents, Chinese 20-somethings grew up in two decades of prosperity and largely believed that their efforts in school would pay off, said Ms. Qian of Northwestern University. With growth slowing so much this year, the lack of visible payoffs has “added up to an accumulation of frustration and anger.” (…)

Scientists Revive 48,500-Year-Old ‘Zombie Virus’ Buried in Ice

The thawing of ancient permafrost due to climate change may pose a new threat to humans, according to researchers who revived nearly two dozen viruses – including one frozen under a lake more than 48,500 years ago.

European researchers examined ancient samples collected from permafrost in the Siberia region of Russia. They revived and characterized 13 new pathogens, what they termed “zombie viruses,” and found that they remained infectious despite spending many millennia trapped in the frozen ground. (…)

“It is thus likely that ancient permafrost will release these unknown viruses upon thawing,” they wrote in an article posted to the preprint repository bioRxiv that hasn’t yet been peer-reviewed. “How long these viruses could remain infectious once exposed to outdoor conditions, and how likely they will be to encounter and infect a suitable host in the interval, is yet impossible to estimate.” (…)

BNPL

Another slow moving accident…

Klarna says it has made progress towards profits as losses double

This sarcastic headline is from the FT. The rest is from Bloomberg:

Klarna offers interest-free loans to customers who shop online, allowing them to spread the cost of a product over multiple payments, making money by charging retailers a fee on transactions.

The Stockholm-based fintech reported an operating loss before tax of 6.2 billion Swedish kronor ($581 million) for the six months through June, up from 1.8 billion kronor in the same period a year ago. Revenue rose 24%. (…)

Klarna’s sharp increase in losses were driven by administrative expenses — the cost of running the business, including paying salaries — which rose to 10.2 billion kronor, compared to about 6 billion kronor a year before. (…)

Klarna is working to restore profitability after an investment round this summer that slashed the company’s valuation to $6.7 billion from about $45.6 billion a year ago. (…)

Net credit losses were 2.85 billion kronor, up from 1.85 billion kronor.

Klarna said the US continues to be the company’s fastest-growing key market, with volumes up 109% on a year ago and 30 million users. Overall it has 150 million customers across 45 markets.

But how do you “restore profitability” giving interest-free loans to sub-prime borrowers when your own borrowing costs skyrocket and dumb investors wake up?

• Klarna Says Investor Mood Is Holding Back Expansion Plans

U.S. crypto broker Genesis says it is working to avoid bankruptcy filing