CFO Survey: Economic Outlook for 2022 Deteriorates

Views on the economy among CFOs have worsened for 2022, according to the latest results of The CFO Survey, a joint project of Duke University’s Fuqua School of Business and the Federal Reserve Banks of Richmond and Atlanta.

“Price pressures have increased, real revenue growth has stalled, and optimism about the overall economy has fallen sharply,” said John Graham, a Fuqua finance professor and the survey’s academic director. “Monetary tightening is one of several factors dampening the economic outlook.”

The quarterly survey of 320 U.S. financial executives was conducted May 25-June 10. Among its findings:

• The median CFO expectation last quarter was for a 6 percent increase in unit costs for 2022; this quarter the expectation was an 8 percent increase. Unit cost increases are expected to moderate in 2023.
• Adjusted for inflation, average revenues are not expected to grow in 2022, down from real revenue growth of approximately 3 percent on average in last quarter’s survey.
• Employment growth is expected to moderate for the typical firm in 2022.
• If borrowing costs were to increase by 2 percent, half of borrowing firms indicate they would reduce their capital spending plans.
• If borrowing costs were to increase by 3 percent, two-thirds of borrowing firms indicate they would reduce their capital spending plans.

CFOs now expect flat sales volumes this year, down from +3% three months ago, underscoring the radical slowdown since March that has yet to transpire in official economic data.

Consumer spending for Q1 has already been revised down from +3.1% to +1.8% in the third iteration of GDP. But, as I wrote on June 30, the bigger, actually shocking, revision was on real personal disposable income revised down from -2.0% in the first GDP estimate to -7.8% in the third, “primarily reflecting an upward revision to personal current taxes.”

The next day, we learned that real expenditures on goods were down 1.6% in May after +0.3% (revised from +1.0%) in April. Real services were revised down every month this year, from +0.6% on average to +0.4% Jan. to Apr. and to +0.3% in May.

The income/spending relationship is back to normal but, unless inflation abates quickly, lower real income will push total expenditures downward.

Clearly, slowing demand for goods is not fully offset by services while spending power is quickly eroding. Not the smooth transition many were forecasting (hoping).

In June 23, the S&P Global flash PMI for the U.S. revealed

(…) a solid fall in new orders [for services companies]. Client demand dropped for the first time since July 2020, and at the steepest pace for over two years. Total new sales were also weighed down by the quickest decrease in new export orders since December 2020.

Clear sequence: softer spending on goods in March, then a sharp drop in April and May. Services were hanging in…until June per the flash PMI. No major Omicron impact there.

Ned Davis Research has an Economic Timing Model which

plunged to a reading of 4 in May, its lowest level since the early months of the pandemic. The steep decline over the previous three months moved the Model from indicating above-trend growth in March to indicating slow growth today.

Since 1948, a drop in the ETM into the low growth zone has been followed by recession a median of two months later. The only exceptions are 1951 and 1956, when it returned to the moderate growth zone. Heeding the Model, we believe the risk of recession has been pulled forward to late 2022/early 2023.

The decline in the ETM was driven by weakening leading economic indicators (LEI), tumbling equity prices, and tighter financial conditions.

The LEI specifically posted its third consecutive decline in May, the first time that has happened since April 2020, producing a slowdown signal for the economy. Historically, the LEI has peaked a median of ten months ahead of recession, raising the risk of contraction at the end of this year.

David Rosenberg has another way of looking at the LEI suggesting the recession is here:

On the leading indicator, here’s the reality: the Conference Board’s official index of leading economic variables goes back to February 1959, and whenever this composite fell three months in a row and in four of five, the economy was still in economic expansion less than 1% of the time six months out. So let me repeat — 99% of the time in the past 70+ years, the economy was either in recession or within six months of entering one with the LEI contracting three straight months and for four of five months, as is currently the case.

The Fed could thus be completely misreading the situation, aggressively tightening while the consumer and the housing market are weak and weakening, hoping that saved stimmies will spend us out of the mess.

Assume that the assumed $2.7 trillion of excess savings are still there, that’s 11% of GDP. But the current U.S. equity market drawdown, so far, is equivalent to 46% of GDP. Plus the crypto meltdown. And unlike other equity bears, this one did not come with a bond bull, a bond bear rather. In terms of wealth destruction, particularly for the wealthiest, 2022 is almost unparalleled.

@strategasasset

The $19B Consumer Discretionary Select Sector SPDR Fund (XLY) is down 32% this year, -24% since April. Its components are, much like the S&P 500 Index, primarily goods companies. The narrower Invesco Dynamic Leisure and Entertainment ETF (PEJ), invested mostly in services companies, is also down 24% since April after having held up in Q1. Investors are not seeing the same offset from services as the Fed is.

Statista

Yesterday, I posted the Atlanta Fed’s GDPNow estimate for Q2, at -1.0% as of June 30. I had missed the July 1 update, now -2.1% after the latest data on construction spending but mainly after the June Manufacturing ISM. The consensus is still +2.9%!

On June 15, the FOMC published its median 2022 estimate calling for +1.7% GDP growth, down from +2.8% in March. With Q1 at -1.6%, if Q2 is, say +1.0-1.0%, second half growth would have to be 3-4%+ for the FOMC to be about right. The latest Atlanta Fed release must have shaken many in the Eccles building where the FOMC meets on July 26-27. They will not meet again until September 20-21.

Hopefully, the July 13 CPI release will show the beginning of some easing. It will come 2 days before the retail sales report. But the next consumer expenditures and PCE inflation report, with more input on services spending and prices, is only due July 29, after the FOMC.

The San Francisco Fed has designed a tool to track the price changes in the extent to which either supply or demand factors are responsible for inflation levels. Declining demand is already having an impact on prices, particularly since March, but supply constraints and other factors (yellow) have taken over and kept monthly core inflation in the 4% annualized range, so far…

Supply- and Demand-Driven Contributions to Annualized Monthly Core PCE Inflation

The key is services inflation since goods prices will undoubtedly decline as retailers liquidate their excess inventories and supply bottlenecks ease.

Goldman Sachs has this neat chart showing that 47%, and rising, of core services categories ex-shelter are inflating by more than 4% annualized with 25%, and rising, inflating by more than 6%.

The glass half full approach would say that 53% of categories are seeing prices rising by less than 4%, but that proportion is down from 80-90% pre-pandemic, and falling.

Meanwhile, Goldman’s wage tracker is flirting with 6% which, coupled with rising energy prices, will keep pressuring service providers.

• Apartment List National Rent Report

Our national index rose by 1.3 percent over the course of June, consistent with last month’s increase. So far this year, rents are growing more slowly than they did in 2021, but faster than they did in the years immediately preceding the pandemic. Over the first half of 2022, rents have increased by a total of 5.4 percent, compared to an increase of 8.8 percent over the same months of 2021.

For comparison, rent growth from January to June totalled 3.1 percent in 2017, 3.6 percent in 2018, 3.4 percent in 2019, and -0.7 percent in 2020.

Year-over-year rent growth currently stands at a staggering 14.1 percent, but has been trending down from a peak of 17.8 percent at the start of the year.

On the supply side, our national vacancy index ticked up slightly again this month, continuing a streak of gradual easing dating back to last fall. Our vacancy index now stands at 5 percent, up from a low of 4.1 percent, but remains well below the pre-pandemic norm. And with spiking mortgage rates sidelining potential homebuyers, we could see additional tightness in the rental market in the months ahead. Rents increased this month in 97 of the nation’s 100 largest cities. New York City has seen the nation’s fastest city-level rent growth over the past year, while some of the hottest Sun Belt markets are finally showing signs of plateauing growth. (…)

  

Bank of Canada’s rapid rate hikes likely to cause a recession, study finds

Accelerating Inflation in Asia Puts Pressure on Central Banks to Raise Rates Accelerating inflation is rippling through the Asia-Pacific, stoking expectations that policy makers will need to keep ratcheting up borrowing costs to cool climbing prices.

China’s Housing Pain Set to Continue After Sales Bottom

Industry executives and economists foresee sales remaining depressed due a weak job market, a prolonged cash crunch and low confidence on housing prices. It could hit growth in the world’s second-largest economy, where real estate and related industries account for about 20% of gross domestic product.

Sales at China’s largest housing developers fell 43% in June from a year earlier, according to China Real Estate Information Corp., less than the previous month’s 59% decline. Weekly sales data from CRIC show that some major cities, including Shenzhen and Guangzhou in southern China, generated year-on-year growth at the end of June.

The market has “bottomed out” but a recovery will be slow, Yu Liang head of China’s second-largest builder China Vanke Co., said last week. He attributed the recovery partly to seasonal factors — property developers usually rush sales in June to polish interim results.

China’s land transactions increased in June compared with the previous month. Sales of land through auctions from 300 cities rose by 45% to 120 million square meters in June, China Securities Journal reported. Fewer under-subscriptions were reported from the first two rounds of auctions held by core cities, an indication that the housing market is recovering. (…)

CRIC data show home sales by top developers were up 61% in June from May. Still, that was less than half the pace of increase following the lifting of 2020’s lockdowns.

(…) developers in some rural areas to accept garlic, wheat and even watermelon as housing deposits in recent months. (…)

Luxury builder Shimao Group Holdings Ltd.’s default on a $1 billion offshore bond this week highlighted the severity of the spreading liquidity crisis. It could also leave millions of square feet of apartments unfinished — underscoring a risk that has deterred homebuyers. Developers’ completion for property projects slumped further in May, according to official data.

Chinese builders have been driving record offshore bond defaults this year, and the risks are now spilling into the onshore market. (…)]

“Limiting the drop of real estate industry to between 10% and 20% would be difficult,” Feng Jun, a former housing ministry official who is now head of the state-backed China Real Estate Association, warned during a June 29 conference in Beijing.

American Factories Are Making Stuff Again as CEOs Take Production Out of China

(…) Rattled by the most recent wave of strict Covid lockdowns in China, the long-time manufacturing hub of choice for multinationals, CEOs have been highlighting plans to relocate production — using the buzzwords onshoring, reshoring or nearshoring — at a greater clip this year than they even did in the first six months of the pandemic, according to a review of earnings call and conference presentations transcribed by Bloomberg. (Compared to pre-pandemic periods, these references are up over 1,000%.) (…)

The construction of new manufacturing facilities in the US has soared 116% over the past year, dwarfing the 10% gain on all building projects combined, according to Dodge Construction Network.

(…) Russia’s invasion of Ukraine also got Pettit’s attention.

Not just because the war further snarled global trade and added to the surge in freight costs but because it reminded him that China could try something similar in Taiwan. And in the same way that business ended for most Western companies in Russia, so too it could end in China. Suddenly, that benign geopolitical backdrop that had helped encourage so many executives to globalize their operations over the past few decades was vanishing. And this, Pettit said, added to his sense of urgency to change things up. (…)

US Wants Dutch Supplier to Stop Selling Chipmaking Gear to China

The US is pushing the Netherlands to ban ASML Holding NV from selling to China mainstream technology essential in making a large chunk of the world’s chips, expanding its campaign to curb the country’s rise, according to people familiar with the matter.

Washington’s proposed restriction would expand an existing moratorium on the sale of the most advanced systems to China, in an attempt to thwart China’s plans to become a world leader in chip production. If the Netherlands agrees, it would broaden significantly the range and class of chipmaking gear now forbidden from heading to China, potentially dealing a serious blow to Chinese chipmakers from Semiconductor Manufacturing International Corp. to Hua Hong Semiconductor Ltd.

American officials are lobbying their Dutch counterparts to bar ASML from selling some of its older deep ultraviolet lithography, or DUV, systems, the people said. These machines are a generation behind cutting-edge but still the most common method in making certain less-advanced chips required by cars, phones, computers and even robots. (…)

The Dutch government has yet to agree to any additional restrictions on ASML’s exports to Chinese chipmakers, which could hurt the country’s trade ties with China, the people said. ASML is already unable to ship its most advanced extreme ultraviolet, or EUV, lithography systems, which cost about 160 million euros ($164 million) per unit, to China as it cannot obtain an export license from the Dutch government. (…)

ASML is the world’s top maker of lithography systems, machines that perform a crucial step in the process of creating semiconductors. ASML’s dominance of the market for that type of equipment means that further cutting China off from access to its products would undermine the Asian country’s ambitions to make itself more self-sufficient in production of the crucial electronic components.

“China’s share of the global chip-equipment market is negligible,” said Alex Capri, a research fellow at the Asia-based Hinrich Foundation, characterizing chip production as “a choke point” in China’s plans to bulk up its semiconductor muscle. (…)

American officials are also trying to exert pressure on Japan to stop shipping the same technology to Chinese chipmakers, one of the people said. Japan’s Nikon competes with ASML in this area.

Immersion lithography is also known as argon fluoride immersion, or simply ArFi. According to China-based Founder Securities, ASML sold 81 ArFi systems in 2021, compared with four from Nikon, giving the Dutch firm a 95% market share. (…)

Dutch Prime Minister Mark Rutte said in June he is against reconsidering trade relations with China and called for the EU to develop its own policies toward Beijing. China is the Netherlands’ third-biggest trade partner after Germany and Belgium.

ASML opposes a ban on sales of DUV lithography equipment to Chinese customers because it is already a mature technology, Wennink said earlier this year. Chinese-based facilities, run by either domestic or foreign companies, account for 14.7% of ASML’s total revenue in 2021, according to company disclosures and data compiled by Bloomberg.

ASML is also alleging potential IP infringement by a Chinese tech firm supported by the country’s government. (…)

Major US chip-equipment makers including Applied Materials Inc. and Lam Research Corp. are already banned from selling certain advanced products to SMIC due to national security concerns. The potential DUV ban could further hit SMIC and its Chinese peers.

“Lithography equipment is the most difficult equipment for China to replace when it comes to semiconductor production,” said Johnson Wang, an analyst at Taiwan Institute of Economic Research. “Without access to foreign DUV lithography equipment, the progress of China’s chip industry could come to a halt.”

• China Accuses US of ‘Technological Terrorism’ as Chip Curbs Grow

Crypto Broker Voyager Digital Files for Bankruptcy Protection The voluntary filing comes after crypto hedge fund Three Arrows Capital defaulted on a large loan from a Voyager unit.

BA.5 Subvariant Drives Majority of Recent Covid-19 Cases The highly infectious version of the virus represented nearly 54% of U.S. cases in the week ended July 2, the CDC estimates.

(…) Another version known as BA.4, which is closely related to BA.5, and also ramped up recently, represents nearly 17% of cases, the CDC estimates.

Virus experts believe BA.5 is particularly adept at evading immune protections built up from prior infections and vaccines, giving it an advantage as it takes over as the major subvariant. This adds to the possibility people will contract Covid-19 repeatedly while facing the risk of developing complications like long-running and sometimes debilitating symptoms. (…)

The U.S. seven-day moving average for new Covid-19 cases has mostly hovered slightly above 100,000 a day since May, according to CDC data through last week, before the July Fourth holiday temporarily slowed reporting. These cases likely represent a fraction of actual infections due to at-home testing states generally don’t track, epidemiologists say. (…)

Hospitalizations remain far below levels seen in prior peaks, but there are signs of upward pressure, the latest federal data show. (…)

The seven-day moving average for confirmed, prior-day hospital admissions recently surpassed 5,000 a day for the first time since late February, data from the Department of Health and Human Services show. The U.S. in early April was averaging less than 1,500 new admissions a day.

Meantime, the U.S. recently averaged slightly more than 300 deaths a day. A year ago the average dipped to slightly above 200 a day, reflecting a lull in cases as vaccinations rose and a respite before the Delta and then Omicron variants took hold.

Data: JAMA Intern Medicine. Chart: Axios Visuals

• The Health Risks of Getting Covid a Second (or Third) Time New research details the risks of Covid-19 reinfection as more-infectious Omicron subvariants circulate.

(…) each new infection carries a risk of medical problems, including hospitalization, death and long Covid, according to preliminary data from a study of patients in the Veterans Affairs health system.

(…) out of 100 people with a reinfection and 100 who had only one infection, five more people with reinfection developed a lung or respiratory issue or heart problem within a six-month period. (…)

With the more contagious and immune-evading Omicron subvariants BA.4 and BA.5, reinfections matter because they will become more common, according to Dr. Topol. 

“We’re headed into the worst zone of reinfection that we’ve seen since the pandemic began,” Dr. Topol says. (…)

New data from the United Kingdom’s Office for National Statistics found that the risk of getting reinfected with Covid-19 was seven times higher when Omicron variants were circulating compared with when Delta was the predominant strain.

The ONS, looking at the period between July 2020 and June 2022, also found that younger people were more likely to get Covid again, as were unvaccinated people. (…)

EVERYTHING IS SINKING, EVEN U.S DEMOCRACY

According to Gallup, confidence in the U.S. Presidency is now 23% (38% in 2021), the criminal justice system 14% (20%) and Congress 7% (12%). Seven percent!

Add the Supreme Court which now seems to be automatically voting everything 6-3, the same six vs the same three. These nine should have a discussion about their 25% current confidence level. Forty percent in 2020 was already dangerously low, 25% is alarming.

Confidence in the U.S. Supreme Court

SERVICES PMIs

Note: The US and Canada Services PMIs will be out later today.

Eurozone growth slows to 16-month low in June

Latest PMI data pointed to a further expansion of the eurozone economy in June, as has been the case in each month since March 2021. However, the pace of growth slowed to the weakest in this sequence and was only modest overall.

Weighing on the performance in June was the first fall in manufacturing production for two years and a weaker rate of increase in services business activity.

Furthermore, inflows of new work stalled in June, thereby ending a 15-month sequence of growth as eurozone firms struggled with weakening demand. Notably, factory order book volumes declined at the steepest rate since the depths of the initial COVID-19 lockdown in May 2020. International demand conditions continued to weaken in June, with the latest fall in exports the quickest in two years.

Nonetheless, firms continued to struggle with capacity pressures, as backlogs of work rose again, and subsequently took on additional staff at a sharp pace.

On the price front, cost burdens surged further, albeit with the rate of inflation retreating further from March’s peak. Consequently, charges levied rose at a slightly reduced pace, but one that was nonetheless marked.

Stalling demand conditions and weaker activity growth were reflected in a further dampening in business confidence amongst eurozone firms. The level of sentiment was the weakest since October 2020 and subdued in the context of historical data.

The seasonally adjusted S&P Global Eurozone PMI® Composite Output Index registered 52.0 in June. Although still indicative of a modest upturn in private sector output, the latest reading was down from 54.8 in May, signalling the slowest rate of expansion in the current 16-month sequence as demand stalled. The fall in the headline figure reflected both a weaker upturn in service sector activity – the slowest since January – and the first reduction in manufacturing output for two years.

Of the monitored euro area constituents, Spain registered the fastest expansion in June, although the respective seasonally adjusted index nonetheless pointed to the slowest rate of growth since March. Slowdowns were broad-based across the remaining eurozone economies, most notably in Ireland and France where the rates of increase in output slowed sharply, to 16- and 14-month lows respectively, but remained solid in both cases. Elsewhere, Italy and Germany were tied at the bottom end of the growth rankings, with the latest upturns only marginal.

Inflows of new work to eurozone companies stagnated in June, ending a 15-month sequence of growth. Weakness was principally in the manufacturing sector, where order book volumes declined sharply, although services firms did record a weaker uplift in demand.

Despite stagnating demand conditions, eurozone firms continued to face capacity pressures in June, as signalled by a further increase in outstanding business. That said, the rate of backlog accumulation was the slowest since the current sequence of increase began in March 2021.

Ongoing capacity pressures were nonetheless strong enough to spur on additional job creation in June, stretching the current sequence of hiring growth to 17 months. Although the slowest since December, the rate of job creation remained strong overall.

Turning to prices, June data highlighted further severe inflationary pressures. Costs faced by euro area firms rose steeply, although the rate of inflation retreated further from March’s peak. Most pressures were again more acute in manufacturing. Consequently, charges levied by companies rose further. The rate of inflation eased to a four-month low, but remained marked in the context of historical data.

Looking ahead, the weaker performance in June was also reflected in a further moderation of business confidence amongst eurozone firms. The level of sentiment was the weakest since October 2020 and subdued in the context of historical data, with firms concerned around the economic outlook and inflationary pressures.

The S&P Global Eurozone PMI Services Business Activity Index fell from 56.1 in May to 53.0 in June, indicative of a sustained upturn in eurozone services activity but one that was the weakest since January.

The slowdown in June primarily reflected a weaker uplift in new business to services firms. New work rose for the fourteenth month running, but the pace of growth was the slowest since January and only mild overall. Inflows of new work from abroad meanwhile declined for the first time in three months, albeit at just a marginal pace.

June data nonetheless pointed to sustained capacity pressures at service providers, with the level of work in hand (but not yet completed) increasing further. That said, the pace of backlog accumulation eased to an eight-month low.

Eurozone services firms also reported ongoing cost pressures in June, extending the current sequence of rising input costs to over two years. The rate of increase accelerated on the month and was the third-steepest on record.

Efforts to maintain margins subsequently led firms to raise their average charges further during June. The rate of inflation hit a three-month low, but was nonetheless amongst the strongest in the series history and marked overall.

Concerns around inflationary pressures and the economic outlook weighed notably on business confidence at euro area services firms in June. The Future Activity Index fell to a 20-month low and pointed to subdued expectations towards activity over the next year.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence:

“The sharp deterioration in the rate of growth of eurozone business activity raises the risk of the region slipping into economic decline in the third quarter. The June PMI reading is indicative of quarterly GDP growth moderating to just 0.2%, with forward-looking indicators such as the survey’s new orders and business expectations gauges pointing to falling output in coming months.

“The manufacturing sector is already in decline, for the first time in two years, and the service sector has suffered a marked loss of growth momentum amid the cost of living crisis. Household spending on non-essential goods and services has come under particular pressure due to soaring prices but business spending and investment is also waning in response to the gloomier outlook and tightening financial conditions.

“While employment growth remained robust in June, the downshifting in the pace of demand growth and deterioration in business optimism points to the labour market also cooling in the coming months.

“More encouragingly, although price pressures remain elevated, there are signs that inflationary forces peaked back in April, reflecting a marked cooling of industrial price growth, improving supply chains and diminished demand. However, energy and food supply will likely remain two particular areas of concern and potential inflationary pressures as long as the war in Ukraine continues.

“The June PMI data therefore suggest that risks have increasingly tilted towards the economy slipping into a downturn at the same time that inflationary pressures moderate but remain elevated.”

China: Steep rise in services activity as COVID-19 measures are loosened

Chinese services companies registered a steep increase in business activity during June, according to latest PMI data, as the domestic COVID-19 situation improved and containment measures were loosened. New orders also returned to growth, rising modestly overall,while the downturn in foreign client demand softened notably. Firms trimmed their staffing levels at a softer pace, while backlogs of work rose only slightly. June saw a sustained slowdown in the rate of input price inflation, with costs rising only slightly. At the same time, efforts to attract new work led to only a marginal increase in prices charged.

When assessing the 12-month outlook for business activity, firms remained upbeat in June. That said, the degree of confidence was little-changed from May and remained below the series average. (…)

  

MANUFACTURING PMIs

Note: Japan, China and Eurozone PMIs were covered last week.

USA: PMI falls to near two-year low in June amid contraction in client demand

The US manufacturing sector signalled subdued improvements in operating conditions during June, according to latest PMI^TM data from S&P Global. The headline PMI dropped to its lowest level since July 2020 amid a near-stagnation of factory output and a fall in new orders. The decrease in sales was the first since May 2020, with domestic and foreign client demand falling. As a result, firms utilised their current holdings of inputs and finished goods to supplement production, with input buying stagnating and supply chain delays easing. A reduction in new orders, combined with a sustained rise in employment led to greater success clearing backlogs of work, which increased at a notably weaker pace.

At the same time, inflationary pressures remained historically elevated, but increases in input costs and output charges eased to three-month lows.

The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI™) posted 52.7 in June, down notably from 57.0 in May but up slightly on the earlier released ‘flash’ estimate of 52.4. The latest headline index reading was the lowest for almost two years and pointed to a relatively subdued improvement in operating conditions.

Contributing to the drop in the headline index was a renewed fall in new orders at manufacturing firms in June. The decrease in client demand was the first in over two years. Although only marginal overall, the drop in sales signalled a marked contrast to the sharp upturn seen in May. Firms stated that inflationary pressures, weak client confidence in the outlook and supply-chain disruption drove the decline.

Similarly, new exports returned to contraction territory in June. The fall in foreign client demand was the quickest since June 2020, albeit marginal overall.

Reduced new order inflows weighed on production volumes in June. The respective seasonally adjusted index fell to its lowest for two years. Some companies also highlighted that supplier shortages had constrained production capacity. Average supplier delivery times nevertheless lengthened to the smallest extent since November 2020, signalling some easing in the pandemic-induced supply squeeze.

Meanwhile, input costs and output charges continued to rise at substantial rates amid marked increases in supplier prices. Alongside hikes in material costs, firms noted that greater fuel and transportation charges pushed up operating expenses. The rate of input cost inflation was the slowest for three months, however. Output charge inflation also moderated. That said, firms reiterated the need to passthrough higher costs to their clients through greater selling prices.

Inflationary concerns were once again cited by firms, as business confidence regarding the year-ahead outlook slumped to the lowest level since October 2020. Firms were also more cautious regarding their forecasts due to weak customer demand and further disruption to supply chains.

Nevertheless, firms expanded their workforce numbers further in June. Hiring activity reportedly stemmed from efforts to clear backlogs of work and the filling of long-held vacancies. As a result, pressure on capacity eased and the level of work-in-hand was broadly unchanged on the month, a stark contrast to the sharp expansion seen in May.

Buying activity stagnated during June, as weak client demand led firms to work through their current holdings of inputs. As such, stocks of purchases were at a similar level to that seen in May. Firms also used post-production inventories to supplement output, as stocks of finished goods fell once again.

Canada Manufacturing PMI at 17-month low

Notably, output expanded at the softest pace for two years, while new orders rose only moderately. At the same time, weaker uplifts were recorded for employment and purchasing activity, while exports fell
for the first time in four months. Panel comments indicated that persistent price hikes and material shortages weighed on demand and output growth, as input price inflation ticked higher. (…)

Firms cited that while demand continued to expand, price hikes deterred some clients from placing orders.

The softening in overall sales growth was partly driven by a renewed fall in exports, which dropped for the first time in four months. Although modest, the rate of decline was the joint-steepest since July 2020. Respondents blamed the war in Ukraine and weak demand from Europe and Asia. (…)

Overall, the rate of [input inflation] was marked, and among the quickest in the series history. A general uptick in expenses contributed to another sharp increase in selling prices at the end of the quarter. (…)

Americans Tap Pandemic Savings to Cope With Inflation Households of almost all income levels drew down those balances in the first quarter

From the start of the pandemic to the end of 2021, U.S. households built up $2.7 trillion in extra savings, according to Moody’s Analytics. (…) Families have tapped about $114 billion of their pandemic savings so far, according to Moody’s Analytics, which analyzed government data. (…)

Americans’ checking-account balances jumped after they got their pandemic stimulus payments, bank executives have said. While customers have spent some of that money, balances still remain markedly above where they were in 2019, said Chris Wheat, co-president of the JPMorgan Chase Institute, the bank’s in-house think tank. At the end of March, balances of families with the lowest incomes were 65% above 2019 levels.

Still, they used to be higher. In March 2021, around the time of the third round of federal stimulus checks, balances for those families were up 126% from 2019 levels. (…)

The bottom 20% of earners was the only income group that didn’t draw on their pandemic savings in the first quarter of the year, Moody’s Analytics found. “These are folks working in leisure, hospitality, retail, healthcare,” Mr. Zandi said. Strong wage growth has allowed many of these workers to continue to save.

The data is to March. More recent data show the sharp declines in real income and spending since. Retail sales weakened in March but got very weak in April and May per recent corporate results and comments.

The Chase card spending tracker currently estimates that control retail sales are down 3.8% MoM in June (data through June 26).

Bosses Offer Midyear Raises to Retain Employees Employers say higher pay is needed to keep up with rivals and to reflect that staffers are paying more for gasoline, groceries and other daily living expenses.

(…) Exxon Mobil Corp. XOM 2.23%▲ gave U.S. employees a one-time payment in June equivalent to 3% of their salaries. PricewaterhouseCoopers LLP says it will hand out raises in July to reflect its performance in its fiscal year that just ended. Microsoft Corp. MSFT 1.07%▲ told employees this spring it planned to nearly double its global budget for merit-based raises. (…)

“The market has moved,” said Michelle Swanenburg, head of human resources at asset manager T. Rowe Price Group Inc., TROW 1.50%▲ one reason companies are changing pay now.

Last month, T. Rowe sent thousands of employees an email saying it would give about 85% of its workforce a 4% raise effective July 1. T. Rowe employs more than 7,500 full-time staffers.

Though the company’s fiscal year doesn’t end until December, executives made the decision to grant raises now after noticing an uptick in attrition, particularly among technology workers and some entry-level employees, and to account for inflation, Ms. Swanenburg said. The firm extended the raises to some new hires, meaning some employees got a pay bump after only weeks on the job. (…)

The 4% raise is in addition to annual, year-end salary adjustments that the company still plans to offer.

Overall, companies have on average increased base pay in the U.S. by 4.8% so far in 2022, and about a third of employers are considering or planning midyear raises, according to a survey of more than 300 large employers conducted in May by Pearl Meyer, a compensation advisory firm. (…)

Exxon’s 3% bonus in June came outside of the company’s typical annual review cycle. Chief Executive Darren Woods said on a call with investors in late April that it was meant to help Exxon maintain competitiveness. The company also said it would triple the number of employees eligible for stock grants. (…)

Larger employers say they are monitoring pay data almost continuously now, too. At PwC, the firm no longer reviews salary data once a year, said Tim Ryan, the firm’s U.S. chairman. Instead, PwC regularly looks at a number of data points, including salary expectations of new hires, using that information to react quickly and make compensation changes if needed.

The firm raised pay 5% in January, and offered additional raises this month. “Our people will get another round of good raises and we will stay competitive,” Mr. Ryan said. (…)

If the U.S. Is in a Recession, It’s a Very Strange One Economic output is down—but the job market is strong, unlike in previous recessions. It’s the latest twist in the odd trajectory of the pandemic economy.

The U.S. economy has experienced 12 recessions since World War II, and each one included two features: Economic output contracted and unemployment rose.

Today, something highly unusual is happening. Economic output fell in the first quarter and signs suggest it did so again in the second. Yet the job market showed little sign of faltering during the first half of the year. The jobless rate fell from 4% last December to 3.6% in May. (…)

The backdrop to U.S. jobs is now unusual. The U.S. has recorded more than 11 million unfilled job openings in six of the past seven months, four million more monthly openings than was typical before Covid-19 hit the economy in early 2020. In other words, demand for workers is abundant. (…)

But unemployment is always low just before recessions and job openings per unemployed always high…

Bloomberg last week: US Layoffs, Hiring Freezes Are Tip of Labor Market Slowdown

In the past few weeks, companies have announced tens of thousands of job cuts and plans to freeze hiring. The bulk has come from technology, cryptocurrency and real estate firms big and small, which have laid off at least 37,000 workers since May, according to tech job-listings website TrueUp. Brokerages and banks including JPMorgan Chase & Co. are reducing headcount as the housing market cools.

(…) The country’s second-largest aluminum producer, Century Aluminum Co., said it was laying off about 600 workers. (…)

Manufacturing overtime hours have declined for three months in a row, the longest downward streak since 2015. The four-week average of jobless claims, which is less volatile than the weekly figures, climbed to the highest level since January as more people filed for benefits. And wage growth across the country is cooling. (…)

One nonfinancial-service firm told the Richmond Fed that its plans for hiring and spending are on hold because clients are capping or cutting budgets. Another services company told the Kansas City Fed it too instituted a hiring freeze after sales dropped, adding it’s looking to cut costs. (…)

And, nowhere near the pandemic levels but, at its current 232k, the four-week moving average of initial unemployment claims is up 35% from its April 2 low and is back to its pre-pandemic range.

J.P. Morgan’s job tracker based on alternative data suggests a pretty weak job market in June.

The U.S flash PMI survey last week said that “service providers signalled a notable change in pressure on capacity during June, as backlogs of work fell for the first time in two years. As a result, the rate of job creation eased to the softest in four months.”

• Latest Real GDP Estimate estimate: -1.0% June 30, 2022 (GDP Now)

• Ned Davis Research: “The downward revision to our growth outlook implies that the risk of recession has been pulled forward from late 2023 to end of 2022/early 2023. While nine of the ten key indicators we track for turning points in the business cycle have yet to signal a recession, several are close to doing so. All ten have registered local peaks/troughs, and half have declined to levels no
  longer consistent with above-trend growth
• US Recession Chances Surge to 38%, Bloomberg Economics Model Says That’s up from around 0% just a few months before.
• Our Recession Forecasting Model Is Broken There might be a recession soon, but trying to predict it using our pre-Covid-19 toolbox is silly

(…) The pandemic brought about major distortions to the economy and, though worries about Covid-19 have been waning, many of those distortions remain. There are still fewer jobs in the U.S. than before the pandemic struck, but because many people still haven’t returned to the workforce, the unemployment rate is near its lowest level in more than 50 years. Reduced spending and government relief allowed households to accumulate savings like never before. Federal Reserve figures show that holdings of cash and cash equivalents were 30% higher in the first quarter than two years ago. (…)

With everything looking so different, trusting too much in recession models, which are based on how the economy behaved going into previous downturns, is problematic. Consider a New York Fed forecasting model, which now puts the chances of a recession occurring over the next 10 quarters at about 80%. It uses a variety of inputs, including gross domestic product, which contracted at a 1.6% annual rate in the first quarter, and gross domestic income, which theoretically should be the same as GDP, but grew by 1.8%. It also includes a measure of productivity, which, with all the supply-chain issues and labor-market shifts the economy has been going through, is even harder to assess than usual. (…)

Industries focused on the production, transportation and selling of goods, such as manufacturers and construction firms, truckers and retailers, also throw off a lot more economic data than many services-focused industries, in part because it is easier to do things such as count freight-car movements than to count the lines of code the nation’s programmers produce. Typically, this isn’t a problem for economists, because even though services are a bigger part of the economy, they aren’t as volatile as goods sectors, which drive ups and downs. But services got crushed by the pandemic. To the extent that more spending is moving back toward them, the goods focus in the economic data creates a blind spot that could be flowing into recession models. (…)

Surely with the Fed raising rates in an attempt to cool inflation, the risk of recession has to be higher than it was a year ago. A downturn could still be on the way, and by the time it is obviously coming, it might already have arrived.

• Bank of England tells lenders to brace for economic storm
• European gas prices jump as Norway strikes add to supply woes Region’s energy crisis intensifies as Equinor begins shutting down oil and gasfields

Demand for Chips Eases as Sales of PCs Slow Intel and Nvidia are among the semiconductor makers warning of rockier times ahead after two years of surging demand across their product lineups, pointing to a chillier consumer climate.

Inflation Expectations Hit Record in Bank of Canada Surveys

The Bank of Canada’s quarterly surveys of executives and consumers released on Monday show the price pressures that have brought inflation to four-decade highs are expected to persist for longer than previously thought, as the country faces tight labor markets and companies get hit by rising input costs. (…)

Consumer expectations for price increases rose across all time horizons, with households seeing inflation at 6.8% in one year and 5% in two years. Both are records.

The five-year inflation expectation also increased significantly to 4%, but still remains slightly below pre-pandemic levels. (…)

Businesses anticipate “significant” wage and price increases, according to the report, with supply chain bottlenecks now expected to persist for longer. Investment intentions and hiring remain elevated, but so are expected wage costs. The average expected wage increase is now at 5.8% next year, according to the business survey, a record.

“Expectations for higher inflation and rising interest rates are affecting consumer confidence,” the Bank of Canada said. “In response to such factors, Canadians plan to cut spending. They are seeking out more-affordable options when shopping.” (…)

Americans likely think alike…

Markets Had a Terrible First Half of 2022. It Can Get Worse.

We keep making history!

(Jefferies vis The Market Ear)

BofA

• This one is actually low-key shocking — US equity market drawdown is equivalent of -46% of US GDP, that’s massive. (Callum Thomas)

Source:  @strategasasset

• iTraxx main is now leaving CDX IG behind. Both are elevated, but Europe’s panic is becoming rather “spectacular”. (The Market Ear)

Refinitiv

JPMorgan Sees ‘Stratospheric’ $380 Oil on Worst-Case Russian Cut

(…) given Moscow’s robust fiscal position, the nation can afford to slash daily crude production by 5 million barrels without excessively damaging the economy, JPMorgan analysts including Natasha Kaneva wrote in a note to clients. (…)

A 3 million-barrel cut to daily supplies would push benchmark London crude prices to $190, while the worst-case scenario of 5 million could mean “stratospheric” $380 crude, the analysts wrote.

“The most obvious and likely risk with a price cap is that Russia might choose not to participate and instead retaliate by reducing exports,” the analysts wrote. “It is likely that the government could retaliate by cutting output as a way to inflict pain on the West. The tightness of the global oil market is on Russia’s side.”

• Citi Warns Oil May Collapse to $65 by the Year-End on Recession Crude oil could collapse to $65 a barrel by the end of this year and slump to $45 by end-2023 if a demand-crippling recession hits, Citigroup Inc. has warned. (…) oil prices fall in all recessions to roughly the marginal cost.

We now have a range to work with…

Peter Thiel-Backed Vauld Suspends Withdrawals The crypto lender backed by Coinbase and Peter Thiel is exploring a possible restructuring after becoming the latest cryptocurrency platform to freeze services.

China’s Covid Outbreak Flares, Fueling Fears of Wider Spread

China reported more Covid-19 infections in its current epicenter, putting pressure on authorities to tame the outbreak before it spills over into some of the country’s most economically important areas.

The eastern province of Anhui reported 231 Covid cases for Monday, with the tally since late June topping 1,000 infections. Authorities locked down Si county and one neighboring county late last week to carry out mass testing and to try and stop the virus from spreading, and pledged on Monday to stop community spread in the next three days.

Still, the virus is already spreading through the Yangtze Delta region that accounts for a quarter of China’s economy and is home to key hubs for medicine to semiconductor chips and e-commerce. (…)

The restrictions came after the provincial disease control center said it detected the BA.5 omicron sub-variant in its recent outbreak, state media China National Radio reported earlier Tuesday. The BA.5 sub-variant is more infectious than the BA.2 variant found in earlier outbreaks, the report said. (…)

FYI:

Summer in America is becoming hotter, longer and more dangerous(Washington Post)