THAT BUMPY ROAD

Labour costs reaccelerate more than expected

We have seen a big jump in the US 1Q employment cost index of 1.2% quarter-on-quarter versus 0.9% in 4Q23, well above the 1% expected and above every single individual forecast in the Bloomberg survey.

Not a good look as this is the Federal Reserve’s favoured measure of labour costs, and given labour costs are the biggest cost input in a service sector-led economy, such as the US, it can help to keep price pressures elevated.

The details show the strength was primarily led by the government sector where wage and salary growth rose from 4.7% year-on-year to 5% YoY while for the private sector, wages and salaries remained at 4.3% YoY with overall compensation continuing to grow 4.1% YoY.

In terms of QoQ rates, government worker compensation rose 1.3% versus 1.0% in 4Q23 while private industry compensation rose 1.1% versus 0.9% in 4Q 23. It is likely that a decent hike in minimum wages in around half the US states was the primary driver. The increase in minimum wage to $20/hour for California fast food workers will hit in 2Q. (…)

Wells Fargo:

The pickup in Q1, from a 0.9% increase in Q4, is particularly disappointing given that the ECI tends to offer the cleanest and most encompassing read on labor costs and thus is the Fed’s preferred gauge of inflationary pressures from the labor market. Unlike the more timely average hourly series from the monthly employment report, the ECI controls for compositional shifts in the economy’s jobs and includes compensation growth for public sector workers. It also includes the cost of employee benefits, which account for about one-third of compensation.

 

U.S. Department of Labor and Wells Fargo Economics

This QoQ chart compares the ECI private wages with hourly earnings reported monthly but shown quarterly here. In truth, the deceleration since last spring is very minor and trending back up. We will get April data on Friday.

However you look at it, wages are rising in the 4.5% range.

Department of Labor, Goldman Sachs Global Investment Research

This makes it challenging for services inflation to really break the 4% range.

Goldman Sachs remains hopeful:

The employment cost index accelerated sharply in this morning’s release for Q1. Our preferred measure, private wages and salaries excluding incentive-paid occupations, rose 4.6% on a quarterly annualized basis, moving away from the 3.5% rate that we estimate is compatible with 2% inflation.

However, we think the actual news on wage growth was less worrisome, in part because the Q1 number was boosted by strong compensation growth for unionized workers, which has historically been a lagging indicator of labor market conditions because union workers’ contracts adjust less frequently and therefore take longer to reflect past inflation spikes. Put more simply, a portion of today’s wage growth reflected lagged catch-up, not a reheating labor market. Nonunion compensation growth, which adjusts more rapidly, picked up but to a more moderate 4.1%.

Citi CEO says US consumers are more cautious

CEO Jane Fraser told shareholders on Tuesday that U.S. consumers are becoming more cautious with their spending and making smaller purchases.

U.S. borrowers earning lower incomes are increasingly struggling to keep up with loan payments, prompting banks to become more cautious about issuing credit cards and car loans.

“Consumers remain healthy and resilient,” Fraser said at the bank’s annual meeting on Tuesday. “But we are seeing them more cautious in the U.S. and more discerning in their spending patterns.”

Affluent customers account for almost all spending growth, while consumers with lower credit scores are spending less, she said. Meanwhile, borrowers’ delinquency rates have risen above pre-pandemic levels on all loan categories, except mortgages, Fraser added. (…)

• From AMZN’s Q1 results:

The company’s main e-commerce business reported sales of $54.6 billion in the quarter, slightly missing analysts’ estimates. Olsavsky said consumers continue to trade down to save money. Shoppers are ordering more consumables, which they need quickly, but also cost less than other categories, he said. That puts pressure on the profitability of the business because Amazon has to process and deliver more units.

• MCD:

Four months into the year, I think what we can say is clearly 2024 isn’t going to be a typical year for the broader industry. I say that because we’re certainly seeing, as you heard in our upfront remarks, that the macro headwinds have been more significant than I think we even anticipated coming into the year. And we continue to see those macro headwinds as we have started quarter two. And, frankly, many of our large international markets and the U.S. and I think we expect in the U.S. that we’re going to start the quarter roughly flat from a comp sales perspective from what we can see so far.

If you look at margins in the U.S. today, restaurant level margins for franchisees versus where we were in 2019, we’ve just now rebuilt franchise restaurant level margins back to where we were in 2019. So the pricing that’s been taken over the last several years was all taken as a means to offset what we were seeing around quite high labor inflation and quite high commodity food and paper inflation. So restaurant margins are now back to where we are — where we were again in 2019 in the U.S., which then says to me that we do have the ability to be thinking about what we do from a value proposition going forward.

(We) do continue to see there’s certainly labor inflation. Much of that is coming out of what happened in California. And on a national level, you could probably see we’re expecting high single-digit labor inflation. Again, much of that from the bleed-over of what California introduced. (via Bloomberg’s Joe Weisenthal)

Americans are resourceful when times get tougher:

Number of gig workers on the rise again

Gig employment continues to increase. The three-month moving average of the share of Bank of America customers who received income from gig platforms through direct deposits or debit cards was 3.8% in March 2024, above the previous peak in early 2022. While gig employment stalled through 2022 as wage gains attracted workers to more traditional forms of employment, there was a renewed uptrend starting in spring 2023, according to Bank of America internal data.

Bank of America data also shows that ridesharing has driven overall gig employment over the past year and is now the gig type with the largest share of workers. Conversely, the share of Bank of America customers earning income from social commerce and deliveries has moderated since December 2021. This mirrors the pivot in consumer spending towards out-of-home services and away from in-home services and goods, with more people eating out, for example, rather than ordering in. (…)

Meanwhile, internal Bank of America data shows that the share of workers earning gig income for all 12 months of the year, which we view as a proxy for full-time gig employment, has increased consistently for the past three years (Exhibit 8). This is particularly the case for customers earning income from ridesharing platforms, as these types of gig workers account for nearly half of full-time gig employment.

Japan Manufacturing PMI: Manufacturing sector moves closer to stabilisation in April

The headline au Jibun Bank Japan Manufacturing Purchasing Managers’ Index™ (PMI®) recorded 49.6 in April. Although still below the crucial 50.0 no-change mark, the index posted its highest level for eight months and was noticeably higher than March’s 48.2.

Latest data showed that output was down again in April, extending the current period of contraction to 11 months. The rate of decline was however modest and the lowest recorded by the survey since last October. Firms again continued to signal a preference for utilising existing inventories rather than raising output.

There were also reports that a lack of incoming new orders had weighed on production. Amid reports of soft demand and destocking at clients, new orders were also down for an eleventh successive month. That said, the degree to which sales fell was marginal and eased noticeably for a second month running. New export volumes also declined amid evidence of low demand from key export markets like China and the US.

Against a backdrop of subdued underlying trends in output and new orders, purchasing activity was reduced for a twenty-first successive month. The cut was modest, and the lowest recorded since October 2022. Stocks of purchases continued to be utilised wherever possible, and this meant inventories of inputs fell again in April (albeit marginally).

Meanwhile, companies noted that supplier performance had improved, as evidenced by the first shortening of lengthening lead times in nine months. Apart from semi-conductors, the availability of goods was noted to be generally better.

That said, prices data showed that inflation rates picked up in April. On the cost front, input prices rose to the steepest degree of the year so far, with inflation remaining above trend. Metals were a key source of upward cost pressure, although inputs in general continued to increase in price. Firms responded by raising their own charges to the greatest degree in 11 months.

Confidence in the future meanwhile was unchanged since March, and therefore remained relatively high in the context of the survey history. Firms are looking for the global inventory cycle to turn upwards, and for a general improvement in demand over the next 12 months.

These projections in part explained a second successive monthly rise in employment. The rate of growth was solid and the best recorded by the survey since September 2022. Additional capacity meant that firms were able to comfortably keep on top of overall workloads: backlogs of work were cut again in April for a nineteenth successive month, with the rate of contraction remaining marked despite easing to the lowest since last October.

The weak yen is not helping much so far.

Canada GDP Rises 0.2% in February Canada’s economy lost momentum, supporting expectations a first cut to interest rates could come before summer

Preliminary data suggest gross domestic product, a broad measure of goods and services produced across the economy, was essentially unchanged in March, Statistics Canada said Tuesday.

That follows 0.2% growth in February GDP from the month before to 2.218 trillion Canadian dollars, the equivalent of $1.624 trillion. That was softer than the data agency’s advance estimate a month ago of 0.4% growth and follows a downwardly revised 0.5% expansion in January. Compared with a year earlier, GDP in February increased 0.8%.

If March’s estimate stands when official numbers are released late next month, Canada managed industry-level growth of 2.5% annualized in the first quarter following growth in the prior quarter of 0.6% or a slightly stronger 1% when consumption figures not included in monthly GDP data is included. The Bank of Canada has forecast the economy will continue to strengthen this year after stalling in the second half of 2023, and has projected total annualized growth for the latest quarter of about 2.8%.

With growth in Canada waning after January’s jump, most economists don’t anticipate a rebound in the second quarter of the year that could derail the central bank from pivoting to rate cuts as soon as its next policy meeting in early June, provided inflation continues to cool. The growth Canada has seen in recent months has been bolstered by a booming population and recovery in consumer spending, but has come alongside an increasingly softer labor market and steady rise in unemployment. (…)

The latest data again highlights what economists expect will be a policy divergence between the Bank of Canada and Federal Reserve. The U.S. economy has shifted down a notch even as core inflation has accelerated in the first quarter, though the slowdown in headline GDP growth to 1.6% still shows an economy outpacing that of its northerly neighbor. (…)

NBF:

Record population growth (+3.7% annualized) in the quarter supported not only economic growth, but also potential GDP, which is consequently rising at a fast clip. For illustration, GDP per capita continued its downward trend during the quarter and is now 3% below its peak recorded in September 2022. A decline of this magnitude has never been recorded outside of a recession. Moreover, this “solid” growth during the quarter did not prevent the unemployment rate from rising, another sign that economic growth was below potential during the quarter.

There are many other signs that the Canadian economy has cooled significantly, including significant progress in inflation, particularly over the last three months. (…)

We expect the Canadian economy to contract by mid-year, limiting growth to 0.6% in 2024, with a slight acceleration to 1.2% the following year. This would translate into an unemployment rate of around 7.0% by the end of the year.

  

Euro-Zone Speeds Out of Recession But Inflation Proves Sticky

The euro zone exited recession as its four top economies drove much speedier growth than expected, though the recent retreat in inflation stalled.

First-quarter gross domestic product increased by 0.3% from the previous three months — the strongest pace in 1 1/2 years. A separate release showed consumer prices rose an annual 2.4% in April, matching March’s pace and in line with analyst estimates.

The prospects for the 20-nation bloc are brightening after elevated inflation, rising interest rates and weak global demand sank output. Helping the revival is Germany, which is emerging from a similar malaise led by its industrial sector. June’s likely start of monetary easing by the European Central Bank should also provide a shot in the arm. (…)

Inflation, meanwhile, has been approaching 2%, with officials more confident that it’s on track to meet that target – opening the door for a rate cut in June. They’ve been worrying about sticky services inflation, which eased to 3.7% in April after five months of staying unchanged at 4%.

Core pressures as a whole, which exclude volatile items such as food and energy, also moderated this month — to 2.7% from 2.9%, coming in a touch higher than anticipated. (…)

BIGGER FOR LONGER

There is this:

There is no escaping Ozempic and Wegovy. The diabetes and obesity drugs are a global phenomenon. They’ve won over the rich and famous, generated billions in sales and blown open a new market for weight loss drugs, which Goldman Sachs estimates will reach $100 billion a year by 2030.

The development of semaglutide, the key ingredient in the medicines, has also transformed their maker, Novo Nordisk, into Europe’s most valuable company, with profound implications for its home country of Denmark. Novo’s market capitalization of more than $570 billion is bigger than the Danish economy.

Now that:

McDonald’s Will Test a Bigger Burger

The Quarter Pounder is not enough. McDonald’s Corp. will test a bigger burger this year to meet diners’ appetite for more filling patties.

“Our team of chefs from around the world have created a larger, satiating burger,” Chief Financial Officer Ian Borden said Tuesday on a call with analysts.

Fed to Signal It Has Stomach to Keep Rates High for Longer Firmer price pressures could lead longer-term rates to rise as investors continue paring back expectations of cuts

(…) officials are likely to emphasize that they are prepared to hold rates steady, at a level most of them expect will provide meaningful restraint to economic activity, for longer than they previously anticipated.

With no new economic projections at this meeting and minimal changes expected to the Fed’s policy statement, Fed Chair Jerome Powell’s press conference will be the main event on Wednesday. (…)

Powell is likely to repeat a message he delivered two weeks ago, when he said recent data had “clearly not given us greater confidence” that inflation would continue declining to 2% “and instead indicate that it’s likely to take longer than expected to achieve

that.” (…)

The Fed’s rate outlook hinges on its inflation forecast, and the most recent data raises two possibilities. One is that the Fed’s expectation that inflation continues to move lower but in an uneven and “bumpy” fashion is still intact—but with bigger bumps. In such a scenario, a delayed and slower pace of rate cuts is still possible this year.

A second possibility is that inflation, rather than on a “bumpy” path to 2%, is getting stuck at a level closer to 3%. Without evidence that the economy is slowing more notably, that could scrap the case for cuts altogether.

Powell is likely to acknowledge that officials have less conviction about when and how much to reduce interest rates. (…)

At the same time, Fed officials have indicated that they are broadly comfortable with their current stance. This makes a hawkish pivot toward entertaining rate increases unlikely.

“Policy is well-positioned to handle the risks that we face,” Powell said on April 16. If inflation continues to run somewhat stronger, the Fed will simply keep rates at their current level for longer, he said.

As financial-market participants anticipate fewer cuts, longer-dated bond yields will rise. In effect, this achieves the same kind of tightening in financial conditions that Fed officials sought when they raised interest rates last year. Higher yields across the Treasury yield curve should ultimately hit asset values, including stocks, and slow the economy’s momentum. (…)

But a hawkish pivot, suggesting an increase in rates is more likely than a cut, appears unlikely, for now. Any such shift is likely to unfold over a longer period. It would require some combination of a new, nasty supply shock such as a significant increase in commodity prices; signs that wage growth was reaccelerating; and evidence the public was anticipating higher inflation to continue well into the future.

A key measure on wages will be released Tuesday morning by the Labor Department, which will report the employment-cost index for the first quarter. Fed officials consider that measure the most comprehensive measure of pay growth. Signs that wage pressures have continued to ease would likely allay concerns about stickier service-sector inflation. (…)

If and when the FOMC thinks about raising rates further, somebody will likely flash this chart during the meeting. Times have changed, haven’t they?

Source: BofA Global Research

China Manufacturing PMI: Business conditions improve amid fastest rise in new work in 14 months

The headline seasonally adjusted Purchasing Managers’ Index™ (PMI) rose to 51.4 in April, up from 51.1 in March. This indicated a sixth successive monthly improvement in the health of the sector, with growth the most pronounced in 14 months.

Underpinning the latest acceleration in manufacturing sector growth was better demand conditions. Incoming new orders expanded at the fastest pace in over a year, supported by improvements in underlying demand conditions and marketing efforts from manufacturers. Additionally, new orders from abroad expanded at the fastest pace for nearly three-and-a-half years. Global market demand improved at the start of the second quarter, according to panellists.

In turn, Chinese manufacturers raised their production levels at the fastest pace since May 2023, though that still resulted in additional backlog accumulation. Sub-sector data revealed that the investment goods sector recorded the fastest growth across the measures of new orders, output, and backlogs.

Purchasing activity meanwhile rose in line with higher production, further contributing to higher stocks of purchases in April. Anecdotal evidence revealed that some manufacturers also raised their holdings of raw material and semi-finished items for safety stock building. The level of post-production inventories similarly rose in April. Although marginal, this marked the first increase in warehouse goods in three months.

Despite rising new work inflows and capacity pressures, Chinese manufacturers remained cautious with hiring. Employment levels fell for an eighth straight month in April amidst resignations and redundancies due to restructuring efforts.

Additionally, average charges also declined alongside export charges even as input price inflation renewed in April. The rate at which average input costs rose was the fastest since October 2023 with higher metals, oil and other input material costs often mentioned by panellists. However, increased competition and promotional efforts aimed at supporting sales limited Chinese manufacturers’ pricing power. Intense market competition led businesses to slash prices, resulting in output prices declining for the fourth straight month.

Finally, sentiment among Chinese manufacturers remained positive at the start of the second quarter with firms staying hopeful that sales can rise as economic conditions improve. That said, the level of confidence eased from March to a four-month low amidst concerns over rising costs and increased competition.

• China’s Factory Activity Keeps Growing But Loses Some Steam China’s official manufacturing purchasing managers index fell to 50.4 in April from 50.8 in March

(…) Tuesday’s official data also show that production rose in April from March, while total new orders declined over the period and new export orders also fell, though both stayed in expansionary territory. (…)

If you only read the official PMI, you are missing the clear upturn in world manufacturing demand revealed by S&P Global’s survey. This is the WSJ’s headline today: China’s Factory Activity Keeps Growing But Loses Some Steam. S&P Global’s data on new orders and new export orders suggest exactly the opposite. The goods inventory down cycle is over and consumers keep buying goods amid this “very restrictive monetary policy”.

Bloomberg illustrates the different PMI gauges but new orders would better reflect what’s really going on.

Goldman has a longer term chart:

It is also interesting that China’s National Bureau of Statistics specified that “equipment manufacturing and high-tech manufacturing PMIs were 51.3 and 53.0, respectively” and that “they continued to be in the expansion range and were both higher than the overall manufacturing industry”. High-end manufacturing maintained rapid development.”

President Xi Jinping’s call to boost growth through green and IT industries is showing rapid success.

China Hints at Rate Cuts, Property-Market Support Leaders warned of rising uncertainty and signaled a new campaign to revive the country’s flagging economy.

At a Tuesday meeting, the Communist Party’s elite Politburo warned of “significantly rising external uncertainties,” an apparent reference to global geopolitical and economic frictions. It said it would gather the party’s top 370 or so officials for a plenary meeting, or plenum, in July to discuss economic development and reforms.

In a statement issued after Tuesday’s meeting and carried by the state-run Xinhua News Agency, the 24-member Politburo pledged to issue ultra-long-term special treasury bonds and local government special-purpose bonds more quickly and called for them to be put into use as soon as possible to provide a fiscal boost to the economy.

Both types of bonds are usually used to fund government-led infrastructure investment projects. Beijing said in March that it would issue ultra-long-term special treasury bonds equivalent to $138 billion as well as local government special-purpose bonds worth $539 billion.

The Politburo also said the government could use interest rates and bank-reserve requirement ratios to slash financing costs and offer more support to the economy. People’s Bank of China governor Pan Gongsheng signaled in March that the central bank could cut banks’ reserve requirement ratio to release more liquidity into the financial system, though no such easing policies have materialized since then.

On real estate, leaders said the government would study new measures to “digest existing homes” while optimizing incremental housing amid a prolonged property downturn. (…)

Cheaper Teslas? China Says ‘You Ain’t Seen Nothing Yet’ Despite a brutal price year, China’s large automakers are in surprisingly good shape. That means the EV price war will continue.

(…) Despite enormous overcapacity, the largest Chinese automakers still have big cash cushions. And gross margins at BYD, China’s market leader, actually rose last year. That means the global EV price war will continue—and probably get worse. (…)

BYD took the competition up a gear in February when it priced some of its plug-in hybrids at around $11,000, cheaper than equivalent gasoline-powered cars. Tesla responded by slashing prices by nearly $2,000 for its cars in China this month. Its Model 3 now starts at around $32,000 there. [$39k in USA, +22%] (…)

Around half of cars sold in China in the first three weeks of April were new-energy vehicles, which include plug-in hybrids, according to the China Passenger Car Association.

Moreover, price cuts last year were partly offset by plunging costs of raw materials such as lithium and nickel. Deeper cuts this year could be more painful with more stable commodity prices.

Yet the price war will likely still drag on for a while. Goldman Sachs estimates that BYD makes around 8,100 yuan, the equivalent of $1,118, per car, compared with 2,600 yuan for the whole EV industry in China. That means BYD has room to cut prices 7% while still being profitable.

And further cost savings and better economies of scale may give the company even more leeway. BYD is vertically integrated, making its own batteries and even chips, which allows it plenty of ways to shave costs. BYD actually improved its gross margin to 20% last year, from 17% a year earlier. (…)

Goldman says the top 13 listed Chinese automobile manufacturers, which represented 69% of the total passenger-car market, had 315 billion yuan of net cash at the end of 2023. Some of those are also state-owned.

Many Chinese EV makers will target exports, which command a price premium, to soothe the pain at home, especially since capacity has risen so fast over the past couple of years. Automobile manufacturing utilization rates fell below 65% in the first quarter, compared with 76% in the previous quarter.

Cheaper EVs are good news for consumers, and the green transition. But they are terrible news for most Western carmakers, especially those that are lagging behind.

How the TikTok Law Could Intensify the US-China Tech Spat The law is almost certain to lead to a Supreme Court case and retaliation against US interests in China.

(…) A ban of the immensely popular app has for years seemed like a long shot to overcome the effective lobbying and congressional dysfunction that have stifled nearly every other attempt to impose stricter regulations on tech companies. Then, improbably, the forces that govern the process of legislating in Washington suddenly aligned, and the provision was approved as part of an emergency bill authorizing tens of billions of dollars in aid to Ukraine, Israel and Taiwan. On April 24, President Joe Biden signed it.

This set up an inevitable legal challenge, probably on First Amendment grounds. “Make no mistake, this is a ban, a ban on you and your voice,” Shou Chew, the Singapore-based chief executive officer of TikTok, said in a video on the app the day the bill was signed. “Politicians may say otherwise, but don’t get confused. Many who signed the bill say the TikTok ban is the ultimate goal.” It also raised the chances that China will retaliate against a US company or industry. This spat over an app best known for silly dancing videos could be a pivotal moment in an escalating rivalry between the world’s two superpowers.

TikTok has about 170 million users in the US, and they spend significantly more time on it than people do on Instagram or Snapchat, according to app monitoring firm SensorTower. A Chinese company operating a giant consumer internet service in the West had always suggested an uncomfortable double standard. US-owned apps such as Facebook, Google, Instagram, Signal and WhatsApp aren’t allowed in China. (…)

In a flurry of classified briefings between that bill’s introduction in March and its inclusion in the foreign aid package, senior officials from the FBI and other federal agencies warned that the app is subject to Chinese national security laws that require turning over data and algorithms to the government in Beijing. They raised the possibility that the app could influence American politics. (…)

The proliferation of pro-Hamas videos on the app after the Oct. 7 attacks on Israel also swayed some lawmakers, as did a series of alerts TikTok sent in March, urging its adult users to contact their representatives to express opposition to the bill. The alerts triggered plenty of angry phone calls to Capitol Hill offices, but the maneuver may have backfired on TikTok by proving that the app could in fact manipulate the behavior of Americans, according to Representative Mike Gallagher, the Wisconsin Republican who until recently chaired the House China committee.

With no organized resistance from US tech companies, which could benefit from the elimination of a robust competitor, the TikTok provision was a last-minute addition to the foreign aid bill, the culmination of what one aide describes as the “thunder run,” a military term for sending a line of tanks into enemy lines with no warning. Combining the bills effectively forced the hand of skeptical senators, many of whom felt they couldn’t risk jeopardizing much-needed aid to Ukraine. (…)

ByteDance figures Beijing officials would oppose the sale of TikTok’s prized source code and recommendation algorithms, according to two people familiar with its thinking, who asked not to be named talking about politically sensitive matters. Executives are instead mapping out legal strategies and betting they can get an injunction to avoid an immediate shutdown, according to one of the people. (…)

The still hypothetical legal dispute, TikTok v. US, would almost certainly head to the Supreme Court, which would have to weigh the government’s security concerns against the free speech and “expressive interests” of both its users and the app’s corporate owner. The government would have some precedent on its side: The US has long restricted foreign ownership of media companies, radio stations and telephone networks. “If the question is ‘will this thing hold up in court?’ I think it’s more likely than not that it will,” says Alan Rozenshtein, a law professor at the University of Minnesota and former adviser to the Justice Department on cybersecurity and foreign intelligence.

It’s all but certain that China will retaliate against the US, say China watchers. The country could restrict US access to critical minerals or other key components of the tech supply chain. It also could go after companies such as Apple, Microsoft or Tesla, which have significant manufacturing facilities in the country and sell to Chinese companies and consumers. Apple Inc.’s dependence on China, where it gets one-fifth of its sales, makes it particularly vulnerable, though its contributions to the Chinese economy could protect it from reprisal. (…)

BTW, FYI:

• TikTok, Tesla Show US-China Battle Over Data Is Just Beginning Data fight threatens to reshape US-China trade relations

(…) New technology is creating new risks. Modern devices are becoming ever smarter, gaining unprecedented abilities to generate and transmit data. Cars collect information on drivers and passengers, while medical devices can parse and process personal healthcare intelligence. Washing machines, port cranes and even clothes connect to some sort of remote server. The AI era only promises to magnify those capabilities. (…)

Meanwhile, there is also a crucial war for talent:

The Global AI Talent Tracker 2.0

(…) what’s certain is that a large chunk of the tech world’s capital and talent will be deployed toward bringing AI applications to the real world. If anything, the competition among countries in this arena will be fiercer than ever—and much of that competition will be over the indispensable input of an AI ecosystem: talent.

Talent also happens to be one of the most clearly quantifiable inputs, which is why we are assessing the global balance and flow of top AI researchers and scientists.

Key Takeaways of 2023 Update

1. The United States remains the top destination for top-tier AI talent to work. Within US institutions, researchers of American and Chinese origin (based on undergraduate degrees) comprise 75% of the top-tier AI talent, up from 58% in 2019. Moreover, the United States remains far and away the leading destination for the world’s most elite AI talent (top ~2%) and remains home to 60% of top AI institutions.

2. Beyond the United States and China, the United Kingdom and South Korea, along with continental Europe, have slightly raised their game as destinations for top AI researchers to work. When it comes to AI researcher origin (based on undergraduate degrees), India and Canada have seen relative declines.

3. Meanwhile, China has expanded its domestic AI talent pool over the last few years to meet the demands of its own growing AI industry. Because China produces a sizable portion of the world’s top AI researchers—rising from 29% in 2019 to 47% in 2022—it is no surprise that more Chinese talent are working in domestic industry.

4. A similar dynamic appears to be taking place in India. While India remains a significant exporter of top-tier AI researchers, its ability to retain talent is growing. In 2019, nearly all Indian AI researchers (based on undergraduate degrees) opted to pursue opportunities abroad. But in 2022, one-fifth of Indian AI researchers ended up staying to work in India.

5. These developments in China and India seem to reflect a broader pattern over the last few years: top-tier AI researchers appear to exhibit less mobility overall. Just 42% of top-tier AI researchers in 2022 are foreign nationals currently working in a different country, down 13 percentage points from 2019—meaning more top-tier talent are staying put in their home countries.

Portion of top-tier AI researchers (top ~20%) working abroad vs. staying home