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.