CPI for all items rises 0.2% in June; shelter up
The U.S. labor market continues to cool, but only at a gradual pace
According to one of the Federal Reserve’s key indicators, the ratio of job openings to unemployment, the labor market has begun to show signs of easing. LinkedIn’s measure of labor market tightness, which has a slightly different definition than government data (includes all job seekers, not just the unemployed), indicates more slack than government data implies. In June, there was 1 job opening for every 2 active applicants on the platform, marking a significant slowdown compared to the previous peak of 1 job opening per applicant observed in the last months of 2022.
June 2023 witnessed a 2% decline in hiring across all industries in the U.S. compared to the previous month of May 2023. Furthermore, national hiring in June 2023 experienced a significant 20.9% drop compared to the same period in the previous year, June 2022. However, there are signs that the decline in hiring is starting to stabilize.
The most impacted industry in terms of hiring continues to be the Technology, Information, and Media sector, which saw a staggering 42% decrease in hiring compared to the same period last year. Retail and Wholesale sectors also faced substantial challenges, with YoY hiring rates dropping by 32% each. Real Estate and Equipment Rental Services experienced a 27% decline in hiring, closely followed by Professional Services at 24%. Other industries also faced significant declines, such as Manufacturing and Transportation, Logistics, Supply Chain, and Storage, which both saw a 22% reduction in hiring. Financial Services and Accommodation and Food Services also experienced notable declines at 21% and 19%, respectively.
The short tenure rate, or STR, which measures the fraction of positions that end after being held for less than a year, has decreased across industries over the past year.
Short tenures started a growth spell in August 2021 that peaked in March 2022 when the STR was up 10.25% year-over-year. However, due to the current slowdown in the labor market, workers are now staying in their positions for longer durations compared to the previous year, resulting in a year-over-year decrease of -5.46% in STR as of June 2023. This suggests that workers’ confidence in the labor market is waning and their expectation to land jobs elsewhere is declining. After all, there are less jobs available for every active job seeker today compared to the trend of the last two years.
Some industries are seeing a more prevalent decline in quick quitting than others, as shown in the chart below above. The STR in the technology, information, and media industry, for example, declined 12.6% year-over-year in June, meaning workers are leaving their jobs at a much slower rate this year compared to last year. (…)
The Accountant Shortage Is Showing Up in Financial Statements Advance Auto Parts and others have cited a lack of skilled accounting personnel for material weaknesses in their financial-reporting controls, a key predictor of restatements
(…) The company said it wasn’t able to attract and retain enough qualified people to fulfill internal-control responsibilities. (…)
The disclosures come as fewer people are pursuing degrees in accounting and entering the field, resulting in more positions open and for longer periods of time. What’s more, academics say, the shortage will likely be compounded as more accountants retire without a robust pipeline of replacements. (…)
Nearly 600 U.S.-listed companies of a total 7,359 reported material weaknesses related to personnel, typically in accounting or information technology, this year through June, down 5.2% from the prior-year period, but up 40.6% from the 2019 period, according to a review of filings by research firm Bedrock AI.
Of these companies, 21% were based outside the U.S., a jurisdiction whose reporting requirements can be knotty for companies with complex operations and corporate structures. (…)
The number of foreign U.S.-listed companies reporting personnel-related material weaknesses this year through June grew 5% to 125, compared with the prior-year period, Bedrock said. That is nearly triple that of the 2019 period. The 125 companies included 16 with at least a $1 billion market capitalization, up from 15 in the prior-year period and six in the 2019 period. (…)
“Higher salaries are coming for in-house accountants whether management likes it or not,” he said.
Is China Mired in a ‘Balance Sheet Recession’? Warning signs are adding up that China might face a slow, post-2008 style U.S. recovery—absent a much bigger fiscal push
(…) The value of contracted sales for China’s top 100 property developers fell 28% from a year earlier in June, compared with 7% growth in May, according to industry tracker CRIC. A higher base from last June—when Shanghai emerged from its Covid-19 lockdown—probably contributed to that decline. But sales were lackluster by any reasonable measure: They only reached around a third of June 2020 and 2021 levels, according to Nomura.
China probably won’t slip back into a formal recession. But, like the U.S. after the 2008 financial crisis, it may be facing a scenario where households and companies refuse new borrowing due to existing heavy debts—and a lack of confidence about the future. Instead, they use new income to pay down existing obligations. That in turn makes it difficult for policy makers to goose the economy with lower interest rates, because the pass-through to actual new investment and consumption is marginal.
That is certainly playing out in the real-estate market. Households, which levered up rapidly over the past decade, are worried about the economy and the fact that housing prices no longer seem destined to keep going up—to say nothing of the small problem that many buyers who bought the rights to future apartments from developers have yet to actually receive their homes. Investors have become less willing to put savings into new apartments.
That spells troubles for developers too. Bond defaults have picked up. The default rate of Chinese property junk bonds is around 16% so far in 2023, according to Goldman Sachs. The bank raised its full-year default rate forecast to 28% earlier this month, after lowering it in February—a sign of how quickly and dramatically the mood has darkened again in financial markets. (…)
More stimulus of some kind is almost certainly in the pipeline this year. But repairing the confidence of home buyers looks increasingly like a long-term battle—one that poor demographics and heavy household debts will make difficult indeed.
- China’s Hidden-Debt Problem Laid Bare in Zunyi City’s Half-Finished Roads, Empty Flats A city in one of China’s poorest provinces is awash in half-built roads and apartment blocks, symbolic of the mounting debt crisis facing municipalities around the country after years of stimulus-fueled growth.
(…) The Fengxin Expressway, still partially closed after construction stalled four years ago, is one of the many unfinished infrastructure projects in Zunyi, a city of 6.6 million people in mountainous Guizhou province. In addition to highways, housing projects and tourist attractions also stand incomplete, symbolic of the stark debt crisis that many local governments in China are facing after years of credit-fueled stimulus to juice growth. (…)
Now, the provincial government is struggling to pay its debts, small businesses are not getting paid for construction projects and displaced residents are demanding overdue compensation and new housing be delivered. (…)
At the heart of China’s debt crisis are so-called local-government financing vehicles, which were created to fund infrastructure by skirting limits on municipal authorities selling bonds in the market. However, LGFVs rarely generate enough returns to cover their obligations, meaning most rely on methods including refinancing and injections of municipal funds to stay solvent, which are now drying up. Rolling over debt is also getting harder as investors are more cautious.
Money owed by LGFVs is known as “hidden debt” because it doesn’t appear on governments’ balance sheets. The issue has grown into a major risk for the Chinese economy and is also a big concern for investors who have bought bonds sold by such firms. (…)
While there is no official figure, the International Monetary Fund estimated in February that there was 66 trillion yuan of such debt outstanding in China at the end of 2022, up from 40 trillion yuan in 2019. (…)
Kicking the can down the road seems to be the main way LGFVs are trying to delay a full-blown credit crisis. China’s biggest state banks are meanwhile offering the vehicles loans with ultra-long maturities and temporary interest relief to prevent a credit crunch in the market. (…)
Xi Calls for More Economic Opening, Trade as Recovery Falters China’s attempts to encourage foreign investors have ramped up in recent weeks as it’s become clear that the economy’s recovery following the end of Beijing’s Covid Zero policies is starting to flag.- Mexico is now the top U.S. trade partner (Axios)
Mexico supplanted China this year as the United States’ top trading partner, Emily writes.
The milestone reflects a real shift in the dynamics of the global economy — away from prioritizing low prices and greater efficiency (via super fragile supply chains) to something more nuanced. (…)
The auto industry accounts for nearly a quarter of the total manufacturing trade activity between the U.S. and Mexico.
- China exports more to the U.S. than the U.S. sends to China, but trade with Mexico is more balanced between imports and exports.
- For example, in some industries, products are started in U.S. plants, and finished in Mexican factories before coming back into the U.S. “We complement each other,” Torres tells Axios.
Data: U.S. Census; Chart: Axios Visuals
For the record, YtD in 2023:
- U.S. imports from China total $168.6B. From Mexico: $194.9B. From Canada: $175.5B.
- U.S. exports to China total $62.4B. To Mexico: $133.2B. To Canada: $146.2B.
- U.S. trade balance with China: $-106.4B. With Mexico: $-61.8B. With Canada: $-29.3B.
EARNINGS WATCH
A repeat performance? (Refinitiv)
Heading into the Q1 earnings season, we were expecting an ‘earnings recession’ based on a negative Q4 actual growth rate along with analyst estimates forecasting a negative growth rate for both Q1 and Q2. However, Q1 marked a resilient (and suspenseful) quarter which threw water on the earnings recession narrative as the growth rate finished at +0.1% from a starting point of -5.1% at the beginning of the quarter. It was a suspenseful ending to earnings season as many readers waited to see if the Q1 growth rate would turn to positive territory and eventually did at the last minute. This was a remarkable feat as we have only seen the growth rate start negative and end positive on eight occasions since 2002.
Looking at Q2, the backdrop heading into the quarter looks remarkably similar to Q1 which raises the question – will we see ‘A Repeat Performance’ of last quarter?
Surprisingly, the upbeat Q1 did not translate into upward Q2 growth expectations. Instead, analysts have set the bar lower heading into earnings season by downgrading Q2 estimates, albeit at a slower pace compared to the prior three quarters. From a guidance perspective, we have seen 62 negative Q2 EPS pre-announcements compared to 39 positives, resulting in a negative/positive ratio of 1.6, which is below the long-term average of 2.5 and the prior four-quarter average of 2.0.
Over the last three-months, the Q2 EPS estimate has declined from $54.24 to $52.81 per share, resulting in analysts downgrading y/y growth expectations by 2.5 ppt heading into earnings season. Interestingly, the majority of Q2 downgrades finished by the beginning of May and remained unchanged throughout the month of May and June. Finally, Q2 has seen a slower pace of revisions compared to the prior three quarters where estimates were revised downwards by an average of 6.8 ppt.
(…) ex-energy earnings growth is currently forecasted to be negative for the fifth consecutive quarter, surpassing the three quarters of negative ex-energy growth seen in 2020.
(…) The S&P 500 forward 12-month P/E ratio is 19.2x, which ranks in the 84th percentile (since 1985) and a 9.2% premium to its 10-year average (17.5x). For reference, the trough forward P/E during the last four recessions were as followed: 10.1x (Oct 1990), 17.3x (Sept 2001), 8.9x (Nov 2008), and 13.0x (March 2020).
Furthermore, the S&P 500 ‘PEG’ ratio is currently 1.99x which ranks in the 98th percentile (since 1985) and a 42.3% premium to its 10-year average (1.3x). The PEG ratio is expensive as the forward P/E continues to rise since the October low, while the long-term EPS growth rate expectations have sharply declined 2021. (…)
(…) The ‘Magnificent-7’ group comprising of Apple Inc, Amazon.com Inc, Alphabet Inc, Meta Platforms Inc, Microsoft Corp, NVIDIA Corp, and Tesla Inc has a market cap weight of 27.9% compared to an earnings and revenue weight of 14.0% and 9.3% respectively. The ‘Magnificent-7’ group has an aggregate forward P/E of 33.2x, a 73.0% premium to the overall index. (…)
CIBC Capital Markets has this chart showing that the P/E of the equal-weight S&P 500 index is just below its 25-year median:
BofA data reveals that only 23% of individual equities have outperformed the S&P 500 during Q2, the lowest share on record going back to 1986.
- The top 10 holdings in the S&P 500 now make up over 30% of the index, the highest concentration we’ve seen with data going back to 1980. (@charliebilello)
- Technology’s percentage of S&P 500 at 23-year high (NDR)
- Technology’s relative forward P/E highest since 2004 (NDR)
- Ed Yardeni (my green dashed line):
- IT revenue growth is not materially different than that of S&P 500 companies:
- IT Earnings are growing faster long-term (my dashed lines):
- How high can IT margins go?
- Investors are betting higher:
- Analysts also see continued margins expansion, in spite of slowing revenue growth (my dashed lines):
WSJ investigation finds that AT&T and Verizon knew about toxic lead cables in their networks — and did little. (WSJ) (Remember leaded gasoline…)