Note: I am travelling this month. Posting will be sporadic and shorter due to limited time and equipment.
NFIB Small Business Optimism Index Declines Again in September
The NFIB Small Business Optimism Index fell to 90.8 in September from 91.3 in August. Optimism is up a bit from the low of 89 hit in April 2023, however over the past few months, the index has been hovering around levels not experienced since 2012 in the aftermath of the Great Recession.
Ongoing pessimism on the part of small firms reflects a long list of challenges which include inflation, labor shortages, higher financing costs and reduced credit access. Although some of these macroeconomic factors have improved this year, small firms do not appear to be convinced that the road ahead is clear of obstacles.
The share of firms expecting the economy to improve over the next six months, which is still near a record low even after turning up in the summer, deteriorated for the second consecutive month in September. (…)
- The business outlook deteriorated for the second straight month in September. The net percent of respondents expecting the economy to improve over the next six months fell to -43% from -37%. This is the lowest share since May and is an about-face from the more optimistic survey results seen in June and July.
- Deteriorating credit conditions weighed on sentiment in September. A net 8% of owners reported it was harder to get a loan compared to three months ago—the highest reading since the March survey conducted in the wake of multiple bank failures. The outlook was equally pessimistic as a net 10% of owners expect credit conditions to worsen in the next three months, the highest reading since December 2012.
- (…) Small businesses are clearly feeling the effects of higher interest rates, however. A net 26% reported paying a higher interest rate compared to three months ago, the highest since 2006. The average rate paid on these loans was 9.8%, up from 9.0% in July.
- Hiring plans ticked up slightly in September. The slight upturn coincides with September’s surprisingly robust nonfarm payrolls report and August’s increase in job openings. Small business continue to have difficulty filling positions, however, with 43% of owners reporting they were unable to fill a job opening in September, up from 40% in August.
- Wage pressures continue to ease. The net share of owners raising compensation held steady at 36% during September, while the share planning to raise compensation dipped to 23% in September from 26% in August.
- Although wage pressures appear to be abating, a higher share of small firms reported raising selling prices during the month. The net share of owners raising prices increased two percentage points to 29%, the highest since June 2023.
- Inflation and labor quality remained the chief concerns of business owners in September. Although inflation concerns are down on an annual basis, the measure is still above its pre-pandemic trend.
Bloomberg’s Joe Weisenthal (@TheStalwart) tweeted (Xed?) “Such a striking chart from the NFIB Small Business Optimism survey. Huge gap between the hard and the soft data.”
Wage Growth Tracker Was 5.2 Percent in September
The Atlanta Fed’s Wage Growth Tracker was 5.2 percent in September, down slightly from the 5.3 percent reading for August. For people who changed jobs, the Tracker in September was 5.6 percent, the same as in August. For those not changing jobs, the Tracker was 5.0 percent, down from 5.2 percent in August.
Composition-adjusted wage growth rates are all converging around the 5.0% range.
- 420,000 workers are now on strike in the United States, according to Bank of America. Estimates show that up to 545,000 workers are likely to be on strike by the end of 2023. This would be the most workers on strike since 1983, which also happens to be the last time inflation was an issue. Meanwhile, a record 447,000 people now hold 2 full-time jobs in the US. Consumers are feeling the pain of inflation. (@KobeissiLetter)
China’s Country Garden Wilts The troubles of China’s largest private property developer still standing won’t be enough to spark a broader Chinese debt crisis but it could undermine Beijing’s attempts to put a floor under the housing market.
Mounting damage to banks’ balance sheets from the property meltdown could also make stabilizing other parts of the economy more difficult.
Country Garden, the largest Chinese developer by contracted sales last year, warned Tuesday that it doesn’t expect to be able to repay all its U.S. dollar bonds and other offshore debts—after missing a 470 million Hong Kong dollar loan repayment, equivalent to around $60 million. The company has flagged liquidity issues for months but managed to make payments on past-due dollar debts last month within its 30-day grace period. (…)
And, as was the case at Evergrande before it, the firm’s financial troubles have plunged it into a vicious cycle as home buyers stay away, further draining it of cash needed to repay debts. Country Garden’s contracted sales were down a shocking 81% year on year in September.
Country Garden’s downfall is significant as it was considered one of the financially healthier developers not too long ago. While it had similar revenue to Evergrande in 2019, it has much less debt. As of June, it had a net debt, including bonds and bank loans, of 146 billion yuan, the equivalent to $20 billion, compared with Evergrande’s 618 billion yuan, according to S&P Global Market Intelligence.
That could cause jitters in debt markets, especially since Evergrande scrapped its own plan to restructure its offshore debt just last month. But more important, the apparent implosion of a seemingly solid big developer deals another blow to already fragile sentiment in the housing market and makes other private developers’ debt woes harder to solve.
Property sales have remained sluggish despite easing policies rolled out by many Chinese cities since late August. Country Garden also has around 603 billion yuan of contract liabilities, which are mostly apartments that have already been sold but not yet delivered to buyers. (…)
Chinese property developers had 5.3 trillion yuan, equivalent to $726 billion, of domestic bank loans as of June—about 6% of Chinese banks’ books. Country Garden’s darkening outlook, on top of Evergrande’s failure, substantially raises the probability that a big chunk of that debt will eventually need to be written off. And it comes as commercial banks’ net interest margin is near an all-time low.
Another potential ripple effect is on suppliers. As sales dry up, developers are finding it harder to pay construction and material companies. Country Garden had around 202 billion yuan of trade payable as of June and China’s listed developers together owed 3.4 trillion yuan in trade payables to their suppliers, according to research firm Gavekal.
That has already caused delays in payments to sectors such as steel and cement and tied up around 1 trillion yuan in working capital for those sectors, says Gavekal. For now, Chinese heavy industry still seems to be getting by: Profits at key property-related heavy industrial sectors were about six times interest payments in mid-2023. But deepening financial troubles at another big developer such as Country Garden could chip away at that too.
The Country Garden mess is another reminder that China’s housing meltdown is a long way from over. Banks, households and the economy writ large will be footing the bill for years.
US PPI
The producer price index (PPI) increased by 0.5% in September, above expectations for a smaller increase. This reflected an increase in energy prices (+3.3%), an increase in food prices (+0.9%), and an increase in core producer prices (+0.3%). The PPI excluding food, energy, and trade services increased by 0.2%. Retail margins increased 0.5%. The “old methodology” core PPI—finished goods excluding food and energy—increased by 0.2%. Core intermediate producer prices were unchanged, and the prices of crude materials less food and energy decreased by 0.8%. (Goldman Sachs)