Global Economy Poised to Slow as Higher Rates Bite, OECD Says Central banks must remain restrictive to tame inflation: OECD
Growth will ease to 2.7% in 2024 after an already “sub-par” expansion of 3% this year, according to the latest OECD forecasts. (…)
Moreover, the Paris-based the organization warned that risks to its prediction are tilted to the downside as past rate hikes could yet have a stronger impact than expected and inflation may prove persistent, requiring further monetary tightening. It called China’s struggles a “key risk” for output around the world. (…)
The OECD cautioned against easing up, with core-price gains remaining stubborn in many countries even as headline gauges head lower. There’s limited scope for any rate cuts until “well into 2024,” it said. (…)
While US expansion will be stronger than predicted in June, it will slow to 1.3% in 2024 from 2.2% in 2023. (…)
NAHB Housing Market Index: Builder Confidence Weakened by High Mortgage Rates
The latest reading fell 5 points from last month to 45, the index’s second consecutive monthly decline and its lowest level since April. Builder confidence continued to weaken in September largely as a result from rising mortgage rates moving above 7%.
The red line above is the most important one. Traffic has turned back down to a historically low level.
Cass Freight Index – Shipments
The shipments component of the Cass Freight Index® rose 1.9% m/m in August, or 0.8% m/m seasonally adjusted (SA).
- On a y/y basis, the index was 10.6% lower in August, after an 8.9% decline in July.
- The freight market downcycle is now 20 months old, which compares to a range of 21 to 28 months in the past three downcycles.
- Part of the large y/y decline is the comparison to the extraordinary time last summer when destocking was creating freight demand as retailers shipped out stale inventory.
- The current downcycle is similar to the peak-to-trough declines in two of the three downcycles in the past dozen years. The third ended with the pandemic.
Yardeni Raising Odds of a Recession a Tad
(…) Today, in response to several new developments, we are raising the odds of a recession before the end of next year from 15% to 25%.
We remain in the rolling-recession-and-recoveries camp for now. However, the 30% increase in a barrel of Brent crude oil since June 27 is a concern. (…) If the price of oil breaches $100 per barrel and the price of gasoline rises solidly above $4.00 a gallon and both remain above those levels for a while, they could trigger a renewed wage-price spiral and higher inflationary expectations.
That scenario would be reminiscent of the 1970s, when the first wave of inflation was followed by a second wave and both triggered recessions. That is not the scenario we consider most likely, but it is the risk to our happier outlook. It’s partly because of this risk that we’ve raised our subjective odds of this alternative scenario to 25%. (…)
The big difference we are forecasting between now and then is that productivity growth, which collapsed during the 1970s, will be improving significantly over the rest of the decade. The average annualized five-year growth rate of productivity peaked at a record high of 4.5% during Q1-1966, then proceeded to plunge to a record low of 0.1% during Q3-1982. This time, productivity growth bottomed at 0.4% during Q4-2015. It rose to 1.4% during Q4-2019 just before the pandemic. It soared during the lockdowns and fell when quits rose sharply during the pandemic. Now it is settling down, with a 1.6% increase during Q2-2023.
But we expect that our measure of productivity growth will resume its pre-pandemic ascent to 4.0% by the end of the decade. That may seem farfetched, but that would be consistent with the peaks in the previous three productivity growth cycle booms. This time, we expect to see the plethora of technological innovations boosting productivity in many more companies in many more industries than ever before. In this sense, all companies are now technology companies.
The collapse in productivity growth combined with rapidly rising compensation caused unit labor costs inflation (ULC) to soar during the 1970s. There actually were three peaks in this inflation rate, which closely tracks the headline CPI inflation rate. This time, ULC inflation peaked last year at 7.0% y/y during Q2 and fell to 2.5% during Q2-2023. The headline CPI inflation rate peaked at 9.1% last summer and fell to 3.7% during August. (…)
It isn’t just the recent upturn in oil prices that’s caused us to raise the recession warning flag a bit higher. We are also concerned about the widening federal budget deficit, with the government’s net interest outlays soaring. Bond yields might have to rise higher to attract buyers for the mounting supply of Treasuries, especially if there is an inflation scare along the way. More immediate concerns are the United Auto Workers’ strike and the likelihood of a government shutdown at the end of the month. (…)
The first chart plots annual productivity growth YoY with the red line at 4%.
This next chart is quarterly productivity growth YoY:
I have an immense respect for Ed Yardeni but I just want to point out that the decade post GFC was the worst decade for productivity growth since 1960 and the “ascent to 4.0%” was only realized in 2020, the first pandemic year. Annual productivity growth was 1.9% in 2019 with the quarterly measure peaking at 2.6% in Q4’19.
We shall see how AI and ChatGPT et al. improve overall productivity, particularly if oil prices breach $100 like they did between 2011 and 2014 (see what happened to productivity during the 1970s).
A 2003 study by the Max-Planck Institute for Demographic Research concluded that
In general, the evidence suggest that productivity tend to follow an inverted U-shaped profile, where significant decreases take place from around 50 years of age.
An important cause of these age-related productivity declines is likely to be reductions in cognitive abilities across the life span. Some abilities, such as perceptual speed, show relatively large decrements from a young age, while others, like verbal abilities, show only small changes throughout the working life.
Although older individuals have longer experience, they learn at a slower pace and have reductions in their memory and reasoning abilities. In particular are senior workers likely to have difficulties in adjusting to new ways of working.
The International Institute for Applied Systems Analysis concurred in 2008:
The findings suggest that productivity tends to increase during the initial years in the labour market before it stabilizes and often declines towards the end of the working life. Productivity reductions at older ages are strongest in job tasks where problem solving, learning and speed are important, while for work tasks where experience and verbal abilities matter more, there is less or no reduction in productivity among elderly workers.
The International Monetary Fund in 2016:
But two recent papers by IMF economists suggest that there are limited prospects for productivity to come to the rescue. That’s because not only is the overall population aging, so are those still in the workforce. And the aging workforce is holding down productivity growth in both Europe and Japan.
The decline in productivity in Japan and Europe manifested itself in what economists call Total Factor Productivity, which is the portion of economic growth that is not the result of changes in inputs (such as capital and labor). Total factor productivity measures how efficiently capital and labor are used in the production process and is affected by such things as innovation, institutions and the quality of the workforce.
Productivity generally increases until workers are in their 40s, then tails off until they stop working. (…) The story is similar for 28 countries in Europe. (…)
Under current demographic projections, the future will be worse. From 2014 to 2045 workforce aging will intensify in Europe and could reduce annual total factor productivity growth by 0.2 percentage points.
The U.S. Census Bureau in June 2023: America Is Getting Older
The nation’s median age increased by 0.2 years to 38.9 years between 2021 and 2022, according to Vintage 2022 Population Estimates released today by the U.S. Census Bureau.
“As the nation’s median age creeps closer to 40, you can really see how the aging of baby boomers, and now their children — sometimes called echo boomers — is impacting the median age. The eldest of the echo boomers have started to reach or exceed the nation’s median age of 38.9,” said Kristie Wilder, a demographer in the Census Bureau’s Population Division. “While natural change nationally has been positive, as there have been more births than deaths, birth rates have gradually declined over the past two decades. Without a rapidly growing young population, the U.S. median age will likely continue its slow but steady rise.”
These charts are from the Congressional Budget Office (2023)
American Business Confidence in China Slumps U.S. companies are painting the bleakest picture in decades over doing business in China as tensions between Beijing and the West are compounded by a deteriorating environment for their operations.
Just over half of 325 members surveyed by the American Chamber of Commerce in Shanghai were optimistic about their five-year business outlooks, the lowest since the survey began in 1999, the group said Tuesday. As recently as 2021, the figure stood at 78%.
While sectors such as pharmaceuticals, legal services and retail reported slightly higher levels of optimism, they were lower in logistics, technology and management consulting because of factors such as China’s crackdown on due-diligence firms, the annual survey said. (…)
Less than half of respondents saw their 2022 revenue increase compared with the previous year, the lowest in more than 15 years. Some 68% of respondents said they were profitable last year, the lowest rate since the survey began, while just 37% saw their operating margins grow from the previous year, the lowest since 2008.
The European Union Chamber of Commerce in China echoed many of the same sentiments in a position paper also released Tuesday that reflected the views of its more than 1,700 member companies. The group cited concerns over the country’s anti-espionage and data-security laws, among other challenges. (…)
Among the problems is that China’s policy environment is highly inconsistent, Jens Eskelund, the European chamber’s president, said.
He cited uncertainty over what constitutes violations of the country’s anti-espionage laws, confusion over data-security rules and the government’s suspension of releasing economic data, such as the youth unemployment rate.
The red lines regarding what is and isn’t allowed are “blurred,” he said, adding that some of the chamber’s social-media postings on Chinese platforms have been censored, though he was unsure why. (…)
- China’s Worst Capital Outflow in Years Spells More Yuan Pressure Outflow from capital account was the largest since 2015
- BlackRock Strategists Downgrade China Stocks on Growth Concerns “Structural challenges imply deteriorating long-term growth”
- A Chinese Property Developer Has, Finally, Restructured Its Debt
Sunac China has become the country’s first big property company to get final signoff from investors to restructure its debt. It received approval from investors holding 98.3% of its foreign bonds.
It has also filed for chapter 15 bankruptcy protection in the U.S., reducing the risk it can be sued by other creditors in American courts.
Sunac owes international bondholders more than $10 billion in principal and interest payments. It had around around $138 billion of liabilities by June 30, including homes it has sold but not delivered, the money it owes to suppliers and its bank debt. Most of its debts are due within a year.
The company focused on wealthy cities including Beijing, Chongqing and Hangzhou. The opposite approach was taken by Country Garden, another developer which has had recent discussions with foreign bond investors.
- Troubled Chinese Trust Company Brings In State Help Zhongrong Trust’s recent financial struggles rekindled debates over China’s ‘Lehman moment’
China’s Zhongrong International Trust, a shadow-banking giant whose financial troubles have rattled investors, broke its silence late Friday and said it is working with two state-owned institutions to address its problems.
The domestic asset manager last month failed to make payments on high-yielding investment products that it had sold to many companies and wealthy individuals. That sparked concerns that the country’s worsening property downturn was developing into a wider financial-sector contagion.
Zhongrong Trust acknowledged late Friday that it had missed payments on some products, and said it would bring in two large state-owned trust companies to help with operations and management.
“Due to multiple internal and external factors, some of the company’s trust products could not be paid on schedule,” it said. Zhongrong Trust said it has engaged CITIC Trust, owned by state conglomerate CITIC Group, and CCB Trust, owned by China Construction Bank, to work with it for a year.
The asset manager indicated the arrangement isn’t a government bailout. It said the two state-backed firms won’t be responsible for paying for its trust products, and the arrangement could be terminated early or extended.
Since Zhongrong Trust’s troubles bubbled up around the middle of this year, investors have grown concerned that China’s $2.9 trillion trust industry could be the next casualty of the country’s property crisis. (…)
In 2022, Zhongrong’s trust funds had 11% of their assets in the property sector, according to the company’s annual report. (…) The full scope of its financial difficulties isn’t known. The privately held company had the equivalent of $108 billion in assets under management at the end of 2022. (…)
Its biggest shareholder is a state-owned company called Jingwei Textile Machinery, which last month said it wanted to delist its shares from Shenzhen Stock Exchange. The company cited “significant uncertainties in its operations” due to “market changes,” without providing specifics.
Trust funds in China had about $155 billion in exposure to the property sector at the end of the first quarter, according to data from the China Trustee Association. That portion is “under great threat,” Nomura analysts said last month. Trust funds also have larger exposures to financial markets, which increases the risk of contagion, they said.
TECHNICALS WATCH
The S&P is chugging along with fewer members participating
For more than a month, the S&P 500 has held more than 5% above its 200-day moving average. But no more than 60% of its member stocks have held above their own 200-day averages by any amount. This is highly unusual and is one of the longest divergence streaks since 1928. (…)
It’s not that breadth is bad per se; it just hasn’t been all that great. One of the hallmarks of healthy markets is that long-term trends within stocks in the S&P 500 should remain robust for prolonged periods. More than 60% of stocks in the index should consistently hold above their 200-day moving averages. When the market dips and fewer than 40% of stocks (or close to it) are above their averages, buyers should see an opportunity and return.
We have definitely seen the latter over the past 11 months. We have not seen the former.
One of the nice things about the new backtesting feature is the ability to add multiple indicators to a single chart. Below, we can see the S&P 500, its deviation from its 200-day moving average, and the percentage of stocks in the index above their own 200-day moving averages. The index has held more than 5% above its average for weeks, while fewer than 60% of members are above their own averages by any amount.
This is unusual – since 1928, when the S&P 500 has been more than 5% above its 200-day moving average, a median of 81% of its stocks were also above their own moving averages. Lately, more than 25% fewer stocks than average have been maintaining their long-term trends. (…)
The “weak breadth” gang has been tilting at windmills for nearly a year. The weaknesses of their “weakness” argument have been fairly obvious, but it’s getting less so. While most major indexes have been holding up very well, fewer members are doing the same.
It has reached a point where the last month has seen a lack of stocks managing to hold their long-term uptrends, which is highly unusual given how well the S&P 500 index has been holding up. The precedents for similar behavior are somewhat troubling. It would be a lot more worrisome, however, if we get to a point where fewer than 40% of S&P stocks are holding above their 200-day averages, and bulls show little interest in using that as a buying opportunity.
