US Sales Activity Accelerates In August US SMIs relating to Market and Sales Growth accelerated sharply in August, reflecting buoyant growth over a wide spectrum of economic activity.
Wednesday we get the flash PMI surveys (purchasing managers). This is the Sales Managers survey from World Economics, right from the very front line, coming after the very strong July retail sales report:
- The Business Confidence Index increased 1.5 index points to 48.3 in August.
- The Market Growth Index continued to show solid growth in August rising to 53.5.
- The Sales Growth Index, at 53.5, grew to a 6-month high this month.
- The Prices Charged Index increased to a 17-month high in August.
Source: World Economics Data Shown as a Diffusion Index.
Pay for New Hires Is Shriveling After years of salary increases, business across the economy say they’re reducing starting salaries for recruits.
(…) The declines mark a stark turnaround from 2022, when compensation for three-quarters of advertised job titles rose from the year before, according to ZipRecruiter. In a July survey of about 2,000 employers conducted by the online hiring platform, nearly half said they had reduced pay for recent job openings. (…)
Data from Gusto, a payroll and benefits software company serving more than 300,000 small and midsize businesses, shows that pay rates for new hires are 5% lower than they were for new recruits for the same roles at this time last year. While professional-service roles have been most affected—pay rates for engineers and developers, for example, have dropped 18% in the past year—workers in other industries have also been hit. (…)
The company’s data shows pay in tourism and construction, for example, has continued to rise. (…)
The Atlanta Fed’s Wage Growth Tracker shows that switchers’ pay gap is back to normal but also that stayers’ wage growth has stabilized around 5.5% during the past 18 months.
American Airlines pilots approve sweetened labor deal with big raisesThe more than 15,000 pilots at American will get immediate raises of 21% with compensation increasing more than 46% over the duration of the four-year contract, including 401(k) contributions, their union said Monday. (…)
The agreement also includes improvements in scheduling and benefits.
American said on Tuesday retroactive pay for the pilots will cost it $230 million in the third quarter. The airline raised its unit cost guidance on Tuesday to a 4% to 6% increase compared with the same period last year, up from a previous forecast of a 2% to 4% increase, maintaining its annual guidance. (…)
US Corporate Debt Refinancing: Costly But Manageable
Since the end of 2021, IG and HY bond yields have more than doubled. This has raised concerns among investors over the refinancing impact for issuers with upcoming maturity walls. (…)
Unsurprisingly, our findings suggest that the incremental increase in coupon payments is the largest since 2010 for both IG and HY issuers. This makes sense given the speed and magnitude of the hiking cycle combined with the significant amount of cash added to balance sheets in 2021. (…)
With a historically low share of IG-rated bonds maturing within the next 2 years, the incremental hit to interest expenses should be manageable, especially when combined with a strong fundamental backdrop. Profits, debt service capacity, and liquidity are all healthy. In contrast, the notional share of HY-rated bonds maturing within the next 2 years is at the high end of the range. This backdrop suggests a faster transition to a higher funding cost environment for HY bond issuers relative to their IG peers. (…) (Goldman Sachs)
Spread widening coming?
S&P Joins Moody’s in Cutting US Banks A mix of pressures is making life “tough” for lenders, the ratings company said.
Many depositors have “shifted their funds into higher-interest-bearing accounts, increasing banks’ funding costs,” S&P wrote in a note summarizing the moves. Non-interest-bearing deposits have fallen 23% in the past five quarters, according to S&P, as a spree of Federal Reserve rate hikes prompted consumers to seek higher deposit rates elsewhere.
Data: FactSet, Investment Company Institute; Crane Data; Charts: Axios Visuals
The recent rebound in the nominal yield has been driven by the rebound in the 10-year TIPS yield from a low of 1.06% on April 6 to 2.00% today. The latter seems to be normalizing back around 2.00%, which is where it was during 2003-06, the years just before the GFC of 2008 set the stage for the TIPS yield to fluctuate around 1.00% to -1.00% from 2010-22.
The spread between the 10-year nominal and TIPS yields is deemed to be a measure of the annual average expected inflation rate over the next 10 years. The history of the 10-year expected inflation proxy shows that it mostly has hovered around 2.50% since 2003 except for during the recessions associated with the GFC and the GVC, along with the mid-cycle slowdown of 2014-16. During those three periods of economic weakness, the TIPS yield fell below 1.50%.
This simple model suggests that during normal times, the 10-year nominal bond yield should be around 4.50% with the TIPS yield at 2.00% and expected inflation at 2.5%. That’s where the nominal yield was most of the time from 2003-06, the years before the GFC-to-GVC period. It’s almost there now. The economy performed just fine back then and so did stocks.
Be warned: This is a simple model. We’ve recently discussed our concerns about profligate fiscal policy and the resulting mounting federal budget deficits. We think that inflation will continue to moderate, but we could be wrong.
Amid all the talk about term premium, inflation expectations and real yield, here’s another simple bond yield model:
Between 1985 and 2019, growth in nominal GDP averaged 5.0% and the yield on 10-Year Treasuries averaged 5.0%. The correlation between the two series was 68.7% when excluding the 3 recession episodes.
And speaking of TIPS:
America’s Fight Over Tipping at Restaurants Comes to Its Biggest Battleground Yet Chicago restaurants say they will have to boost prices and cut staff if a “sub-minimum wage” proposal becomes law.
(…) In Chicago, large businesses pay servers, bussers, bartenders and other tipped employees a minimum of $9.48 an hour—with tips making up the difference. If their tips don’t push their hourly pay over the minimum, law requires their employer to make up the difference.
Activists are pushing to eliminate the decades-old system in Chicago, and elsewhere. They say that it relies on diners’ goodwill to subsidize workers’ wages—and that sit-down restaurant staff should be able to earn the same minimum pay as other workers. (…)
Chicago’s City Council introduced an ordinance in July to phase out by 2025 the tipped wage for restaurant servers and others who receive tips, including employees of nail salons, carwashes, hair salons and parking services.
The ordinance would require employers of tipped workers to pay them the municipal minimum wage. Restaurant owners can then decide what to do with customer tips, including giving them to the server or pooling them to distribute to nonmanagerial staff, according to the Illinois Restaurant Association. (…)
If the ordinance passes, Chicago would become the second-biggest U.S. city to eliminate the tipped-wage system, after Los Angeles and the rest of California ended the practice in 1976. (…)
“The concern is there are going to be less hours, and prices will go through the roof. People can barely afford to eat out now,” said Ande Moore, a 51-year-old Chicago waiter and bartender who has been in the industry for 34 years.
Some Chicago restaurant owners have voluntarily started paying a set wage across staff, and said it is helping them attract and retain employees. Joe Frillman eliminated the tipped wage and instituted a 25% gratuity on dine-in checks instead of tips and fees at his Daisies restaurant in Chicago in late 2020. Distributing the gratuity to staff has improved staff loyalty and service, he said. (…)
The owners of Chicago eatery Thattu decided to forgo asking for tips on guest checks when they opened their restaurant in May. They instead charge more than other restaurants serving Indian cuisine, but many customers are pleased to not have to pay tips or other fees on their bills, co-owner Vinod Kalathil said.
Kalathil said: “Here is the true cost of dining out. You see it before you place your order.”
During a recent road trip through Vermont, New Hampshire, Maine, New Brunswick and Québec, we experienced the sharp increase in hotel and restaurant costs. Bar Harbor, Maine was particularly expensive (USD$38 lobster rolls!!!). Restaurants are still struggling with staff shortages. We have seen many suggesting 20-22% tips over the taxed total.
One high end restaurant in NH got creative (!), adding a 7.5% surcharge for “staff management” to which we were expected to add 18-22% tip. It wasn’t clear in whose pockets the surcharge would end up.
At the other end of the fairness spectrum (!), a high end restaurant owner in Qc imposed a 15% tip but, buried in the check’s fine print, revealed that 2.5% would be retained by the restaurant. When I told the server I wanted to tip her directly with cash, it proved impossible since the 15% was automatically added to the bill. When I secretly compensated her, she gave us a large appreciative smile and a clear signal she was unhappy with the situation. Go figure!
BTW, “Help Wanted” signs were almost non-existent in the U.S. states we visited but still numerous in NB and Qc.
Interestingly, Indeed Job Postings have flatlined this summer (through Aug. 11), suggesting that U.S. job openings may have stopped falling.
SHRINKFLATION
- Goodbye Bathtub and Living Room. America’s Homes Are Shrinking. For many Americans, homeownership may be attainable only if they give up a dining room.
(…) Home builders are having to find ways to make their product more affordable to increase their pool of customers.
Shrinking the size of a new single-family home is an increasingly popular way to do it. Smaller homes can help cost-constrained buyers facing high mortgage rates. They also boost the bottom line for builders who are contending with spiraling labor and construction costs.
Since 2018, the average unit size for new housing starts has decreased 10% nationally to 2,420 square feet, according to Livabl by Zonda, a listing platform for new construction homes. Construction starts for new single-family homes declined in 2022. But starts for homes with fewer than three bedrooms increased 9.5% over the same period, according to a Zillow report.
Home sizes are shrinking the most in some of the hotter markets of previous years. The Seattle area, where the size of newly built homes is 18% smaller than it was five years ago, tops the list. New homes in Charlotte, N.C., and San Antonio shrank by 14%, Livabl by Zonda said.
Most builders and architects follow the same basic playbook to produce tighter, more efficient living spaces. They are axing dining areas, bathtubs and separate living rooms. Secondary bedrooms and loft spaces are shrinking and sometimes disappearing.
At the same time, they are increasing the size of multiuse rooms like kitchens and great rooms. Shared spaces like bunk rooms and jack-and-jill bathrooms, which are located between and shared by two bedrooms, are on the rise. In some cases, the kitchen island has become the only eating area in the home. (…)
For entry-level buyers across the nation, the cost of owning a home increased 72% from February 2020 to May 2023, according to an analysis by John Burns Research and Consulting that estimates monthly payments, maintenance and other costs of ownership.
And the smaller floor plans usually mean that buyers are getting less space for their dollar. Lower list prices might make the overall price cheaper, but buyers are still paying more a square foot, according to the U.S. Census Bureau. Inflation-adjusted cost a square foot increased about 2.5% on average between 2012 and 2020. In both 2021 and 2022, it increased nearly 4%, according to John Burns Research and Consulting.
Builders have also ramped up activity for other cost-saving methods, like starting home construction off-site and building more attached homes. In Lexington, S.C., buyers are willing to share a wall with a neighbor when it saves thousands and makes homeownership more attainable. (…)
But not on cars!
Five years ago, a price-conscious U.S. shopper could choose from among a dozen new cars selling for under $20,000.
Now, there’s just one: the Mitsubishi Mirage. And even the Mirage appears headed for the scrap yard, AP’s Tom Krisher writes.
Americans increasingly want pricey SUVs and trucks rather than small cars. So the Mirage is the lone new vehicle under 20 grand, which once marked a kind of unofficial threshold of affordability.
The Mirage, with hatchback and sedan versions, costs less than half of what the average U.S. new vehicle does. That average is now just above $48,000 — 25% more than before the pandemic struck three years ago.