THE DAILY EDGE: 24 NOVEMBER 2020

Chicago Fed National Activity Index Improves During October

The Federal Reserve Bank of Chicago’s National Activity Index rebounded to 0.83 during October after easing to 0.32 in September, revised from 0.27.

The three-month moving average, which smoothes out the m/m volatility in the index, fell to 0.75 in October from 1.37 in September. It was the lowest level since June. During the last 15 years, there has been a 77% correlation between the Chicago Fed Index and quarterly growth in real GDP.

  

Amid Virus Surge, Holiday Shoppers Flock to Malls Americans visited malls over the weekend saying they wanted to do Christmas shopping before potential lockdown restrictions are implemented or to avoid Black Friday crowds, as the spreading coronavirus looms over the holiday season.

(…) There were crowds at three shopping malls that reporters from The Wall Street Journal visited in New York, Michigan and Texas on Saturday. Some shoppers said they wanted to beat the holiday crush or take advantage of early deals promoted by many retailers. Others said they needed to get out of the house. (…)

“People are getting shopping done early this year,” said a sales clerk at a Michael Kors store inside Crossgates who was furloughed during the mall’s closure earlier this year. Sales started early, which is drawing shoppers and “they are scared of a lockdown,” the worker said. (…)

November U.S. Light-Vehicle Sales Forecast for Second Straight Month-to-Month Decline

US Flash PMI: Recovery gains further momentum with hiring at all-time high

U.S. private sector business activity rose sharply in November, as growth momentum picked up further. The overall expansion was the fastest for over five-and-a-half years, as both manufacturers and service providers indicated a steeper upturn in output. The month also saw a survey record rise in employment and an unprecedented increase in prices, the latter in part linked to a record incidence of supply chain delays.

Adjusted for seasonal factors, the IHS Markit Flash U.S. Composite PMI Output Index posted 57.9 in November, up from 56.3 in October. The rate of growth was the sharpest since March 2015, as a steep upturn in service sector activity was accompanied by an accelerated rise in manufacturing production.

As well as a sharp increase in business activity, companies reported a marked rise in new orders during November. The rate of growth was the fastest since June 2018, with a substantial acceleration in manufacturing new business growth to a 30-month high boosting total sales, joined by the quickest rise in service sector sales for 26 months. The increase in total orders was largely driven by domestic demand, as both goods producers and service providers indicated only marginal upturns in new export business.

Encouragingly, there was a marked uptick in hiring during November to result in the steepest monthly rise in employment recorded since the survey began in 2009. Service providers boosted their workforce numbers amid burgeoning demand, but hiring slowed slightly in manufacturing.

The improving demand environment allowed increasing numbers of firms to raise their selling prices, with November consequently seeing the quickest rise in prices yet recorded by the survey. The rate of inflation hit a record high in the service sector and a 25-month high in manufacturing.

Firms also registered an unprecedented rise in input costs during November, as growing demand for inputs and supply shortages reportedly pushed supplier prices higher. Service sector cost inflation hit a survey high and manufacturers’ input costs rose at the sharpest rate for just over two years, with supplier delays more widespread than at any other time in the survey’s 11-year history.

Improved hopes of a vaccine against the coronavirus disease 2019 (COVID-19), and an end to election uncertainty, led to the greatest degree of optimism for the year ahead since May 2014.

The seasonally adjusted IHS Markit Flash U.S. Services PMI™ Business Activity Index registered 57.7 in November, rising from 56.9 in October, to signal the strongest expansion in output since March 2015.

Contributing to the steep rise in business activity was a faster increase in new orders at service providers, and one that was the quickest since September 2018. A number of survey respondents noted that new domestic client acquisitions supported the upturn, offsetting a swift slowdown in new export orders.

In line with stronger demand, firms registered a sharp increase in employment in November. The boost to service sector workforces was the most marked since data collection began in October 2009, as rising demand spurred on hiring.

Service providers indicated a steep rise in input costs midway through the fourth quarter, with rising supplier prices and wage growth pushing the rate of inflation to the fastest on record. Firms were able to partially pass on higher costs to clients, however, through a survey-record rise in output charges.

Finally, firms were more upbeat regarding the outlook for output over the coming year, with optimism at its strongest since May 2014.

Manufacturing firms indicated the strongest improvement in operating conditions since September 2014, as highlighted by the IHS Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posting 56.7 in November. Up from 53.4 in October, the latest headline figure signalled a sharp improvement in the health of the U.S. goods-producing sector.

Manufacturers registered a marked expansion in output, largely driven by a notable uptick in new business as demand conditions improved. Moreover, the rise in production was the fastest since March 2015, with some firms noting a greater ability to complete orders as they were received.

New export orders also rebounded from October’s contraction and rose marginally.

Despite the strongest rise in backlogs of work since August 2014, goods producers signalled a slower rate of job creation in November. Many noted that the cautious approach to hiring stemmed from efforts to cut costs and short term uncertainty regarding the ongoing pandemic.

The rate of input price inflation picked up to the fastest since October 2018, as demand for inputs increased once again and amid a record-breaking deterioration in vendor performance. Higher supplier prices were passed on to clients in part, however, through the sharpest rise in charges for over two years.

Business confidence among manufacturers soared in November, as the year-ahead outlook for output improved notably. The level of optimism was the strongest since February 2015.

PMI surveys are diffusion indices which, in certain circumstances such as this pandemic, can give the impression of growth when they merely reflect a rebound from a deep state. However, the U.S November survey is amazingly strong on just about every stat, particularly the important New Orders, Employment and Inflation data.

That said, the strength in the Manufacturing PMI has yet to be reflected in the Chemical Activity Barometer and actual industrial production. Chemicals are used in most manufacturing processes and the CAB often leads turns in IP and the overall business cycle.

The U.S. Chemical Production Regional Index (U.S. CPRI) rose 0.9 percent in October following a 0.8 percent gain in September and a 1.0 percent increase in August, according to the American Chemistry Council (ACC). Compared with October 2019, U.S. chemical production was off 4.9 percent on a year-over-year (Y/Y) basis, the seventeenth consecutive month of declines, but shows steady improvement over the past several months.

The risk remains that the recent confinement measures will hit U.S. businesses late November/December (Markit’s survey data was collected Nov.12-20). The Eurozone November composite PMI broadly slumped 5 points to 45.1.

The hope is that the PMI inflation data reflect actual very strong demand: “The improving demand environment allowed increasing numbers of firms to raise their selling prices, with November consequently seeing the quickest rise in prices yet recorded by the survey.”

The final PMI on December 1 will be interesting.

FIBER: Industrial Commodity Prices Show Widespread Strength

The Industrial Materials Price Index from the Foundation for International Business and Economic Research (FIBER) increased 3.1% (7.7% y/y) during the last four weeks and 19.4% over the last six months as the economy recovered from recession.

The gain was led by higher prices in the crude oil & benzene group which increased 6.0% during the last four weeks. Prices of the petro-chemical benzene strengthened 31.0% (-12.2% y/y). A 1.7% rise in crude oil prices to $41.27 per barrel accompanied the increase. Excluding crude oil, industrial commodity prices rose 3.1% during the last four weeks and increased 10.3% during the last year.

Metals group strengthened 5.8% during the last four weeks as the price of steel scrap rose 9.4% and aluminum costs rose 5.9%. Zinc prices rose 7.4% in recent weeks (12.9% y/y) while lead prices strengthened 8.0% (-3.8% y/y). The cost of copper scrap gained 3.1% over the last four weeks.

These price gains were accompanied by a 1.7% price rise in the miscellaneous group during the last month. Framing lumber costs rebounded 5.6%. This increase was accompanied by a 7.2% rise in natural rubber prices. Plywood prices have been unchanged since December 2019 (-0.9% y/y).

Yellen Will Confront a Cooling Recovery, Uncertain Stimulus Prospects President-elect Joe Biden’s pick to be Treasury secretary will play a key role pushing for more aid for an economy battered by the coronavirus pandemic and related shutdowns.

Here’s what Yellen said last week:

“There is a glut of savings and a shortage of investment,” which is the core problem facing developed economies, former Fed Chair Janet Yellen, who is set to be nominated for Treasury Secretary by President-elect Joe Biden, told Bloomberg’s New Economy Forum last week. “We have to have fiscal policy, structural policy other than just relying on central banks to achieve healthy growth.”

But any additional fiscal program will need the blessing of McConnell’s Senate.

Millions of Americans Expect to Lose Their Homes as Covid Rages

About 5.8 million adults say they are somewhat to very likely to face eviction or foreclosure in the next two months, according to a survey completed Nov. 9 by the U.S. Census Bureau. That accounts for a third of the 17.8 million adults in households that are behind on rent or mortgage payments.

CHINA ECONOMY ROARS BACK IN NOVEMBER. BUSINESS CONFIDENCE AT 5 YEAR HIGH. IN SHARP CONTRAST THE US ECONOMY STAGNATES AND INFLATION RISES RAPIDLY

November Sales data presents a striking contrast between a resurgent China and a US economy mired in stagflation.

The China All-Sector Business Confidence Index is at a 65 month high, the year-on-year Sales Growth Index is at a 13 month high and the Jobs Index at a 61 month high.

In sharp contrast, the US Business Confidence index languishes below the 50 (‘no growth’) line, and fell further in November, partly as a result of the bizarre post election Trump “I’ve won” activities. The crucial Jobs Index remains way below 50, reflecting endless staff lay-offs rather than job market growth.

Perhaps most worrying of all, while price inflation remains low in China, the US Price Index rose very sharply to a figure indicative of rapid inflation. Various respected economists have discussed recently the possibility that inflation may be back much sooner than expected. These numbers could be the canary in the coalmine…

CHINA AND USA: BUSINESS CONFIDENCE INDEX

Flee the city, keep your salary? Not so fast say more employers

(…) But now, a new study by global advisory firm Willis Towers Watson shows that many employers aren’t necessarily planning to let you keep your full paycheck if you move. The survey of 344 employers in North America showed that nearly 20% of employers are “setting pay levels by first determining the market value of an employee’s skills and then applying a geographic differential based on where the employee is located.” However six in 10 employers say they will continue to pay remote employees the same as in-office employees “no matter where they work.” (…)

U.S. states prepare second antitrust lawsuit against Google for December A bipartisan group of U.S. states plans to file an antitrust lawsuit against Google as early as next month, according to two people briefed on the matter, potentially beating a more widely anticipated lawsuit from a different group of states led by Texas. The pending legal actions follow an antitrust lawsuit filed by the U.S. Justice Department against Alphabet’s Google in October.

The WSJ Editorial Board:

Trump’s Gift to Joe Biden His new drug price rule will hurt the innovation that has produced Covid vaccines.

Congratulations to drug companies for their tremendous work developing Covid-19 vaccines and therapies in record time. Their reward from the Trump Administration is a new regulation imposing drug price controls, which will make it easier for Joe Biden to go further next year.

The Department of Health and Human Services on Friday finalized a “most-favored nation” rule requiring drug makers to give Medicare the lowest price they charge comparable developed countries. This means the feds will refuse to pay more for medicines than government-run health systems in Europe. Didn’t Mr. Trump campaign against socialism?

While Medicare pays more for medicines than most countries, Americans also get earlier access to more life-saving treatments. According to the Galen Institute, 96% of new cancer therapies are available in the U.S. compared to 73% in Germany, 66% in France and 54% in Japan. Mr. Trump’s penny-pinching will result in fewer breakthrough treatments.

Most drugs fail in clinical trials, including some 97% of oncology treatments. The rare successes finance research and development into new medicines. It doesn’t take a brain surgeon to understand that drug makers will spend less on new medicines if government cuts their return on investment.

HHS is rushing out the rule without seeking public comment under its authority to test new payment models to reduce federal spending and improve patient care. Such tests typically are voluntary and involve a small patient or hospital population. The most-favored nation rule will be imposed by fiat nationwide.

A President Biden will no doubt run with Mr. Trump’s legally dubious precedent. Mr. Biden has proposed requiring drug makers to charge even private insurers the same price as Medicare, and his regulators could use Mr. Trump’s same flawed administrative edict to impose it.

Politico reported this week that Mr. Trump pushed HHS to jam through the most-favored nation rule because he is angry that Pfizer didn’t publicly disclose that its Covid-19 vaccine was 95% effective until after the election. “Pfizer and others even decided to not assess the results of their vaccine, in other words, not come out with a vaccine, until just after the election. That’s because of what I did with favored nations and these other elements,” President Trump said Friday, more or less confirming the Politico story. But perhaps Pfizer’s delay was because the data wasn’t available.

The new rule is likely to be blocked in court, but it will tarnish the Administration’s record of accelerating drug approvals, Covid vaccines and therapies. Industry experts expect the next Congress to pass some form of drug price legislation. Maybe it’s good the pandemic hit before politicians could do more damage to pharmaceutical innovation.