Richmond Fed’s Survey of Service Sector Activity
Fifth District service sector activity deteriorated in October, according to the most recent survey by the Federal Reserve Bank of Richmond. The revenues and demand indexes fell notably to -8 and -7, nearly returning to their August levels.
Firms’ assessments of local business conditions plummeted from September, with a reading of -19 in October. Moreover, a burgeoning share of firms were pessimistic about future business conditions, as the expected business conditions index slid to -28 from -9, nearly matching the -31 reading in July.
A smaller share of firms reported increased hiring in October, but their ability to find workers with the necessary skills improved. Firms were split on the issue of labor availability over the next six months and expect wage increases to persist. Growth in prices paid decreased very slightly in October, while prices received increased somewhat.
U.S. Consumer Confidence Falls in October
The Conference Board’s Index of Consumer Confidence Index fell 4.9% during October (-8.2% y/y) to 102.5 following a 4.1% September rise to 107.8, revised from 108.0. The index was 20.5% below its most recent high of 128.9 in June 2021. A reading of 105.0 had been expected in the Action Economics Forecast Survey for October.
Consumers’ views of both the current & future economic situation deteriorated this month. The Present Situation Index fell 7.5% (-4.5% y/y) to 138.9 and reversed two consecutive months of increase. The index settled at the lowest level since April of 2021. The Expectations Index weakened 1.8% (-12.2% y/y) to 78.1 this month, after rising 5.9% in September and 15.5% in August. It remained 30.1% below its recent peak in March 2021.
Consumers’ assessment of current business conditions deteriorated as only 17.5% of respondents characterized them as good, the weakest reading in three months.
Labor market readings showed less optimism this month. The jobs gap, representing the difference between respondents indicating that jobs are plentiful and those saying jobs are hard to get, fell to 32.5% in October, the lowest level in 18 months. Calculated by Haver Analytics, this series has a 67% correlation with the unemployment rate over the last ten years. The jobs plentiful measure fell sharply this month, also to an 18-month low. The jobs hard-to-get measure rose similarly. (…)
Inflation expectations turned up. The expected inflation rate in twelve months edged up to 7.0% in October after falling to 6.8% in September. It remained below the June high of 7.9%. The figure is higher than the 4.4% low in January 2020. A lessened 64.9% of respondents expected interest rates to rise over the next twelve months.
The share of respondents planning to buy a home within six months increased to 6.8% in October, up from a 4.5% July low. It stood at the highest level in six months and occurred even as mortgage rates rose. Those planning to buy a major appliance jumped to 49.5% of respondents in October, up from a 41.1% July low.
Surging Rents Push More Americans to Live With Roommates or Parents Rents have risen 25% over the past two years, and inflation is eating into how much people have left to spend on housing.
(…) Apartment demand in the quarter, measured by the one-year change in the occupancy of units, was the lowest since 2009, when the U.S. was feeling the effects of the subprime crisis, according to rental software company RealPage. Measured quarterly, the drop in demand was the worst of any third quarter—normally prime leasing season—in the more than 30 years RealPage has compiled the data.
Meanwhile, the apartment-vacancy rate rose to 5.5% in the third quarter, up from 5.1% the quarter prior, according to property data firm CoStar. (…) “The spring and summer leasing season was a total bust,” said Jay Lybik, national director of multifamily research at CoStar. (…)
Eighteen percent of U.S. adults surveyed said they had lived rent free with other people during the last six months, up from 11% at the same time one year ago. That was the highest share of adults living rent free with friends and family since UBS began asking the question in 2015. (…)
John Authers: The Fed’s Cunning Plan to Make You Feel Poorer
(…) The Fed’s hope, he said, lies in a behavioral economic theory called reverse wealth effect, in which consumers spend less as their wealth decreases.
(…) keeping the stock market down for a while matters far more to today’s Fed under Jerome Powell than it did to the Paul Volcker Fed of the early 1980s. To illustrate, Ramsey analyzed the performance of the Wilshire 5000 Total Market index (W5000), which measures the performance of all US equity securities and found that the gauge is currently down as much as the drawdown during Volcker’s term.
But unlike the negligible 14% wealth loss as a percentage of gross domestic product experienced at that time, W5000’s present-day decline is already equivalent to 54% of GDP — nearly four times more. In fact, it’s not that far off from the 61% seen during the Great Financial Crisis: (…)
Chipmakers in ‘Unprecedented’ Slump Rule Out Quick Turnaround Texas Instruments and SK Hynix add to warnings about demand
Dallas-based TI, whose chips go into everything from home appliances to missiles, said Tuesday that revenue will top out at $4.8 billion this quarter — at best — short of the $4.93 billion analysts had projected. Hynix, meanwhile, said memory prices fell 20% over the last quarter and warned of “unprecedented deterioration in market conditions.” The Icheon-based company slashed its capital spending for next year by at least half. (…)
TI rekindled fears that the slowdown is spreading, saying sluggish demand had affected chips for industrial equipment — an area that had been seen as more immune to the slump. (…)
Texas Instruments said it wasn’t surprised by a slowdown in demand for personal devices, but the industrial-equipment market was weaker than expected. Overall, orders have worsened and cancellations have increased during the current quarter, the chipmaker said.
Fellow memory maker Kioxia Holdings Corp., which is cutting output by 30%, also said the market is in a severe condition and there’s little certainty of when sentiment will improve. Demand for NAND memory is weakening across the board, the Japanese firm said in a news conference at its Yokkaichi factory Wednesday. (…)
“Demand from PCs, smartphones and data centers is falling and I can’t foresee when this will start recovering.” (…)
Homebuilder’s Orders Plunge 65% in Canadian Market’s Deep Freeze
Health-Insurance Inflation Is Poised to Drop Sharply The subindex of the consumer-price index is about to turn from a driver of inflation into a deflationary drag
(…) Health-insurance prices rose 28.2% from a year earlier in September, the sharpest increase in the history of the index going back to 2006, as measured by the Labor Department’s consumer-price index. That added just less than 0.4 percentage point to September’s rise in core CPI.
But that will morph into a deflationary drag with October’s CPI, to be released on Nov. 10, as the Labor Department updates the health-insurance index’s data, an effect that will last for the next 12 months.
Omair Sharif, founder of Inflation Insights LLC, estimated the health-insurance index will decline 38% by September of next year from this past September. That would mean health insurance would go from adding around 0.38 percentage point to the 12-month increase in core inflation as of last month, to subtracting about 0.42 percentage point by next September, Mr. Sharif said.
The change to the one-month rate that shows up in October will continue at a fairly consistent pace for the next 11 months. “When we establish that new trend, this trend is likely to persist for a full year,” said Ryan Wang, U.S. economist at HSBC. “That’s one of the aspects of this methodological quirk.”
The Labor Department bases the price of health insurance in large part on health-insurer profits, which are reported with a lag of about 10 months. Thus, data in the October 2022 CPI reflect what happened in 2021.
This lag is currently amplifying big swings in medical-care spending. In 2020, lockdowns, limited healthcare capacity and consumer reluctance to seek care translated to lower healthcare spending and thus reduced benefits paid by insurers and commensurately increased net premium income. That showed up as skyrocketing health-insurance prices starting in October 2021, when the 2020 data were incorporated.
This year’s updated data are based on 2021, when consumers caught up on preventive care and elective procedures, eating into insurers’ premium income, which should translate to a drop in health-insurance prices in the CPI.
(…) the methodological quirk only affects the CPI. While that is closely watched by investors, the media and consumers, the Federal Reserve officially bases its 2% inflation target on the Commerce Department’s separate personal-consumption expenditure price index.
That index is designed to capture a broader range of prices than the CPI which focuses on consumers’ out-of-pocket expenditures. The PCE price index draws from the producer-price index, said Oscar Munoz, macro strategist at TD Securities, which includes expenditures by governments, such as through Medicare and Medicaid. Moreover, health services have a much bigger weight in the PCE price index than in CPI. The healthcare category of the PCE price index rose about 2.5% in August from the same month in 2021.
The lagged nature of the CPI’s health-insurance index means that it may not reflect current underlying price pressures in medical-care services. Those are likely building, thanks largely to labor costs. Medicare’s recently negotiated 4.3% reimbursement rate for inpatient hospital services for fiscal 2023 was the biggest increase in around 15 years. A large share of how Medicare calculates those rates is based on employment cost index data for hospital wages, said Mr. Sharif. That measure rose at an annual rate of 5.6% in the second quarter, up from 2.3% in the last quarter of 2020. The increase is likely to spill over into negotiations now under way between private insurers and hospital groups, he said. (…)
EARNINGS WATCH
Before yesterday’s reports, we now have 129 reports in, a 74% beat rate and a +5.8% surprise factor. These 129 companies have reported actual earnings up 1.7% on a 10.4% revenue gain.
By comparison, after 133 reports in Q2, the beat rate was 76%, the surprise factor +4.3% and those 133 companies reported actual earnings down 3.5%.
Q3 earnings are now expected up 3.3% (+4.1% on October 7). Ex-Energy: -3.3% (-2.6%).
Q4 earnings are now expected up 4.1% (+5.2% on October 7). Ex-Energy: +0.1% (+1.3%).
- Tech Futures Fall After Google, Microsoft Earnings U.S. stock futures declined after disappointing earnings from Microsoft and Google parent Alphabet pointed to challenges faced by major technology firms as the economy slows.
- Microsoft warns of cloud computing slowdown
- Yesterday we got strong results from Sherwin-Williams, UPS, Coca-Cola, and GM.
- UPS delivered a surprisingly upbeat outlook Tuesday, its financial path diverging from that of its rival FedEx, which recently sounded alarms about the economy in reporting its own down quarter, Axios Nathan writes.
UPS posted better-than-expected profit in the third quarter — with higher prices making up for lower volume. It reaffirmed its financial outlook for 2022, including projected revenue of about $102 billion and an adjusted operating margin of about 13.7%.
While executives said volumes are expected to continue a decline from a year ago, they were measured in their outlook. “We have not seen any demand destruction at this point,” UPS CEO Carol Tomé told investors on a conference call, referencing a term used to define sustained decline. (…)
Management still matters. FedEx didn’t see the downturn coming. UPS did, and it reacted.