U.S. FLASH PMI: US private sector employment falls for first time since June 2020 amid muted demand conditions
The headline S&P Global Flash US PMI Composite Output Index posted at 50.7 in November, matching the figure seen in October. This indicated a marginal rise in business activity that was the joint-fastest since July.
Although manufacturing firms signalled a slower pace of expansion, service providers saw a fractional uptick in the rate of output growth. Manufacturing firms noted greater efficiency in production processes supported the increase in output, while demand conditions stagnated. Meanwhile, the upturn in services activity was the quickest since July as companies noted growth in customer bases following successful marketing campaigns.
The first expansion in service sector new business for four months helped support a renewed rise in total new orders during November. The pace of growth was only fractional, however, as goods producers recorded a stagnation in new sales on the month. At the same time, total new export orders rose for the first time since July as manufacturers noted an expansion in new sales from external customers.
Less robust expectations regarding the outlook for output over the coming 12 months at service providers weighed on overall business confidence in November. Manufacturers saw an uptick in the degree of optimism, albeit still below the long-run series average, amid hopes of a stabilization in global economic conditions and ongoing investments in improved production processes. Service sector business expectations dipped to their lowest since July as firms highlighted concerns regarding tightening customer spending and lingering economic uncertainty.
Employment
US companies lowered their workforce numbers during November for the first time in almost three-and-a-half years. Although only fractional, employment tipped into contractionary territory following the first drop in service sector headcounts since June 2020. Manufacturers, meanwhile, recorded back-to-back declines in staffing numbers.
Businesses commonly mentioned that relatively muted demand conditions and elevated cost pressures had led to lay-offs. Other companies noted that hiring freezes were in place amid pressure on margins.
Dwindling levels of unfinished business also impacted hiring decisions, as backlogs of work fell for the seventh month running midway through the final quarter of 2023. Goods producers and service providers alike recorded quicker contractions in incomplete business, largely due to a lack of pressure on operating capacity.
Prices Margin pressures eased across the private sector, as firms raised their selling prices at a quicker pace despite a second successive monthly slowdown in the rate of cost inflation. Input prices continued to rise, but at a pace that was the slowest since October 2020 and softer than the long-run series average. Firms noted that lower energy and raw material costs dampened price increases, with some also highlighting that a reduction in workforce numbers had eased cost pressures. Manufacturers signalled a notable slowdown in input price inflation following successive monthly accelerations in the pace of increase between July and October.
A faster rise in overall selling prices was led by service sector firms in November, with the pace of charge inflation picking up from October’s three-year low. In contrast, manufacturers recorded the slowest increase in factory gate charges since August amid efforts to drive new sales and remain competitive.
Demand for goods remains tepid (“demand conditions stagnated”), like in the Eurozone and Japan. The inventory cycle is not complete just yet.
Growth in services was “only fractional” after 3 months of falling new orders.
Importantly, total employment declined for the first time in 3.5 years, that’s since Mid-2020 with the “first drop in service sector headcounts since June 2020”. Recall that the BLS recorded 150k new jobs in total in October, with service providers contributing 161k jobs.
Since June, monthly services employment rose by 173k on average, contributing 90% of all new jobs in the economy. S&P Global’s survey reveals that some firms noted that a “reduction in workforce numbers had eased cost pressures”. No more labor hoarding?
In 2022, employment growth accounted for 32% of aggregate labor income (employment x hours x wages). The contribution fell to 23% in the first half of 2023 and to 19% in the last 5 months.
Wage growth now adds the most to labor income growth but sequential gains have slowed to +3.2% annualized in the 3 months from +4.7% in the 3 months previous.
Incidentally, John Hussman has this chart aggregating 7 employment-related data series illustrating the strengthening headwinds for the labor market:
- American Borrowers Are Getting Closer to Maxing Out Credit-card utilization and delinquency rates are on the rise.
Card loans are still growing, on average rising 1.6% in October over September across five big U.S. card lenders, versus a seasonally typical 0.7% increase, according to tracking of the latest monthly data by analysts at Goldman Sachs. The trend suggests that consumers still are willing and able to use their cards, portending well for retailers. U.S. retail sales slowed in October, but by less than feared, and were still at an overall solid level. (…)
But as far as people paying back those loans, the data so far is less compelling. The average rate of 30-day-plus delinquency across the five big lenders jumped 0.16 percentage point from September to October, above the typical seasonal jump of 0.06 point, according to Goldman’s tracking. Net charge-offs jumped 0.77 point on average, compared with a 0.18-point typical rise. (…)
A recent note published by the Federal Reserve Bank of Boston found that as of July, consumers with annual household incomes of less than $50,000 whose accounts were delinquent were on average utilizing 80 to 90 percent of their available credit. This leaves “those consumers with a very small amount of credit left on their accounts to cushion against a deterioration of their financial situation,” according to the paper. Across all cardholder income groups as of July, average utilization rates—the ratio of outstanding card account balance to the account’s credit limit—were above February 2020 levels. (…)
The Fed’s latest Senior Loan Officer Opinion Survey for the third quarter found “significant net shares of banks reported tightening lending standards for credit card and other consumer loans.” The Boston Fed review noted that the average card credit limit, adjusted for inflation, was below its level in early 2020.(…)
The silver lining from a macroeconomic perspective is that challenges could be fairly concentrated within certain subsets of consumers, such as those with lower incomes and student-loan debts.
American Express, which tends to have wealthier and more creditworthy borrowers, reported a 30-day-plus delinquency rate as of October of 1.3%, versus over 4% on average across the five lenders, according to Goldman’s tracking. The strong job market also helps ease pressure—though any change there could expose some households.
Beyond sorting loans by borrower income, the timing of loans could also be important. In particular loans made over the prior couple of years could prove more dicey, as some consumers’ credit profiles were bolstered by the pandemic stimulus and recovery. “We’re getting closer to the peak of this massive 2022 vintage of credit, which was a period when several underwriters apparently loosened standards,” says Goldman analyst Ryan Nash. (…)
In truth, consumer credit card liabilities are not very problematic when measured against disposable income. In terms of leverage, we are far from the pre-GFC era:
The problem, as shown in this next chart, is financing costs which have doubled since the end of 2021 and are 55% above their pre-pandemic level. Personal interest payments now represent 2.7% of disposable income, up from 2.0% pre-pandemic and getting close to previous strangle points (dash).
But the financial stress has accelerated since June as Americans reverted to credit cards to offset their slowing income:
The compounding of higher credit balances with higher interest rates is quickly eating into disposable income. In September alone, personal interest payments jumped 7.2% from August and are now 32% above their December 2022 level, before student loans interest payments resumed in October. Disposable income is up 5.6% YtD.
This financial reality won’t go away anytime soon. in fact, it will get worse better getting better. If Americans don’t curb their spending this holiday season, they will have to after Christmas.
Their only blessing comes from lower gasoline and heating oil prices, down some 15% since mid-September, unexpectedly freeing some discretionary dollars.
While on the financial bite from higher interest rates, Goldman Sachs illustrates the sharp rise in S&P 500 companies borrowing costs. This is a 4-quarter average so the quarterly impact has yet to peak:
Earnings pre-announcements are just about in line with Q3 but are much worse than during Q4’22 at the same time.
In the past 2 weeks, 14 of the 20 new pre-announcements were negative and 5 were positive, a 2.8 N/P ratio. Last week, all 7 were negative.
Q4 estimates are now +5.4% vs +11.0% on Oct.1.
Q1’24 are +8.0% vs +9.6%.
Trailing EPS are now $218.73. Full year 2023e: $220.48. Forward 12m EPS: $235.82e. Full year 2024: $245.00e.
Black Friday Shoppers Set Online Spending Record, Adobe Says US online revenue up 7.5% from last year: Adobe Analytics
Black Friday shoppers spent a record $9.8 billion online in the US, Adobe Analytics reported, offering a positive sign for retailers facing lackluster sales forecasts for the holiday season.
Demand for electronics, smartwatches, TVs and audio equipment helped boost the day’s online sales by 7.5% compared with last year. Consumers extended their budgets by leaning on buy-now, pay-later options, which climbed by 72% from the week before Thanksgiving. (…)
US online sales grew 9% year-on-year in a separate Salesforce Inc. gauge, driven by footwear, sporting goods, health and beauty. Clothing, home and beauty showed the biggest discounts. (…)
- Black Friday Spending Was Strong. How People Pay for Gifts Is Upending Retailers. Consumers are shifting away from store-branded credit cards, which have been lucrative for retailers, as brand loyalty wanes and interest rates rise.
(…) Americans carry fewer cards and increasingly finance purchases with buy now, pay later providers. Interest rates surpassing 30% on some retailers’ credit cards aren’t helping, according to analysts. (…)
More shoppers visited stores and online spending grew on Black Friday this year compared with last year, according to third-party analytics firms.
U.S. retail sales on Black Friday rose 2.5% from last year, according to Mastercard SpendingPulse, which measures sales in stores and online. The result was helped by gains in purchases of jewelry and apparel as well as spending on sporting events and at restaurants. Foot traffic at U.S. retailers rose 2.1%, with health and beauty brands seeing double-digit-percentage increases from last year, according to store traffic analytics provider RetailNext. (…)
Retailers are bracing for more hits to credit-card revenue. The CFPB has proposed a rule to cap late fees for missed monthly payments at $8, compared with $41 currently. If adopted, the cap could save American families as much as $9 billion a year in late fees, according to the CFPB. The rule would apply to all credit cards, not just store cards. (…)
While buy now, pay later options are still nascent, they are growing. The practice is a modern take on old-fashioned layaway plans and lets shoppers get the goods up front but make interest-free payments over time, usually in four installments over six weeks. (…)
Overall, the services are still a small part of spending; they accounted for 7.6% of all online sales from January through October. (…)
- Black Friday Finds Picky US Shoppers Waiting for Bigger Bargains Consumers holding out for deeper discounts threaten earnings
(…) While estimates on brick-and-mortar Black Friday sales won’t be available for some time, Salesforce Inc. expects online US sales to grow 1% in November and December versus a year earlier, which would be the slowest growth in at least five years. Sales were in line with that figure on Thanksgiving Day and appeared to pick up speed on Black Friday, the software company said. (…)
Other data companies are forecasting a similarly sluggish holiday shopping season. Adobe Analytics expects online revenue growth in the US during the next two months to be 4.8% versus a year earlier. While that’s a faster pace than last year, it’s well below the average annual rate of 13% growth before the pandemic. Mastercard, meanwhile, sees US retail sales online and in-store up 3.7% this year versus last. That’s back to the pace of pre-pandemic growth. (…)
China Investors Face Tens of Billions in Losses Over Zhongzhi
As China’s embattled shadow banking giant Zhongzhi Enterprise Group Co. faces a criminal probe, lawyers and analysts are assessing the damage to investors. One estimate puts that at about $56 billion.
More than three quarters of investor cash would be lost, with just 100 billion yuan ($14 billion) being recovered from debt of as much as 460 billion yuan, according to one scenario outlined by Ying Yue, a lawyer at Leaqual Law Firm in Shanghai. (…)
Authorities over the weekend said they’ve opened criminal investigations into the money management business of Zhongzhi, days after it warned of severe insolvency and revealed a shortfall of $36.4 billion in its balance sheet. (…)
The company first triggered concern in August after one of its trust affiliates failed to make payments to customers on high-yield investment products. (…)
Shadow banks like Zhongzhi often pool household savings to offer loans and invest in real estate, stocks, bonds and commodities. In recent years, even as rival trusts pared risks, Zhongzhi and its affiliates, especially Zhongrong International Trust Co., extended financing to troubled developers and snapped up assets from companies including China Evergrande Group.
Founded in 1995, Beijing-based Zhongzhi has expanded into a sprawling empire that had more than 1 trillion yuan in assets at its peak. The group holds shares in six licensed financial institutions including Zhongrong International Trust, five asset managers as well as four wealth management firms, according to its website. It also has controlling stakes in a string of listed firms across sectors from semiconductor to health and consumption.
- China Bank-Backed Dollar Bond Sales Plunge Amid Default Jitters Dollar bond sales with standby letters of credit slump 90%. Lenders reluctant to provide pledges as defaults mount
Cash-strapped Chinese borrowers are losing another funding avenue, as default jitters rock a market that relies on quasi guarantees from banks for repayment.
Sales of China dollar notes carrying a so-called standby letter of credit, effectively a lender’s pledge to repay if the issuer can’t, slumped 90% to $1.04 billion so far this year from the previous year, according to Bloomberg-compiled data. This outpaced a 52% drop in China dollar bond sales to $52.2 billion for the same period, the data showed.
With the nation’s developers going through a fresh round of crises and even large builders defaulting, banks are reluctant to provide such pledges. Investors also have doubts over the structure, which falls short of being an explicit repayment guarantee. That’s upended a market that helped lower-rated companies, including local government financing vehicles, raise a record $10.3 billion in 2022. (…)