RECESSION WATCH
More states are reporting declining economic activity, which typically occurs around recessions. (The Daily Shot)
Source: Simon White, Bloomberg Markets Live Blog
(…) The industry set aside $13.05 billion in the third quarter for expected credit losses, up from $10.95 billion in the second quarter, according to S&P Global Market Intelligence data. It was the sixth straight quarter that provisions for loan losses were increased, S&P said.
History Lessons: How “Transitory” Is Inflation? (By Rob Arnott, Omid Shakernia)
The US Federal Reserve Bank’s expectations for the speed of reverting to 2% inflation levels remains dangerously optimistic.
An inflation jump to 4% is often temporary, but when inflation crosses 8%, it proceeds to higher levels over 70% of the time.
If inflation is cresting, inflation levels of 4 or 6% revert by half in about a year. If inflation is accelerating, 6% inflation reverts to 3% in a median of about seven years, threatening an extended period of high inflation.
Reverting to 3% inflation, which we view as the upper bound for benign sustained inflation, is easy from 4%, hard from 6%, and very hard from 8% or more. Above 8%, reverting to 3% usually takes 6 to 20 years, with a median of over 10 years.
History tells us that once the inflation genie is out of the bottle, it can take far longer to return to normal levels than most people realize. (…) Those who expect inflation to fall rapidly in the coming year may well be correct. But, history suggests that’s a “best quintile” outcome. Few acknowledge the “worst quintile” possibility, in which inflation remains elevated for a decade. Our work suggests that both tails are equally likely, at about 20% odds for each. (…)
We observe a useful pattern. When inflation first crosses the 4% threshold, often caused by a temporary exogenous shock, it usually reverses course; in 32 out of 52 cases; over 60% of the time inflation never reaches the next threshold of 6%. We call any case where inflation fails to reach the next threshold cresting inflation. That is the good news.
The bad news is at 6% and higher inflation, cresting inflation is the exception, not the rule: inflation usually marches to the next threshold. When inflation subsequently rises to the next threshold, we call these cases accelerating inflation.
Indeed, once the 8% threshold is surpassed, as happened this year in the United States and much of Europe, inflation marched to the next threshold, and often well beyond, over 70% of the time.
The lesson we should take from this is not that inflation is destined to move to new highs in the months ahead (after all, nearly 30% of the time, it is, in fact, cresting!), but that we dismiss that possibility at our peril. (…)
Given the recent US inflation rate, which has been above 6% for the last 12 months and above 8% for the last 7 months, history tells us that the median number of years to reduce inflation below 3% is 10 years, with a 20th to 80th percentile range of 6 to 19 years. How many economists—let alone pundits and policy “experts”—have suggested we may have elevated inflation for six years, much less the longer outliers? (…)
Curiously, this Indeed & Glassdoor’s Hiring and Workplace Trends Report 2023 and the BlackRock piece also reached me yesterday:
Tight Labor Supply Will Continue to Impact Hiring
It is a fundamental error to think that as COVID recedes, hiring difficulties will evaporate. Deep-seated and long-term supply dynamics will continue to be a major force that creates a persistent gap between employer demand for new hires and the supply of candidates. That means the hiring difficulties seen today will continue beyond the short-run impacts of the pandemic.
To be sure, the economies of many countries could slow or even fall into recession as central banks work to lower inflation. But even if employers’ hiring appetites fade, the supply of workers seems likely to remain tight in the long run.
But the tight supply of workers has a fundamental impact on the workplace as a whole. Not only will hiring be more difficult, but workers will have more power to demand changes. The following trends in this report will be persistent because of this supply and demand gap within the labor force.
The principal reason for this can be summed up in one word: demographics. Over the next decade, the number of people of working age (between 15 and 65), will decline in a variety of countries, according to World Bank projections:
Fewer people of working age mean the supply of workers will dwindle. Combine this aging population with other trends, such as reduced immigration, and the stage is set for chronic recruiting challenges. Of course, this will play out differently from country to country:
• US and UK population growth will be driven solely by net migration. In the UK, deaths are projected to exceed births by 2025.
• In Canada and Australia, populations will continue to grow—in Canada thanks largely to migration. But the share of people over 65 will rise rapidly in both countries.
• In Germany, the population is aging and the labor force is shrinking. Migration is still not back to pre-pandemic levels.
• The French labor force is expected to expand slowly until 2040 and then contract.
• Japan’s demographic prospects are particularly stark, with the population forecasted to fall from 128 million in 2010 to below 100 million by 2050, while the share of those ages 65 and older soars.
• A shrinking population is projected in a variety of other countries, including China, which is poised to overtake the US as the world’s biggest economy sometime in the next decade.
Workers will continue to have the leverage to press for higher pay, stronger benefits, scheduling flexibility, and a variety of other perquisites. (…)
BlackRock: Aging raises cost of curbing inflation
The share of the U.S. population in work or seeking a job is still below pre-Covid levels. This shortfall won’t be made up: A bigger share of people are older than the normal retirement age – a major constraint. That makes it hard for the economy to operate at current activity levels without fueling inflation. The Fed would need to crush activity to push inflation back to its target. We see the Fed causing recession, with persistent inflation.
A smaller share of the U.S. population is in the workforce than pre-Covid. That’s unlikely to change, we think. Why? The participation rate, or the share of people aged 16 and over that have or are looking for work, nosedived when the pandemic hit and people left the workforce (orange line in chart). Some of that sharp decline has been made up as people return. But we don’t see it recovering further because the effects of an aging population account for most of the remaining shortfall.
More people have hit 64 years old, the age at which most retire. That’s taken 1.3 million out of the workforce as of October, we find. Another 630, 000 left as the pandemic caused fewer people to work past retirement age and hastened retirement for people coming up to 64. An aging population is increasingly cutting into the participation rate (yellow line) and shrinking the labor force.
These trends explain why the U.S. participation rate is below its pre-Covid level and yet unemployment is still at a 50-year low. The share of the population aged over 64 has been increasing since 2010 and it’s set to keep rising. The effect of this demographic shift on participation won’t reverse without massive structural changes in workforce behavior over time, in our view. That implies the workforce will keep shrinking relative to the population. Economic activity will need to run at a lower level to avoid persistent wage and price inflation, especially in the labor-heavy services sector, in our view.
Interest rate hikes can’t cure production constraints like labor shortages. So the Fed today faces a sharp trade-off betweenv either creating a recession to slam economic activity down to levels that the economy can more comfortably sustain or living with more persistent inflation. For now, the Fed seems to be trying to do the first, we think, with its “whatever it takes” stance trying to quickly stomp inflation down to its 2% target. In the face of production constraints, bringing inflation down to target would require a deep recession, in our view – a roughly 2% hit to activity.
That’s why we think a recession is foretold. Yet we think the Fed will ultimately stop as the damage from rate hikes becomes clearer and before generating a deep recession. We think that means the U.S. will be in a recession and still living with inflation persistently above target. (…)
GDP growth is labor force (employed persons) x productivity (output per employed). During the 9 years before the pandemic, U.S. GDP grew 2.0% per year, thanks to a 0.8% growth rate in its labor force and 1.0% productivity growth. Since 2020, the labor force is unchanged but productivity rose 1.4%.
However, the 2022 reopening brought productivity (blue below) sharply lower while the labor force (red) flattened.
Looking ahead, the key uncertainty is whether productivity follows its more recent path (since 2018, post tax reform, +1.7%/yr) or returns to its 2011-2017 trend (+0.7%/yr). Given that labor force growth will surely be held low, perhaps even negative, by demographics, the U.S. economy looks set to grow at a 1.0-2.0% annual rate in the coming decade.
BlackRock: “Demographic trends also suggest the labor pool will expand much more slowly in the next 20 years than it did in the past 20. If individual worker productivity keeps rising at the same rate, annual GDP growth would average just 1.8% – about two-thirds the average from 1980-2020 and the slowest 20-year period since data began.”
How will that play on wages and inflation?
Small Business Employment Watch
The rate of job growth and hourly earnings growth held relatively steady at U.S. small businesses in November, according to the latest Paychex | IHS Markit Small Business Employment Watch. The Small Business Jobs Index moderated slightly -0.05 percent from the previous month and stands at 99.38. At 5.04 percent, the pace of hourly earnings growth was unchanged over the previous month.
“While there was little to no change in hiring rates and hourly earnings growth in November, this month’s data reveals interesting trends in hours worked. One-month annualized weekly hours worked growth was positive for the third consecutive month, increasing 0.50 percent, possibly signaling that small businesses are adapting to the current labor market and are leveraging existing staff,” said James Diffley, chief regional economist at IHS Markit. (…)
- Hourly earnings growth moderated to 5.01 percent in October from a revised 5.02 percent in September. One-month annualized growth remained below 4 percent.
- One-month weekly hours worked growth increased to 1.49 percent in October, nearing its highest level in more than two years. Construction led sectors in weekly hours-worked growth, up 0.31 percent year-over-year.
Apartment List National Rent Report
Our national index fell by 1 percent over the course of November, marking the third straight month-over-month decline, and the largest single month dip in the history of our index, going back to 2017. The timing of the recent cooldown in the rental market is consistent with the typical seasonal trend, but its magnitude has been notably sharper than what we’ve seen in the past, suggesting that the recent swing to falling rents is reflective of a broader shift in market conditions beyond seasonality alone. Going forward it is likely that rents will continue to dip further in the coming months as we move through the winter slow season for the rental market. (…)
From January through November of this year, rents are up by a total of 4.7 percent, which is much closer to the growth rates we saw in 2018 and 2019 than it is to the astronomical 18 percent growth that we saw at this point last year. Year-over-year growth has decelerated rapidly since the start of the year, and is quickly converging back to pre-pandemic levels. (…)
Our vacancy index now stands at 5.7 percent, after more than a year of gradual increases from a low of 4.1 percent last fall. And in the past three months, this easing of the vacancy rate has picked up steam again, after plateauing a bit over the summer. Today’s vacancy rate still remains below the pre-pandemic norm, but could get back to that benchmark as early as next spring, if the current rate of easing continues.
Eurozone Inflation Eases for First Time Since 2021 Consumer prices in November were 10% higher than a year earlier but down from the 10.6% annual rate of inflation recorded in October as energy prices fell.
(…) The rate of inflation last fell in June 2021, but that proved to be a brief interruption in its long climb. According to ECB President Christine Lagarde, the same is likely true of the November drop.
“We don’t see the components or the direction that would lead me to believe that we have reached peak inflation and that it is going to decline in short order,” she told European lawmakers Monday. (…)
From the NYT since most other media provide few details (chart via Twitter).
Although it remained the strongest driver behind eurozone inflation, the annual increase in the price of energy was 39.4 percent in November, down from a rate of 41.5 percent a month earlier. The price of food, however, climbed slightly, to 13.6 percent in the year through November.
Overall, the so-called core inflation rate, which excludes food and energy, remained steady at 5 percent.
In Europe’s largest economy, Germany, (11.3 percent, down from 11.6) and Spain (6.6 percent, down from 7.3), annual inflation rates cooled in November, thanks to easing energy prices. Consumer prices in France, the currency bloc’s second-largest economy, rose 7.1 percent from a year earlier, matching October’s increase. Baltic countries, which remain heavily dependent on natural gas, continued to have the bloc’s highest rates of inflation, topped by Latvia at 21.7 percent. (…)
@jsblokland
- #FRANCE OCT. CONSUMER SPENDING FALLS 2.8% M/M; EST. -1% – BBG *FRANCE OCT. CONSUMER SPENDING FALLS 5.9% Y/Y; EST. -5.5% (@C_Barraud)
EARNINGS WATCH
Note the typo in the headline (“Learning” instead of Leading)
Morgan Stanley
THE CHINESE PLAGUE
Covid Controls Hit Chinese Factories, Adding Risks to Global Growth Surveys point to a broad pullback in activity as authorities wrestle with rising cases and protests.
(…) The purchasing managers index for China’s manufacturing sector fell to 48 in November, from 49.2 in October, China’s National Bureau of Statistics said Wednesday. (…) A similar index that covers activity in services and construction also fell, tumbling to 46.7 from 48.7, the NBS said. (…)
From @Sino_Market:
- The new orders sub-index decreased to 46.4 from 48.1.
- Production and demand continue to slow down on both ends. The pandemic has cast negative impacts on the operations of some enterprises, with production activities slowing down and product orders decreasing.
- #China‘s November #Steel Industry PMI drops by 4.2 percentage points to 40.1%. New Order Subindex drops by 8.9 percentage points to 34.5%. The terminal market for steel rebar in Shanghai has contracted.
- Non-Manufacturing PMI 46.7 [Est.48.1 Prev.48.7]
- 46% of surveyed medium-sized enterprises and 58.8% of small enterprises are reflecting financial constraints and lack of market demand, with 0.8 and 1.9 PPS higher than in October, reflecting greater pressures on SMEs.
Half of China Firms Had Covid Cases This Month, Beige Books Says That was more than double the 24% who reported a case in October and the highest level in data back through January last year
(…) China’s economy was “barely treading water” this month, with every business indicator deteriorating, according to the report. The first quarter could be worse still, as November is not typically the peak of Covid outbreaks and cases might continue to rise through the winter, the report said.
Company revenue and profits both had double-digit declines from last year this month, according to the survey of more than 2,400 firms conducted November 17-27. Factory output “slowed significantly,” as did domestic and export orders.
China Mulls Rolling Out Fourth Covid Shot on Reopening Pressure
Officials are making plans for the rollout, though a final decision on timing and vaccine candidates still has to be made, the people said, asking not to be identified discussing government business. Elderly people, which have some of the lowest vaccination rates in China, will be prioritized for fourth shots, one of the people said.
The move is aimed at raising protection levels in its population, the vast majority of whom have never contracted the virus. China appears to be laying the groundwork for accepting wider Covid spread, and a potential reopening after three years of trying to keep the virus out. A fourth shot, already commonplace in other countries, would aid that transition. (…)
In China, only 69% of those aged 60 and above and just 40% of over 80-year-olds have had booster shots. In the US, over 70% of those over 65 have received a first booster, while 44% have already received a second. (…)
Meanwhile, state media and official rhetoric on Covid has softened, with stories of people surviving infection being highlighted publicly and the phrase “dynamic Covid Zero” appearing less often in government briefings.
While officials have refrained from acknowledging the protests, health authorities struck a conciliatory tone on Tuesday, saying that people’s “reasonable” concerns must be resolved in a timely manner. (…)
On Tuesday, a media outlet supervised by the Propaganda Department of Beijing’s Communist Party Committee published interviews with people who were infected with Covid and recovered, a rare topic in the country of 1.4 billion people where many fear the disease. The patients relayed their infection experiences and shared details, a potential sign that propaganda officials are trying to normalize infection. (…)
China’s Failed Covid Vaccine Nationalism Beijing rejected foreign mRNA shots, putting its citizens at greater risk.
The WSJ Editorial Board:
(…) A Brazil BMJ study of those over age 70 found that Sinovac was only 61% protective against death and 55% against hospitalization. That compares to upward of 90% protection against hospitalization for Moderna and Pfizer for seniors. (…)
Another study, in The Lancet, found that Sinovac produces a much inferior memory T-cell response and neutralizing antibodies against the Omicron variant. The memory T-cell response is what protects people against severe illness as variants evolve.
Tens of millions of China’s elderly still aren’t vaccinated, perhaps because word has spread that its vaccines are less effective. Some countries also refused to recognize Sinovac as an accepted vaccine, and have suggested that those who received the Chinese shot consider getting an mRNA booster.
Beijing responded with propaganda casting doubt on the safety of the Pfizer shots while boosting homegrown vaccines. In January 2021, as Chinese vaccines were distributed to other countries, the Communist Party mouthpiece Global Times ran news stories and editorials suggesting that Western vaccines were killing people.
In Hong Kong, where both Sinovac and Western vaccines were available, the choice between shots was influenced by whisper campaigns in the Chinese community that the Western shots were less safe. In March 2021, China announced that the Chinese border would be open to foreigners who received the Sinovac shots, but not for those getting the Western jab. (…)
When Moderna sought to sell its vaccine in China, Beijing tried to extort the U.S. biotech leader by demanding it hand over its intellectual property, according to a Financial Times report last month. Moderna wisely declined. (…)
In June Hong Kong’s South China Morning Post gushed that China’s AWcorna mRNA vaccine provided a four times stronger immune response than traditional vaccines. But the vaccine still hasn’t arrived, though it has been approved in Indonesia. Could China be using that country as a testing ground in case there are safety problems?
This is one reason that Germany’s chief government spokesperson, Steffen Hebestreit, suggested Monday that China revisit its rejection of foreign mRNA vaccines. “Perhaps after three years of the pandemic, it must be said that Europe and Germany have had very good experience with administering mRNA vaccinations,” Mr. Hebestreit said.
Good idea, but that means Beijing’s commissars would have to admit their mistake. Instead they are endangering the world again—and especially their own citizens.
- World Cup 2022: Chinese state TV accused of censoring maskless fans as they grapple with ‘zero-COVID’ protests
- World Cup Fans Without Masks Pose Dilemma for Chinese TV Amid Protests
Footage of maskless fans packed into Qatar’s stadiums for the World Cup is putting China — facing rising discontent over its continuing strict Covid protocols — in a bind.
Footage reviewed by Bloomberg News and shared on social media appear to show state broadcaster China Central Television pulling back on footage of the stadium crowds compared to other international networks. While not removing them completely, CCTV often substitutes crowd close-ups with video of coaches, the team bench or anything other than the thousands of jubilant or despondent fans. (…)
The tournament’s opening ceremony on Nov. 20 prompted a surge of comments to popular messaging platform WeChat about the lack of masks. On Weibo, a Twitter-like platform, topics related to a recent match were among the top trending topics Monday morning, after posts about protests in China were scrubbed overnight. (…)
Last week, a viral post was censored on WeChat after the unidentified author asked why the crowds in Qatar — where masking is not mandatory — don’t need to follow rules still commonplace in China. “Aren’t they on the same planet we live? Doesn’t the Covid virus hurt them?” the unidentified person wrote. (…)
That gave viewers opportunities to discuss more than just the players’ performances, often with a heavy dose of sarcasm.
“You can’t see anyone wearing a mask at the World Cup, since everyone in China knows that all the foreigners are dead, we should just keep doing Covid tests and keep locking down then,” one Weibo user wrote.
Another said that “After watching the World Cup, I didn’t expect the Qataris to be unable to afford masks. I wonder how long they would need to quarantine after the World Cup to eliminate the virus.”
- Behind Chinese Covid Protests, Economic Worries Simmer Among Youth Demonstrations, while mainly about Covid controls, also reflected young people’s anxiety over job prospects, raising stakes for Beijing to reignite growth
(…) The outlook is particularly gloomy for young Chinese. The official unemployment rate for urban youths between 16 and 24 is hovering around 18%, near a record high.
More than 11.58 million students, a record, will graduate next summer. Yet many jobs for young people and college graduates—especially in China’s internet, education and service sectors—have disappeared because of Covid controls and the government’s regulatory crackdowns on private companies over the past year. (…)
“What’s really dangerous for Xi is if people start to question the leadership’s competence,” said Mark Williams, chief Asia economist at Capital Economics. “The endless cycle of testing and quarantines required by the zero-Covid policy has put the spotlight on that.” (…)
Youths with economic complaints have long been a concern for China’s ruling Communist Party, which resorted to a bloody crackdown on student protesters at Tiananmen Square in 1989. Economists widely attribute inflation, which rose by 18% that year, as a key factor that fueled that unrest. (…)
In Hangzhou, Jiang Lin, an undergraduate student in accounting, said she was pressured by her parents to apply for graduate studies instead this year. More than 5.4 million people registered for exams to enter graduate schools next year, a record high and nearly double the 2.9 million applicants in 2019. (…)
Jiang Huiwen, a third-year graduate student in philosophy at a university in Beijing, abandoned applying for further studies due to what she described as an oversupply of people with doctorate degrees. (…)
Unlike their parents, Chinese 20-somethings grew up in two decades of prosperity and largely believed that their efforts in school would pay off, said Ms. Qian of Northwestern University. With growth slowing so much this year, the lack of visible payoffs has “added up to an accumulation of frustration and anger.” (…)
Scientists Revive 48,500-Year-Old ‘Zombie Virus’ Buried in Ice
The thawing of ancient permafrost due to climate change may pose a new threat to humans, according to researchers who revived nearly two dozen viruses – including one frozen under a lake more than 48,500 years ago.
European researchers examined ancient samples collected from permafrost in the Siberia region of Russia. They revived and characterized 13 new pathogens, what they termed “zombie viruses,” and found that they remained infectious despite spending many millennia trapped in the frozen ground. (…)
“It is thus likely that ancient permafrost will release these unknown viruses upon thawing,” they wrote in an article posted to the preprint repository bioRxiv that hasn’t yet been peer-reviewed. “How long these viruses could remain infectious once exposed to outdoor conditions, and how likely they will be to encounter and infect a suitable host in the interval, is yet impossible to estimate.” (…)
BNPL
Another slow moving accident…
Klarna says it has made progress towards profits as losses double
This sarcastic headline is from the FT. The rest is from Bloomberg:
Klarna offers interest-free loans to customers who shop online, allowing them to spread the cost of a product over multiple payments, making money by charging retailers a fee on transactions.
The Stockholm-based fintech reported an operating loss before tax of 6.2 billion Swedish kronor ($581 million) for the six months through June, up from 1.8 billion kronor in the same period a year ago. Revenue rose 24%. (…)
Klarna’s sharp increase in losses were driven by administrative expenses — the cost of running the business, including paying salaries — which rose to 10.2 billion kronor, compared to about 6 billion kronor a year before. (…)
Klarna is working to restore profitability after an investment round this summer that slashed the company’s valuation to $6.7 billion from about $45.6 billion a year ago. (…)
Net credit losses were 2.85 billion kronor, up from 1.85 billion kronor.
Klarna said the US continues to be the company’s fastest-growing key market, with volumes up 109% on a year ago and 30 million users. Overall it has 150 million customers across 45 markets.
But how do you “restore profitability” giving interest-free loans to sub-prime borrowers when your own borrowing costs skyrocket and dumb investors wake up?
