Vehicles Sales at 15.68 million SAAR in June; Up 20% YoY
Wards Auto released their estimate of light vehicle sales for June: U.S. Light-Vehicle Sales End First-Half 2023 on Solid Note as June, Q2 Record Double-Digit Growth (pay site).
With second-quarter results finishing 18% above the same period last year, first-half 2023 volume totaled 7.66 million units, a 13% increase on January-June 2022. Sales are forecast to rise 11% year-over-year to 7.72 million units in the second half, and Wards Intelligence partner GlobalData is pegging entire-2023 at 15.4 million units.
Wards Auto estimates sales of 15.68 million SAAR in June 2023 (Seasonally Adjusted Annual Rate), up 4.2% from the May sales rate, and up 20.2% from May 2022.
- Households’ excess savings could run out as soon as September per @bcaresearch (via @SoberLook and @LizAnnSonders)
Fed’s Williams Says Data Supports More Action on Interest Rates
(…) “We can take some time and assess and collect more information and then be able to act, knowing that we also communicated through our projections that we don’t think we’re done, based on what we know,” Williams said Wednesday during a discussion held at the New York Fed as part of the annual meeting of the Central Bank Research Association. “And obviously we’re absolutely committed to achieving our 2% inflation goal.” (…)
Williams said he would be data-dependent when deciding the Fed’s next steps, noting that recent economic data showing a stronger-than-expected housing market, resilient growth and a slowdown in consumer spending have been “informative.” (…)
But can we depend on the data?
Some Federal Reserve officials suspect that robust gains in payrolls may be overstating the strength of the labor market.
That’s according to the minutes of the Fed’s June 13-14 policymaking meeting released on Wednesday.
Other measures of employment – including the Labor Department’s household survey and Census report, and Fed staff’s own calculations – “suggested that job growth may have been weaker than indicated by payroll” statistics, the policymakers were reported to have noted during the meeting. (…)
“We think the last several months of payrolls estimates will ultimately be revised down,” Bloomberg economist Stuart Paul wrote in a report on Wednesday that highlighted widening cracks in the labor market.
As evidence, he cited the Quarterly Census of Employment and Wages, a more comprehensive reading of the jobs market also carried out by the Labor Department but which comes out with a lag. Based on that report, he expects last year’s payrolls to be revised down by about 900,000 when the department updates the data in September.
Mark Zandi, chief economist for Moody’s Analytics, reckons that actual payroll gains are running an average of 150,000 to 200,000 per month, rather than the close to the 300,000 pace reported in the monthly jobs numbers.
Paul said the monthly payrolls report may be overestimating the number of jobs being created by new businesses in its so-called birth-death model.
The Labor Department draws its monthly payroll numbers from a survey of employers and its monthly estimate of the unemployment from a survey of households. In May, payrolls rose by 339,000 while employment as measured in the household survey tumbled by 310,000.
Fed staff also make their own calculations of private sector job growth drawing on payroll data from Automatic Data Processing Inc.
I discussed that on Monday:
The chart plots the BLS Nonfarm payrolls (+2.7% YoY in May), the BLS Private payrolls (+2.7%), ADP Private employment (+2.4% black) and the BLS Household employment (+1.5%).
All series have been gradually slowing since spring 2022 but only the household survey has kept weakening lately.
PMI surveys also support a reasonably strong labor market. From S&P Global’s June survey:
“Greater success in finding suitable candidates allowed [manufacturing] firms to expand their workforce numbers in June, despite concerns surrounding future demand conditions. The rate of job creation slowed slightly but remained among the fastest in a year.”
“Services firms continued to hire amid greater new orders. That said, the rate of job creation eased to the weakest since January amid challenges replacing voluntary leavers.”
In a recent interview, Nela Richardson, ADP’s chief economist, said that
small firms that produce two thirds of the net new jobs in the ten years preceding the pandemic, they’re still hiring. Even as larger firms are pulling back in their hiring, small firms are taking their place. They were blocked out by a lot of large retailers and warehouse firms and weren’t able to hire to the degree they wanted to last year. Now, they’re seeing some breathing room in terms of adding to their headcount. That’s why whether you’re looking at BLS or you’re looking at NER, you’re still looking at plus 200 000 jobs created in the economy in a month. In normal times, that would have been considered a strong month. I think small firms are leading that charge right now.
More Manhattan homebuyers are paying cash than at any other time on record as mortgage rates soar. About two-thirds of purchases in the second quarter were completed without financing, the largest share since Miller Samuel and Douglas Elliman began tracking payment methods in 2014.
As Greedflation Starts to Fade, Wageflation Creeps In Softer demand, more supply and rising labor costs all take the air out of profit margins.
Judging by recent developments, inflation driven by corporations flexing their power to jack up prices more than costs—greedflation, as some called it—is on its way out. Pretax margins, which widened sharply in 2021 and 2022, were roughly back to prepandemic levels in the first quarter of 2023, according to revised government data released last week. Margins in six of the S&P 500’s 11 sectors were lower in the second quarter than four years earlier, according to FactSet.
Narrowing profit margins, though, doesn’t necessarily mean an end to inflation. Wages are now growing faster than prices. While that doesn’t provoke the same outrage as soaring profits, it’s just as problematic for getting inflation down. (…)
In the year through the second quarter of 2021, those companies’ prices rose 4.3%. At the same time, the cost of labor per unit of output fell 2.3%, because though wages were rising in that time, output per worker (productivity) was rising faster. Profit per unit of output rose a whopping 40%. (…)
Workers are slowly recapturing more of the economic pie. In the first quarter of 2023, wages and salaries rose to 49.3% of corporate value added, higher than in 2019. Labor costs per unit of sales rose 6% in the year through the first quarter, ahead of prices, which were up 5.3% in the same period. Profits per unit of output rose just 1.6%.
The trend of wages rising faster than prices has continued in recent months. That’s welcome relief for workers but poses a set of difficult tradeoffs: Either profit margins will have to narrow further, which businesses will resist; high inflation will have to continue, which the Federal Reserve is fighting; or productivity will have to boom, of which there is no sign yet. If none of those things happen, then wageflation, like greedflation, will have to go away.
The first chart plots actual business sales and wages. Sales peaked in mid-2022 and have been drifting down since. Wages are showing no signs of slowing.
The same two series but YoY. Business sales were down 1.3% YoY in April against wages up 5.0%.
At the S&P 500 level, primarily a “goods” vs a mainly “services” economy, revenues are expected down 0.5% in Q2 and up only 0.6% in Q3.
Economy-wide, labor productivity has declined rather unusually since 2022. Unit labor costs were up 3.8% YoY in Q1’23 and only decline during recessions:
The same two series indexed at Q1’20 = 100.0. Productivity is up 3.8% and softening but unit labor costs are up 11.3% and rising.
- Remote Work Sticks for All Kinds of Jobs Lower-income, less-educated and service workers are all clocking more work-from-home hours than before the pandemic hit.
Last week, a Fed paper predicted:
End of an Era: The Coming Long-Run Slowdown in Corporate Profit Growth and Stock Returns
I show that the decline in interest rates and corporate tax rates over the past three decades accounts for the majority of the period’s exceptional stock market performance. Lower interest expenses and corporate tax rates mechanically explain over 40 percent of the real growth in corporate profits from 1989 to 2019. In addition, the decline in risk-free rates alone accounts for all of the expansion in price-to-earnings multiples.
I argue, however, that the boost to profits and valuations from ever declining interest and corporate tax rates is unlikely to continue, indicating significantly lower profit growth and stock returns in the future. (…)
A few charts from the report:
The conclusion:
However, P/E multiples in the future—averaged over the longer run—are unlikely to expand much beyond 2019-levels. P/E multiples can only expand if: (1) risk-free rates decline; (2) risk premia decline; (3) earnings growth expectations increase; or (4) payouts to shareholders increase (Eq. 4). Notably, from 1989 to 2019, the decline is risk-free rates can account for all of the expansion in P/E multiples. Since risk-free rates are not expected to fall much below 2019-levels, this severely constrains the extent to which P/E multiples can continue to expand.
Likewise, P/E multiples are unlikely to get a boost from higher earnings growth expectations. Indeed, it is questionable whether the market is currently pricing in the substantially lower earnings growth that I argue is very likely to prevail in the future. There is some chance that the market is simply assuming that the very strong earnings growth experienced over the past thirty years will continue indefinitely.
In other words, it is unclear whether the market is taking into account the fact that this growth was mechanically boosted by declining interest and corporate tax rates—a trend that has reached its limits. If the market is not taking this into account, then P/E multiples will not expand, but contract, once the market adjusts its longer-run earnings expectations downward to more reasonable levels. Obviously, stock market performance would suffer as a result. (…)
What is a reasonable rate growth of EBIT growth to expect? As noted earlier, from 1962 to 2019, EBIT growth came in below GDP growth. Given this 60-year pattern, it is reasonable to extrapolate that, over the long run, EBIT growth in the future will also probably not exceed GDP growth.
For the 15 years prior to the pandemic, U.S. real GDP grew at annual rate of 1.9 percent. Going forward, the Congressional Budget Office projects real GDP growth of 1.9 percent per year over the next decade.
In the future, the real longer run growth rate of both stock prices and corporate earnings is therefore unlikely to exceed 2 percent per year. Given that this represents an optimistic scenario, the risks to this forecast, if anything, are to the downside.
For those who missed The Daily Edge in recent days:
Floating rate debt now costs 550bps more than in 2021. Fixed rate debt is being renewed at double its pre-2022 cost. The hit on cashflow will only keep growing through 2025.
Since U.S. nonfinancial corporate debt reached $12.7T as of Q1’23, a 550bps incremental cost would reduce annualized cashflow by $636B or $500B after tax, a 16% setback on total corporate cashflow and 20% on corporate profits.
But, as Ed Yardeni notes, such bleak outlook is not part of analysts thinking just yet:
Industry analysts remain optimistic on S&P 500 forward revenues which rose to another record high during the June 29 week (chart). They’ve also stopped lowering their consensus expectations for the S&P 500’s forward profit margin. As a result, S&P 500 forward earnings have been rising in recent weeks. The weekly data on forward revenues, forward earnings, and the forward profit margin are excellent coincident indicators of the comparable actual quarterly data collectively reported by the S&P 500 companies.
U.S. Looks to Restrict China’s Access to Cloud Computing The Biden administration proposal, aimed at closing a loophole in chip export controls, could escalate a tit-for-tat fight with Beijing.
- China’s Export Curb on Chip-Making Metals Prompts Countries to Explore Supply-Chain Diversification Beijing’s decision to curb exports of rare minerals alarms South Korea and Japan.
Industrial experts say China’s move—viewed as retaliation against U.S. export restrictions aimed at curbing Beijing’s high-technology industries—is unlikely to immediately hit global output of semiconductors and other products, in part because Beijing would be hurting its own technology industry if it implemented the controls too strictly. But it has sounded an alarm for countries that stand to be hit.
South Korea’s government held an emergency meeting on Tuesday to assess the potential consequences of China’s export restrictions on the two minerals, gallium and germanium, and pledged to do more to diversify its sourcing of materials critical to major industries like semiconductors. Japan’s government also said Tuesday that it is studying the impact of the restrictions. Both countries boast large semiconductor industries that would be exposed to a shortage of the two minerals.
China’s Foreign Ministry said the latest export controls, which kick in on Aug. 1, don’t target any specific countries. “China has always been committed to maintaining the security and stability of the global supply chain, and has always implemented fair, reasonable, and non-discriminatory export control measures,” spokeswoman Mao Ning said Tuesday. (…)
In an interview published Wednesday in the state-run China Daily, Wei Jianguo, a former vice minister of commerce, said China’s latest export curbs are just a start and that China has sanction options should Washington impose stricter technology restrictions on Beijing.
Analysts said China’s measures, which restrict exports of the two minerals, as well as dozens of related compounds, appeared to be aimed at countries such as the U.S., South Korea and Japan, which have restricted exports of advanced semiconductors and related technology to China.
China mines and exports large quantities of gallium and germanium, providing the raw materials to countries such as the U.S. and Japan that process them into high-end products, which can then be used in manufacturing advanced semiconductors, military radars, LED panels, solar panels, electric vehicles and wind turbines. By contrast, China processes other minerals like cobalt, which are mined elsewhere. (…)