Data dependent? Good luck!
(…) The most striking thing about these newly revised numbers is that the labor market appears to have been more or less insensitive to the state of the pandemic last year. Job growth tailed off modestly in September when the delta wave was peaking, but otherwise, it’s basically impossible to spot COVID’s impact with the naked eye.
Why were the initial jobs reports so far off in 2021? It seems to have to do with the adjustment process the Labor Department uses to smooth out the impact of seasonal hiring and layoffs in the data. That process appears to have gone utterly haywire, thanks to the unprecedented job swings of 2020 and 2021, and only with this last round of revisions have the government’s statisticians been able to fix it.
Still, note the diminishing contributions of employment and hours to aggregate payrolls since September, offset by rising hourly earnings.
Wages of production and nonsupervisory employees are up 6.9% YoY in January and up at a 7.7% annualized rate in the last 3 months. Their bosses’ wages are up 5.7% YoY an 6.8% a.r. in the last 3 months. Nothing transitory there.
Goldman Sachs’ composition-adjusted wage tracker has accelerated to a 6% annualized rate over the past 2-3 quarters.
With core PCE inflation running at about a 5% rate over the past 3, 6 and 12 months, this raises the question whether we are already in the middle of a wage-price spiral that will need to be broken by aggressive Fed rate hikes and a large tightening in financial conditions.
So far, we don’t see a spiral where wage and price inflation feed on each other while expectations become unanchored to the high side. Our wage survey leading indicator remains consistent with just under 4% growth, as does a narrower set of business surveys that ask specifically about compensation budgets for 2022.
And while short-term inflation expectations have surged, longer-term forward inflation expectations—whether measured via bond yields, forecaster surveys, or household surveys—remain well anchored. Taken together, these observations suggest that firms, households, and market participants still expect the current wage and price surge to level off as the economy emerges more fully from the pandemic.
But the U.S. second largest employer seems to think differently:
Amazon Is Raising Base Salary Cap to $350,000 From $160,000
(…) “This past year has seen a particularly competitive labor market, and in doing a thorough analysis of various options, weighing the economics of our business and the need to remain competitive for attracting and retaining top talent, we decided to make meaningfully bigger increases to our compensation levels than we do in a typical year,” the company told employees Monday in a memo reviewed by Bloomberg.
Amazon also said it was increasing the compensation ranges of most jobs globally and is changing the timing of stock awards to align with promotions.
Like many big employers, Amazon has struggled to hire and retain workers of late. The company has long relied on stock awards, betting it can entice workers to take positions even if the base pay is low. But the stock languished in 2021, gaining just 2.4% while the S&P 500 jumped 27%, and the strategy began to lose its appeal. Media reports indicate the turnover rate inside Amazon has reached crisis levels, and a record 50 vice presidents departed last year.
The e-commerce giant employed 1.6 million globally as of Dec. 31, including warehouse workers who are paid hourly and office staff who earn annual salaries. (…)
Amazon pays warehouse workers at least $15 an hour and in September said it had raised average wages for these employees to $18 an hour. (…)
And a Bloomberg survey reveals that:
- About 55% say that they are likely to seek out job offers from other companies to get raises at their current firms, according to a nationally representative survey conducted by The Harris Poll for Bloomberg News.
- If offered outside roles, nearly two thirds said they would quit their current jobs. Millennials are the most likely to jump ship, followed by Gen Z, Gen X and Boomers. Among workers likely to ask for a raise soon, nearly all say inflation is a factor in their decision and a majority cited the current economic climate. (…)
- Some 61% say using a job offer from another company for the sole purpose of receiving a pay raise is an ethical practice.
Goldman’s Jan Hatzius goes on in his piece “The Slowdown That We Need”:
With all that said, we do put a significant amount of weight on the wage acceleration. Even if wage growth comes down from 6% to 5%, as we expect, this would imply unit labor cost inflation of at least 3% assuming productivity rises no more than 2%. If it persists, such a pace would be too high for achieving the Fed’s 2% PCE inflation target. This raises the risk that Fed officials would want to see an even bigger slowdown in output and employment growth than we are currently forecasting, to a pace no faster than the long-term trend.
How much additional monetary policy tightening would be needed? (…) Based on our estimated rules of thumb, this would require an incremental 50-100bp of FCI [Financial Conditions Index] tightening, which in turn could be brought about by an incremental 50-100bp of Fed rate hikes. Importantly, the added Fed tightening would need to come on top of the amount that is currently discounted in the yield curve, and thus in our FCI.
All else equal, this suggests that markets will have to revise up their estimate of the terminal funds rate from the current 1.7% to roughly our own 2½-2¾% forecast, or else the Fed may need to deliver more than the five 25bp hikes that are currently priced for 2022 (and included in our own forecast). If it is the latter, we think an even longer series of up to seven 25bp moves this year is more likely than a turn to 50bp moves. (…)
The broadening of wage and price pressures across the advanced economies implies that growth needs to slow and financial conditions need to tighten at an earlier stage of the recovery than previously expected. Consistent with this, our core market views are an increase in riskless yields, a widening of IG and HY credit spreads, and a combination of lower expected returns and bigger potential drawdowns in the major DM equity markets relative to the post-covid recovery so far. At this point, our baseline remains that this will be sufficient to slow growth and bring inflation back toward central bank targets over the next 1-2 years. But the risk of a harder landing will rise if US growth stays significantly above our below-consensus forecast.
But what if growth turns out significantly lower than expected:
Global economy sees inflation pressures persist as growth slows
(…) While the outlook for inflation looks to be tilted toward persistent elevated price pressures, as high wage and energy costs collude with ongoing supply shortages in the coming months, the outlook for economic growth is less certain, especially in the face of increased policy tightening among major central banks.
Just as global economic growth slowed to an 18-month low at the start of 2022 amid rising COVID-19 infection rates, price pressures intensified. The JPMorgan Global PMI™ (compiled by IHS Markit) showed average prices charged for goods and services rising at a rate beaten only once over the comparable PMI survey 12-year history (in October 2021).
Global PMI output and selling prices
Rates of selling price inflation accelerated in both manufacturing and services at a time of output growth faltering to only modest rates in both sectors.
Looking in more detail within the sectors, selling prices rose in all 26 detailed sectors of the global economy covered by the PMI surveys. (…)
Measured globally, the elevated PMI selling price gauge points to persistent high inflation in coming months. However, it is important to note that the drivers of inflation are showing signs of changing. (…)
Global PMI selling prices and inflation
The number of PMI survey contributors reporting that energy prices had increased to an all-time high worldwide in January (comparable data extend back to 2004), matched by a record high in the number of service providers reporting that their expenses had been pushed higher by rising staff costs, in turn linked to deteriorating labour availability, exacerbated in January by the Omicron wave.
The escalation of energy and wage price pressures in coming months therefore adds to risks that the recent elevated rate of inflation in many countries could persist for longer than previously expected, which will in turn add to pressure on central banks to tighten monetary policy.
However, while the odds are clearly pointing to persistent inflation, risks to the outlook for output (and GDP) are more balanced. Growth will likely accelerate again globally once the worst of the Omicron wave passes, but demand forces have waned in recent months amid various headwinds. These include high inflation, squeezed real incomes, ongoing supply constraints and the withdrawal of pandemic-related fiscal stimuli. By tightening monetary policy, how much do central banks further tilt risks towards growth slowing?
Omicron is taking the blame for the recent declines in output. But under the surface:
Inflows of new business slowed globally in January to the weakest since February of last year. The new business index signalled weakening demand growth in both manufacturing and services.
Global new order inflows
Part of the softer demand picture is likely to be temporary, resulting from reduced economic activity arising from the Omicron wave. As containment measures are lifted, demand should revive. However, it is important to note that the number of companies reporting higher orders due to a demand recovery has been on a marked downward trend since peaking early in the pandemic, falling in January to a level below the long-run trend for the first time since April 2020. (…)
Ten-year yields are back to their pre-covid level when the S&P 500 was at 3400. It is up 32% since while profits are up 26%. So the P/E rose from 20.6 to 21.6. The big difference is inflation (2.3% vs 5.5%), wage pressures and clearly hawkish central bankers.
- Equities saw positive returns during previous periods of rate hikes. But this time, the Fed will be acting “into an overvalued market,” BofA strategists said. The tightening cycle that started in 1999 is the closest historical precedent, they added. And the outcome of that—the bursting of the tech bubble—certainly left a bad taste behind.
Inflation Continues Impact on Small Businesses
The NFIB Small Business Optimism Index decreased slightly in January to 97.1, down 1.8 points from December. Inflation remains a problem for small businesses as 22% of owners reported that inflation was their single most important business problem, unchanged from December when it reached the highest level since 1981. The net percent of owners raising average selling prices increased four points to a net 61% (seasonally adjusted), the highest reading since the fourth quarter of 1974.
“More small business owners started the New Year raising prices in an attempt to pass on higher inventory, supplies, and labor costs,” said NFIB Chief Economist Bill Dunkelberg. “In addition to inflation issues, owners are also raising compensation at record high rates to attract qualified employees to their open positions.” (…)
Price hikes were the most frequent in wholesale (88% higher, 3% lower), manufacturing (71% higher, 1% lower), retail (69% higher, 4% lower), and construction (67% higher, 5% lower). Seasonally adjusted, a net 47% of owners plan price hikes. (…)
Middle Class Getting Priced Out of Covid Housing Market The surge in home prices and sharp decline in the number of homes for sale have made home buying more difficult, as affordability worsens for many during the pandemic.
(…) At the end of last year, there were about 411,000 fewer homes on the market that were considered affordable for households earning between $75,000 and $100,000 than before the pandemic, the [NAR] study found. At the end of 2019, there was one available listing that was affordable for every 24 households in this income bracket. By December 2021, the figure was one listing for every 65 households. (…)
The study found that housing affordability worsened over the past two years for all but the very wealthiest Americans, and the shrinking number of homes on the market made home buying more difficult in every income bracket. (…)
Households earning between $75,000 and $100,000 could afford to buy 51% of the active housing inventory in December, NAR said, down from 58% in December 2019. That 7-percentage-point drop was the second-biggest decline among all income brackets, behind households earning between $100,000 and $125,000, where affordability slipped 8 percentage points to 63% of the listed homes. (…)
Current homeowners are in good shape: from the Mortgage Monitor:
Tappable equity climbed to a new record over 2021, hitting an aggregate total of $9.9T. That represents an astounding 35% annual growth rate – for an increase of $2.6T in tappable equity in a single year, with $450B (+5%) of that coming in Q4 2021 alone. As a result, the average mortgage holder has $185K in equity available to them before hitting a maximum combined loan-to-value ratio of 80%, a one year increase of $48K.
Others, not so much:
It now takes 25.8% of the median household income to purchase the average-priced home with 20% down and a 30-year mortgage, up from the 22.4% required at the end of Q3 2021. Interest rate jumps in recent weeks have pushed us – and quite quickly – above the long-term, pre-Great Recession average payment-to-income ratio of 25%, straight to the worst affordability levels since 2008.”
While a 20.5% ratio has been the tipping point between market acceleration and deceleration over the past decade, severe inventory shortfalls are keeping home prices running hotter than they might otherwise.
BTW: “Condo price growth also continues to outpace that of single-family homes as buy side demand has depleted available condo inventory » According to Collateral Analytics data, the shortage of condo inventory across the country is now worse than that of single-family residences.”
From another WSJ article:
- First-time buyers made up 34% of all home buyers in 2021, compared with 31% in 2020, according to a National Association of Realtors survey. Nationwide, first-time home buyers paid a median price of $252,000 in 2021, more than 9.5% higher than in 2020, said NAR. (…)
- The average cost to care for a single-family home rose 9.3% to $4,886 in 2021, compared with the prior year, driven in part by labor and material shortages, according to online-services marketplace Thumbtack Inc.
U.S. Agrees to Lift Trump-Era Tariffs on Japanese Steel The agreement removes a longstanding irritant in the bilateral relations between the two allies and follows a similar agreement with the European Union in October.
EARNINGS WATCH
We now have 281 reports in, a 78% beat rate and a +4.9% surprise factor.
Trailing EPS are now $208.63, forward: $224.98.
Yesterday, 5 companies offered guidance, 2 up, 3 down:
France says Putin is moving towards de-escalating Ukraine crisis Russia’s president agrees not to undertake new military initiatives in region, according to Paris