US Small-Business Optimism Rises for Third Month to 2024 High
US small-business optimism increased for a third straight month in June to the highest level this year as firms became less downbeat about the economy’s prospects.
The National Federation of Independent Business sentiment index advanced 1 point to 91.5 last month. While still pessimistic about the outlook for business conditions, the share of firms expecting the economy to worsen is the smallest in three years.
The overall sentiment index remains well below pre-pandemic levels as firms contend with high prices, interest rates and labor costs, as well as lingering hiring challenges. (…)
The NFIB survey showed the share of firms raising prices rose 2 percentage points to 27%, a three-month high yet well below the peak in 2022. Price hikes were more frequent in construction and retail. At the same time, a smaller share of business owners said they plan to charge more in coming months.
The proportion of owners indicating inflation was their top concern eased one point to 21%, the smallest share since the start of the year.
The share of firms reporting job openings they couldn’t fill fell 5 points in June to 37%, matching the smallest since the start of 2021. Hiring plans held steady.
The charts are not quite as cheerful:
Total credit outstanding rose $11.4 billion after a revised $6.5 billion gain in April, according to Federal Reserve data released Monday. The median forecast in a Bloomberg survey of economists called for an $8.9 billion increase for May. The figures aren’t adjusted for inflation.
Revolving credit, which includes credit cards, advanced $7 billion, also the most in three months. Non-revolving credit, such as loans for vehicle purchases and school tuition, increased $4.3 billion. (…)
The Fed’s report Monday showed that borrowing rates on credit cards that charge interest rose to 22.76% in May, just shy of a record in data back to 1994. A 60-month loan from a commercial bank for a new vehicle purchase stood at 8.2%, also near a series high.
As of March, 3.2% of outstanding debt was in some stage of delinquency, according to the New York Fed. While that’s lower than the fourth quarter of 2019, delinquency transition rates increased for all product types.
Ed Yardeni:
Consumer credit outstanding fell to 24.2% of DPI in May, the lowest since August 2021 (chart). Student debt relief has played a role, helping shrink nonrevolving credit (which also includes auto loans) to 17.8% of DPI. Meanwhile, revolving credit as a percentage of DPI was 6.4% during May, remaining just below its pre-pandemic readings and well below its pre-GFC readings.
Thursday is CPI day:
Economists who produce detailed inflation forecasts expect the June CPI to have been relatively mild, following a lower-than-expected reading for May. The median of these forecasts has the June core index up 0.22%, which would hold the 12-month rate steady at 3.4% (@NickTimiraos)
BROTHERS IN HARMS
Crushing Debts Await Europe’s New Leaders Planned largess by election winners in Britain and France is on a collision course with soaring debts and deficits
New governments in Europe are being handed a poisoned chalice. They are being elected with mandates for change, but only limited means at their disposal to enact it.
Public debt is close to multidecade highs on both sides of the English Channel, where voters this week were electing new parliaments. In both France and the U.K., government spending and budget deficits as a share of gross domestic product are significantly above prepandemic levels. Economic growth remains lackluster, borrowing costs have surged, and demands on the public purse are rising, from defense to old-age pensions.
All that means fiscal restraint—less spending or higher taxes—will be necessary, economists say. But politicians haven’t prepared electorates for that. On the contrary, they have signaled bold new spending plans. (…)
A hung parliament, if the diverse parties can’t agree to form a government, would delay any efforts to rein in the national debt, analysts said.
No French party has discussed how to reduce a public deficit that, at around an estimated 5% of GDP this year, has triggered disciplinary proceedings from the European Union. French government-bond yields have surged in recent weeks as investors responded with alarm at the prospect of much heavier French borrowing. Ratings agency Standard & Poor’s in May cut its rating on France’s sovereign debt to AA-. (…)
Public debt in the U.K. increased to 104% of gross domestic product this year from 86% in 2019 and 43% in 2007. In France, national debt has risen to 112% of GDP from 97% in 2019 and 65% in 2007, according to International Monetary Fund data.
Public budget deficits are running 3 percentage points above prepandemic levels across major advanced economies, according to Capital Economics. That partly reflects higher interest payments, but also increased spending that is no longer related to the pandemic, said Neil Shearing, the firm’s chief economist. “There’s not much scope for big fiscal expansions,” he said.
Even Germany, usually a paragon of fiscal prudence, has swung to large budget deficits from surpluses in the 2010s. After months of tough negotiations, Chancellor Olaf Scholz’s fractious three-way coalition announced Friday that it had finally agreed on a budget deal for next year. The deal stuck to the country’s strict borrowing rules while providing some measures to reinvigorate lackluster economic growth and boost military spending.
The U.S. picture is worse: its public debt has risen to 123% of GDP from 108% in 2019, according to the IMF’s broad measure. Publicly held federal debt has risen from 78% to 97% in the same time span. Yet neither presumptive Republican presidential candidate Donald Trump nor Democratic President Biden has given priority to reducing it, and there is little political pressure to act.
The U.S. deficit will likely run around 6.5% of GDP this year, according to the IMF, which would tie with Japan as highest among major industrial economies. But the U.S. has several critical advantages over Europe: robust economic growth, less adverse demographics and more room to raise taxes that are low by international standards.
The reserve status of the dollar also means that in an uncertain world, investors are more likely to buy the U.S.’s bonds than any other country’s. (…)
As populations age, public spending on healthcare and pensions will trend upward. (…)
All that raises the risk that investors might at some point balk at buying government bonds, pushing yields much higher. In late 2022, then-U.K. Prime Minister Liz Truss sent bond yields surging by announcing large-scale tax cuts and borrowing, which were quickly reversed. In Italy, a government including the populist 5 Star Movement caused a surge in borrowing costs in 2018 with its ambitious spending plans, but later backed down.
Despite Italy’s colossal deficits, Prime Minister Giorgia Meloni of the populist Brothers of Italy has so far avoided a revolt by investors by toning down her spending plans and adopting a conciliatory tone toward Brussels, which has declared Italy, like France, in violation of deficit guidelines.
But Meloni’s example might not be representative of what happens if populists take office in any other country. A 2023 study of 51 populist presidents and prime ministers between 1900 and 2020 found they tend to stumble economically. Manuel Funke, Moritz Schularick and Christoph Trebesch of the Kiel Institute for the World Economy, a German think tank, found that over 15 years, GDP per capita and consumption declined by more than 10% under populist governments compared with nonpopulist ones, while debt burdens and inflation also tended to increase.
Bloomberg piles on:
Macron’s government had already penciled painful spending cuts to get the gap to 5.1% this year from 5.5% in 2023. But those measures are likely off the table as all the parties that might be in a position to join the next government have promised increased spending.
Think tank Institut Montaigne estimates the pledges of leftist New Popular Front would require nearly €179 billion ($194 billion) in extra funds per year, and even the program of Macron’s party would incur extra spending of close to €21 billion.
“The cat’s out of the bag as regards to fiscal deficits and the risk associated with that,” said Orla Garvey, a portfolio manager at Federated Hermes. “If we’re left with weaker governments that are less able to enact the changes they need to make in order to improve the debt trajectory, that’s going to be a difficult environment for spreads.” (…)
Just look at the yield premium investors are demanding to hold French bonds over safer German securities: It hovered around 40 to 50 basis points before Macron dissolved parliament last month, and is now trading above 60 basis points, even after markets expressed relief Monday that neither the left nor the far right will have a majority. (…)
“It’s the worst of both worlds,” said Guy Miller, chief market strategist at Zurich Insurance Co. “You’re seeing debt levels at worryingly high levels, and at the same time you’re having populist parties leading or winning in the polls, promising further spending.” (…)
BTW: the estimated annualized payments to service the US government debt surpassed $1.1 trillion and are still rising almost parabolically (Bloomberg):
Japan would love to strengthen the yen, with the currency’s value at a nearly 38-year low. And it owns one of the world’s biggest dollar stashes.
Many analysts say Tokyo is getting ready to redirect some of those government-controlled dollars back into yen assets, a decision that could ripple through global financial markets, given the sums involved.
The Government Pension Investment Fund is an investing whale, with ¥246 trillion, equivalent to $1.53 trillion, in assets as of March 31. Half of the total is held in foreign stocks and bonds, mostly in dollars, and the fund is about to start a once-every-five-years review of its strategy.
In an aging world where pension programs such as Social Security in the U.S. often face long-term challenges, Japan has adopted an unusual route. It takes a chunk of money from working people’s paychecks beyond the amount spent on current pension costs, then converts some of those yen into dollars to buy assets such as American stocks and bonds.
The fund in 2014 raised the ratio of foreign assets to 40% from 23%, and bumped it up further to 50% four years ago. The investments, which invited similar shifts by other large Japanese institutions, helped push up U.S. and Japanese stock prices.
Though the pension fund has enjoyed big paper gains and was up nearly 23% in its most recent fiscal year, it is a risky way to invest funds earmarked for future retirees. It amounts to a vote of no confidence by the Japanese government in its own currency and contrasts with the U.S. Social Security Trust Funds, which exclusively own the U.S. government’s own bonds.
The U.S. too has weighed a bigger role for stock investments in Social Security, but an effort nearly two decades ago by then President George W. Bush to let workers divert some Social Security payroll taxes to personal retirement accounts fell apart.
With Japan’s long-term interest rates rising recently, “raising the weight of domestic bonds is a natural direction for normalizing the situation” at the pension fund, said Takahide Kiuchi, an economist at Nomura Research Institute.
Kiuchi was a policy board member at the Bank of Japan a decade ago, when the fund started pouring hundreds of billions of dollars into foreign assets. It was part of an effort by the government and central bank to encourage Japanese people to take bigger risks with their money and get out of the funk that had gripped the nation since the early 1990s.
“I think there was also an element then of wanting a cheaper yen,” Kiuchi said. “Now absolutely no one is looking for that.” (…)
The yen has weakened so much that the Japanese government has been selling dollars to prop it up. Meanwhile, elsewhere in the same government, the pension investment fund continues to press the dollar accelerator based on a policy dating to 2014.
“Seeing how they shifted in one direction 10 years ago, I think it makes sense that they would be able to do the same thing now” in the opposite direction, said Stefan Angrick, an economist at Moody’s Analytics. The huge dollar stash could be viewed as a form of insurance, he said, “and if you want to use that money at a point in time when things get tough, then that moment is now, right?”
If the pension fund moves 10% of its assets from foreign currencies into yen, that would mean a movement of some $150 billion. Angrick and Kiuchi cautioned that even such a shift wouldn’t necessarily stem the yen’s depreciation, given the large size and capriciousness of foreign-exchange markets. (…)
The new strategy will officially take effect next April, but analysts observed that the fund often front-runs the planned weighting changes to make the transition smoother.
Analysts at Morgan Stanley predicted that the Japanese government would raise the pension fund’s weighting of domestic stocks. The Nikkei Stock Average is trading near its record level after reaching an all-time high in February for the first time in 34 years. (…)
CATCH ME IF YOU CAN
It’s just so weak under the surface
It’s no longer a secret that breadth has been weak. Indexes like the S&P 500 and Nasdaq Composite have consistently closed at record highs while the average stock has struggled. The divergences have reached historic proportions, and the few precedents show any further short-term gains have almost always been given back.
The average stock isn’t keeping up with the averages. We know that, and have for over a month, yet the S&P 500 and Nasdaq Composite continue to power to record highs. That’s not unprecedented – negative divergences can continue for weeks or even months – but it’s stretching the realm of historical comparisons. (…)
A similar pattern is playing out on the Nasdaq exchange, which we’ve noted for over a month has been especially troublesome. (…)
A handful of strong stocks can mask underlying weakness in capitalization-weighted indexes for a long time. Divergences between them and most other stocks can continue for months before anything bad happens, and something bad doesn’t necessarily have to happen.
Bulls always want to hope investors discover sector rotation and cycle into lagging stocks, which will prop up the whole market. Of course, that can happen. We don’t speculate much about what can happen since the possibilities are endless. We focus more on what has usually happened because human emotion is the most consistent factor in markets. And that tells us that when investors tire of chasing the few leaders, the average stock doesn’t “catch up,” rather the indexes show a strong tendency to “catch down.”
I’m wearing mixed reality goggles, and a disembodied voice is telling me to check the wiring harnesses on the 2.0-liter engine in front of me, inside Ford’s Dearborn engine plant in Michigan.
If any one of the electrical connections in the intricate network is wired incorrectly, the engine won’t start.
- Quality audits like this are routine as carmakers try to squeeze out errors and inefficiencies that wind up costing time and money.
I’m a novice when it comes to inspecting engines.
- Wearing Microsoft’s HoloLens 2 headset, at least I can follow step-by-step holographic instructions in my peripheral view.
My eyes follow a glowing indicator that shows me exactly where to look and what to do for each step in the process.
- Surprise! About three-quarters of the way through my tasks, I discover one of the connectors isn’t properly attached.
- I fix the problem by plugging the connector into its socket and — voilà! — the engine now passes muster and is ready to be installed in a Ford Escape.
Ford is one of the first automakers to use mixed reality (MR) technology in such a way on the factory floor.
- Car designers routinely use virtual reality to simulate vehicle features during the engineering phase, while MR blends virtual content with the real world.
- Ford is using Microsoft’s $3,500 MR headsets to train factory employees in a variety of tasks, from building engines and components to changing tools in computerized factory equipment.
About 25 Dearborn engine plant workers have been trained so far, with 100 more expected to complete the training by the end of the year.
Somebody should share this with somebody at Boeing
