U.S. Existing Home Sales Drop 1.2% in January January marks the third consecutive month of declining sales, a sign that demand for housing continued to cool at the start of the year
(…) January marked the third consecutive month of declining sales, and last month’s 4.94 million home sales were the lowest since November 2015. Compared with a year earlier, sales in January declined 8.5%. (…) Inventories of existing homes for sale rose 3.9% to 1.59 million in January. (…)
Notice from the Haver Analytics chart how weak sales have been in the West (-13.8% YoY) and have fallen below the Midwest.
U.S. Durable Goods Report: Strong Headline, Weaker Details
New orders for durable goods increased 1.2% (3.5% year-on-year) during December following an upwardly-revised 1.0% gain in November (this report was delayed as a result of the government shutdown). A 4.8% jump in volatile aircraft orders (-24.8% y/y) as well as a 2.1% increase in motor vehicles (11.6% y/y) drove the gain. Excluding the transportation sector, durable goods bookings edged up 0.1% (3.5% y/y).
Nondefense capital goods orders less aircraft fell 0.7% (+2.5% y/y) and were down at a 3.4% annual rate in the fourth quarter. In Q3, core capital goods orders grew at an 8.0% pace. This data suggests weakness ahead in equipment spending. (…)
FLASH PMIs
Still no recessionary trends visible…in the U.S..
Private sector output growth regained momentum in February, with a robust upturn in service sector activity more than offsetting the slowdown reported by manufacturing firms. Survey respondents noted that improving domestic economic conditions had underpinned a sustained rebound in new business so far in 2019. Resilient client demand also helped to boost job creation in February, with private sector payroll numbers rising at the fastest pace since last September.
The seasonally adjusted IHS Markit Flash U.S. Composite PMI Output Index picked up from 54.4 in January to 55.8 in February, which signalled the strongest rate of private sector output since June 2018. Mirroring the trend for business activity, latest data pointed to a robust and accelerated rise in new work received by private sector firms. The rate of new business growth was the sharpest for four months, although still softer than the peak seen in the spring of 2018. Survey respondents suggested that sales to domestic clients had been supported by improving underlying demand and expectations of stronger economic conditions in the near-term.
Backlogs of work were accumulated for the second month running in February, with the latest rise in unfinished business the steepest since May 2018. Renewed pressure on operating capacity encouraged an expansion of workforce numbers at private sector companies. Moreover, the rate of employment growth accelerated sharply from the 19-month low seen in January.
Despite recording stronger rises in output, new work and employment, latest data indicated that business optimism softened slightly since January. Subdued business expectations were partly linked to worries about the global economic outlook, with U.S manufacturers recording a particularly marked drop in confidence during the latest survey period.
Meanwhile, input cost inflation remained much softer than seen on average in the final quarter of 2018. Where an increase in cost burdens was reported, this was often attributed to the impact of trade tariffs on prices for imported materials.
A robust and accelerated increase in service sector output was the main area of strength signalled by survey respondents in February. At 56.2, up from 54.2 in January, the seasonally adjusted IHS Markit Flash U.S. Services PMI™ Business Activity Index indicated the sharpest upturn in activity since June 2018.
Service providers commented on higher levels of business and consumer spending during February, as highlighted by the strongest overall expansion of incoming new work since last September.
Latest data pointed to the steepest increase in backlogs of work for just over four years. Greater pressure on business capacity also led to a rebound in job creation to its sharpest for five months in February.
On a less positive note, input cost inflation accelerated from the near two-year low seen at the start of 2019. Higher operating expenses and improving demand conditions contributed to another solid increase in average prices charged by service sector firms.
In contrast to the stronger trends reported by service providers, the latest survey signalled a loss of momentum across the manufacturing sector. Adjusted for seasonal influences, the IHS Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) dipped to 53.7 in February from 54.9 in January, to signal the slowest improvement in business conditions since September 2017.
Anecdotal evidence from survey respondents cited a soft patch for client demand, partly linked to uncertainty across manufacturing supply chains and concerns about the global trade outlook. There were also some reports that adverse weather conditions had disrupted production schedules in February.
Despite a slowdown in production and new order growth, latest data signalled another solid upturn in manufacturing employment. Moreover, input buying continued to rise at a relatively strong pace in February, which added to signs that manufacturers remain firmly in expansion mode.
Meanwhile, input price inflation eased for the fourth month running and reached its lowest since August 2017. Survey respondents still noted that trade tariffs had pushed up the cost of imported materials, although there were some reports that prices charged by domestic steel producers had begun to moderate.
Tim Moore, Associate Director at IHS Markit:
Historical comparisons suggest the latest survey data are indicative of an underlying economic growth rate of around 2.5% annualized, although the PMI is designed to monitor private sector companies so the impact of the government shutdown may not be fully captured.
Although output across the eurozone private sector increased at a slightly faster pace in February, the rate of expansion remained muted. Moreover, the manufacturing sector weighed on overall economic performance, falling into contraction during the month.
The IHS Markit Eurozone Composite PMI® posted 51.4 in February, up from 51.0 in January and the highest in three months, according to the preliminary ‘flash’ reading. Despite quickening from the five-and-a-half year low seen at the start of the year, the rate of expansion remained modest.
Overall growth was centred on the service sector where activity also rose at the fastest pace in three months amid an improving picture in Germany and stabilisation in France. On the other hand, euro area manufacturing production decreased for the first time since June 2013.
While business activity rose at a faster pace, there remained signs of demand weakness as new orders dipped for the second month running. As with output, the manufacturing sector was the main source of weakness in new business. Manufacturing new orders decreased to the greatest extent in almost six years, with new export orders also falling at a faster pace than in January.
Employment remained a bright spot in February, in spite of reductions in both new orders and outstanding business. Staffing levels increased at a solid pace that was faster than at the start of the year. The rate of job creation quickened in the service sector and held steady in manufacturing.
Data on business sentiment also provided cause for optimism, with confidence regarding the 12-month outlook at a four-month high. Optimism dipped in the manufacturing sector, however.
There were signs of inflationary pressures waning midway through the first quarter of the year. The rate of input cost inflation softened for the fourth month running and was the weakest for a year-and-a-half. Output prices also rose at the slowest pace in 18 months. Softer inflation was registered across both monitored sectors.
The divergence in performance between the manufacturing and service sectors in February was most evident in Germany. Service providers in the euro area’s largest economy posted a marked and accelerated rise in activity on the back of a pick-up in new business growth. On the other hand, industry moved into contraction territory, with output down for the first time in almost six years and new orders decreasing sharply amid continued reports of issues in the auto sector.
There were signs of stabilisation in France despite reports of lingering disruption caused by the ‘yellow vest’ protests. Services activity decreased only fractionally, while manufacturing output stabilised following two months of decline. Outside the two largest eurozone economies output growth was only modest, slowing for the second month running to the weakest since November 2013. Rates of expansion eased across both manufacturing and services.
The Eurozone economy remained close to stagnation in February. The flash PMI lifted only slightly higher during the month, continuing to indicate one of the weakest rates of expansion since 2014. The survey data suggest that GDP may struggle to rise by much more than 0.1% in the first quarter. (…)
The weakness is being led by manufacturing, which has now entered its first downturn since mid-2013. With factory order books deteriorating at an increased rate, the rate of contraction in the goods producing sector will likely worsen in coming months. (…)
- Flash Japan Manufacturing PMI® falls to 32-month low of 48.5 in February (from 50.3 in Jan).
- Deterioration in manufacturing sector reflects stronger falls in production and new orders.
- Future output expectations turn negative for the first time since November 2012.
Survey data for Japan’s manufacturing sector ebbed into negative territory in February, reflecting sharper reductions in demand and production. Although the initial Q4 estimate revealed a bounce back in economic activity, the PMI suggests underlying business conditions are unfavourable. This was further highlighted by output expectations turning negative for the first time in over six years, which comes as no surprise given the international headwinds Japanese manufacturers are facing such as a China slowdown and the global trade cycle losing further steam. Unless service sector activity can offset manufacturing weakness, the chance of Japan entering a recession in 2019 looks set to rise.
RECESSION WATCH
Please note that due to the recent government shutdown, data for three US LEI components – manufacturers’ new orders for consumer goods and materials, manufacturers’ new orders for nondefense capital goods excluding aircraft and building permits – were not available for several of the recent months. The Conference Board has used its standard procedure of statistical imputations to fill in the missing data in order to publish a preliminary Leading Economic Index. The Conference Board will be issuing an interim release on March 4th, once these data are published.
Trump Administration Cuts Off Talks With California Over Fuel Standards The Trump administration said it would cut California out of its effort to craft new efficiency rules for cars and trucks, the latest in a series of confrontations between Washington and Sacramento that now threatens to destabilize one of the country’s biggest industries.
Bank of Canada Says Timing of Rate Rises Uncertain Central bank governor says Canada’s labor market is strong, but the trade outlook is clouded with risks
Bank of Canada governor Stephen Poloz said Thursday that interest rates will need to move higher to keep inflation in check, but the timing of future increases remains unclear as policy makers grapple with mixed messages about the country’s economic outlook.
Mr. Poloz said Canada’s labor market remains strong, with encouraging signs on wage growth outside of the country’s energy-producing regions, where activity has been weighed down by low oil prices. However, the central bank governor said risks related to global trade policies appear to be hurting investment plans in Canada and elsewhere.
“We’ve been at the same interest rate since last October precisely because the data have been giving us some mixed messages,” Mr. Poloz said during a press conference in Montreal. (…)
In a speech to a Montreal business audience on Thursday, Mr. Poloz reiterated the view that rates will need to move toward a neutral range, which the central bank has estimated at 2.5% to 3.5%. (…) “The path back to that neutral range is highly uncertain,” Mr. Poloz said. “We will watch data as they come in, and use judgment to deal with the uncertainties and manage the associated risks.” (…)
EARNINGS WATCH
After 434 reports, the beat rate is 69%, the surprise factor +3.0% and earnings estimates +16.3%. Q1’19 earnings now seen down 0.7% (-0.1% ex-Energy).
Trailing EPS are $162.75. The Rule of 20 P/E is 19.3 at today’s pre-opening.
Kraft Heinz Divulges SEC Investigation, Swings to Loss Kraft Heinz wrote down the value of its Kraft and Oscar Mayer brands by $15.4 billion, disclosed a federal investigation and slashed its dividend.
(…) Kraft Heinz said it faced unexpectedly higher costs last year, and it has seen significant pressure on the value of its brands since its $49 billion merger in 2015. The write-down caused Kraft Heinz to swing to a fourth-quarter loss, marking a striking reversal after several years of radical cost-management efforts and higher profit margins that were seen as a model for the packaged-food industry. (…)
Kraft Heinz Chief Financial Officer David Knopf said the company is considering selling some brands that have “no clear path to competitive advantage” or have low profit margins. He said doing so could better position Kraft Heinz to merge with another food maker. (…)
It’s much easier to cut costs than to run a business for real top line growth.
3 thoughts on “THE DAILY EDGE: 22 FEBRUARY 2019: Flash PMIs”
ZBB (zero-based budgeting (ZBB), used to keep costs low and profit margins high)
“KHC’s EBITDA has not grown over the last five years, its revenue has declined, and its balance sheet has ballooned,” said analysts at JP Morgan. “This is not an ideal progression of financial metrics.”
Unilever, Mondelez International, Diageo and Kellogg are among companies that have used ZBB, though none has seen as bad results as Kraft’s.
https://www.reuters.com/article/us-consumer-kraft-heinz/kraft-heinz-problems-shine-light-on-controversial-budget-tool-idUSKCN1QB2CF
Can’t resist looking at ZBB and reading hype from market gurus. ZBB, along with share-buy-backs are stripping away future growth. Here are some random old clips from a recent surf:
ZBB has appeared – or reappeared – on the agendas of many consumer goods companies in recent years, including Unilever, Coca-Cola, Kellogg’s and Mondelez. Private equity firms like 3G Capital, which is involved in Anheuser- Busch InBev, Kraft Heinz and Burger King, are also heavily pushing for ZBB across their investments.
Berkshire Hathaway (BRK-B) and 3G Capital took Heinz private in 2013, and since then, it applied many transformational changes at Heinz. 3G Capital is a supporter of ZBB (zero-based budgeting), which helps the companies to reduce the costs. 3G Capital implemented a ZBB approach to Heinz. ZBB starts from zero-base, and every functional area is analyzed for its cost. Budgets are then prepared for the coming period by calculating a cost for each organizational function irrespective of the budget is higher or lower than the previous cost.
In 2013, Berkshire Hathaway, in partnership with 3G Capital, acquired Heinz. 3G management with its deep partner involvement improved the EBITDA at Heinz within a few quarters by 35%, according to Forbes.
Moving forward with Berkshire Hathaway?
With their strong track record of shareholder value creation, Berkshire Hathaway and 3G Capital may become the perfect partners for Kraft Heinz.
Herein lie Kraft Heinz riddle: where, oh where, is the emphasis on the all-important consumer and brand value? No apparent forward-looking strategies or recent actions by the new management team appear to support the business model, but instead seem to contradict it. The singular focus of 3G has been on cost cutting, such as the reduction of 2,600 jobs and the closure of 7 plants. Plants were not the only items that didn’t make the zero-based-budget cut. A recent moratorium on free office snacks and budgeting of office supplies has left employees stealing hotel pens and devoid of complimentary cheese sticks. Clearly the era of fun associated with Kraft Heinz culture has ended as 3G ushers in a new era of “no nonsense” packaged food. While 3G has considerable expertise in acquiring organizations and increasing profitability through aggressive cost reforms, it risks further alienating the customers so key to its success. For an organization purportedly focused on “customer first” and “innovation”, the new focus should include strategic initiatives that will carry out these core values and address the response to shifting consumer preference. While EBITDA has recently benefited from the dramatic cost extractions, it is questionable how a CPG can deliver long-term value when the focus on consumers, employees, and products are secondary to searching the proverbial couch cushions for spare change.
Has the 3G acquisition created an identity crisis for Kraft Heinz?
In closing:
… For example, in 2018 InBev CEO Carlos Brito told investors that the new drinks it introduced into the U.S. — like Bud Light Orange — were not enough to offset losses in bigger selling brands like Budweiser, according to the Journal.
Now ZBB is dying off. According to Deloitte, in 2017, 16% of U.S. companies planned to use ZBB — over the next two years only 7% expect to use it.
Meanwhile, Buffett is paying a price for his faith in 3G and its obsession with ZBB. Barclays lowered its Berkshire operating earnings per A share estimate a whopping 51% from $3,522 to $1,726.
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