U.S. Durable Goods Orders’ Gain Moderates in June
Manufacturers’ orders for durable goods improved 0.8% (29.3% y/y) during June following a 3.2% May increase, revised from 2.3%. A 2.1% rise had been expected in the Action Economics Forecast Survey.
A 2.1% increase (59.4% y/) in transportation equipment orders accounted for much of last month’s increase. The gain was driven by a surge in nondefense aircraft orders, but orders for motor vehicles & parts eased 0.3% (+5.4% y/y). Excluding transportation, orders improved 0.3% (19.6% y/y) following a 0.5% May rise, revised from 0.3%.
Nondefense capital goods orders excluding aircraft rose 0.5% (18.3% y/y) last month, the same as in May which was revised from -0.1%. (…)
Unfilled orders for durable goods rose 0.9% both m/m and y/y. Order backlogs excluding transportation rose 1.4% (13.3% y/y).
Inventories of durable goods rose 0.9% (4.5% y/y) in June for the second straight month. Excluding transportation, inventories also rose 0.9% (4.8% y/y) after a 1.2% rise.
Total new orders are up at a 13.9% annualized rate in Q2. Non-def. ex-air: +15.6% a.r. (last 2 months: +6.1% a.r.). Inventories are barely keeping pace with unfilled orders.
Total new orders are 11.6% above Feb. 2020. Capex orders: +17.2% to their highest level since at least 1993.
Goldman on autos:
-
The most recent auto production schedules were revised down sharply in July, and recent comments from auto companies suggest that semiconductor shortages will continue to constrain production in 2021H2 and possibly into 2022. As a result, we now expect that new car inventories will not start to recover until September, although used car inventories appear to have bottomed in April.
-
Declines in auction prices suggest that used car consumer prices probably peaked in June, but we expect that new car prices will rise in coming months as inventories continue to tighten. We estimate that the boost to year-on-year core PCE inflation from used and new car price increases will fall from over 70bp in June to around 50bp by end-2021, before turning to a 30bp drag in mid-2022.
Apple says chip shortage reaches iPhone, growth forecast slows
Apple Inc (AAPL.O) said on Tuesday that a global chip shortage that has bit into its ability to sell Macs and iPads will start to affect iPhone production and forecasted slowing revenue growth, sending its shares lower.
Apple executives said revenue for the current fiscal fourth quarter will grow by double-digits but be below the 36.4% growth rate in the just-ended third quarter. Growth will also slow in Apple’s closely watched services business, they said.
In a conference call with investors, Apple executives also said that while the impact of the chip shortage was less severe than feared in the third quarter, it will get worse in the fourth, extending to iPhone production. (…)
Workers Are Gaining at the Expense of Shareholders The supply of labor will be constrained for years to come, eating into profits unless companies can find a way to boost productivity.
(…) History shows that pandemics curb labor supplies and push real wages higher while real interest rates and, therefore, returns on capital are depressed. A research paper by the economist at Federal Reserve Bank of San Francisco titled “Longer-Run Economic Consequences of Pandemics” focused on 15 major pandemics, starting with the Black Death in the 14th century, when more than 100 million people, or 30% to 60% of Europe’s population, died. The economic effects generally persisted for 40 years after major pandemics.
The reason why the aftermath of pandemics push up real wages is because of the shortage of labor. And the reason why real interest rates decline is because there is an excess of capital per active worker and saving rates rise as survivors rebuild assets and prepare for future crises. Pandemics kill people but don’t destroy plant and equipment.
Only 0.2% of the U.S. population has died from Covid-19, but many have dropped out of the labor force as the pandemic made them rethink their lifestyles. (…)
In April, 19.5% of the population was retired, 1.6 million more than if the already-surging number of postwar babies had continued its pre-Covid-19 trend. Also, wages are rising, especially for those in low-paying industries. In June, employees in leisure and hospitality who only earn 46% of the average private sector weekly wage saw their compensation jump jumped 10% from a year earlier, according to the Labor Department. (…)
- Walmart, the nation’s largest private employer, announced it’ll pay 100% of employees’ college tuition and books at a group of schools, as part of a $1 billion, five-year investment in career-driven training, per USA Today. (Via Axios)
- US law firms offer bonuses of up to $250,000 in battle for staff Deals to retain and recruit lawyers hit new highs as M&A fuels demand for services
U.S. Consumer Confidence Is Unexpectedly Strong During July
The Conference Board Consumer Confidence Index edged 0.2% higher (40.8% y/y) this month to 129.1 from 128.9 in June, revised from 127.3. A decline to 124.0 had been expected in the Action Economics Forecast Survey. The confidence index stood at the highest level since February 2020, up from the April 2020 low of 85.7.
The Present Situation index improved 0.4% (67.2% y/y) to 160.3 in July from 159.6 in June, revised from 157.7. The Consumer Expectations reading slipped 0.1% (+21.9% y/y) to 108.4 from 108.5 in June, revised from 107.0.
The jobs gap, representing the difference between respondents indicating that jobs are plentiful and those saying jobs are hard to get, improved to a near-record 44.4% from 44.2% in June, revised from 43.5%. This series has had a 75% correlation with the unemployment rate over the last ten years. The jobs plentiful measure edged up this month after surging in June, also to a near-record high. Remaining near the record low was the jobs hard-to-get index.
Business conditions were perceived as good by an increased 26.4% of respondents in July. Expectations that business conditions would improve in six months eased to 33.4%. More jobs were expected in six months by a 27.7% of respondents, down from 29.6% twelve months ago. The percentage expecting income to increase rose to 20.6%, the most since February of last year.
The expected inflation rate in twelve months eased to 6.6% after surging to 6.7% last month. That remained up from a 4.4% low in January of last year. The share of respondents planning to buy a new home within six months eased to 0.6% and remained down from 2.0% last June. Those planning to buy a major appliance surged to 56.8%, the highest level since December 2017 and up from 44.3% in May.
Confidence of individuals under 35 years fell sharply m/m, but the index remained up by roughly one-third y/y. Confidence amongst individuals 55 and over surged to a pre-pandemic high. Confidence amongst those between 35 and 54 rose modestly m/m, but also was near the pre-pandemic high.
- A 21-year high:
Data: The Conference Board; Chart: Axios Visuals
- Some commentaries from yesterday’s Dallas Fed’s Texas Service Sector Outlook Survey
- Competition for talent has been increasing this year and is resulting in additional bonuses and now increased base compensation for our nonpartner professionals
- This real estate market is the hottest we have ever seen, and there is no sign that it will slow down in the near future.
- Inflation! Inflation! Inflation! General labor [wage] is up 20 percent and tough to get.
- We are still struggling to find service associates and culinary staff despite significant wage rate increases and hiring and retention bonuses
- We are hiring a few employees after the federal [unemployment] subsidy ended but continue to lose others oftentimes because they say they don’t want to work or decide to attend a social function and walk off. They know they can get hired again by walking down the street. Hire three, lose four. Hire two, lose one. I have never seen anything like this in my almost-40 years of working. We continue to turn away business due to lack of employees. Raw product prices continue to significantly increase. It is difficult to raise prices, but we will have to soon
- We had hoped that labor tightness would have corrected a bit, but that does not seem to be the case.
- Consumers’ intention to spend has moderately improved over recent weeks after peaking in late March 2021. (@benbreitholtz)
- The Chase spending tracker is hanging in through July 23rd but no more:
- July data is pointing to a weak Control Sales:
EARNINGS WATCH
We now have 124 reports in, an 89% beat rate and a +17.3% surprise factor. Seven of the eleven sectors are surprising by more than 10%.
Trailing EPS are now $178.37 and full year 2021 estimates are $194.52. 2022e: $214.93.
- Apple, Alphabet and Microsoft rake in $57bn of quarterly profits Big Tech groups prosper as executives say pandemic-era shift to digital is here to stay
COVID-19
- From CalculatedRisk:
- The 7-day average cases is the highest since April 23rd.
- The 7-day average hospitalizations is the highest since May 15th.
- From Bloomberg:
Meanwhile:
China State Media Seeks to Calm Investor Nerves After Stock Rout
China health stocks slammed as investors fear regulators’ diagnosis Medical expenses are one of three key areas of living costs seen as Beijing’s targets for social change, heightening expectations that authorities will make healthcare their next focus of market reform.
Chinese Property Titan Teeters as Investor Confidence Fades
(…) On Monday, S&P Global Ratings downgraded Evergrande two notches to B-, citing a “severe decline in profitability” as the company cut prices of its apartments to boost sales.
Evergrande’s stock tumbled 13% on Tuesday after the company scrapped plans for a special dividend, and has declined 61% in the year to date, according to FactSet.
(…) analysts say that Evergrande and its peers have found other ways to fund themselves—in effect borrowing from suppliers, customers or business partners.
Evergrande’s Hengda unit has issued growing amounts of commercial bills to suppliers, which don’t count toward headline debt figures. It had the equivalent of $31.7 billion of bills outstanding as of end-2020, filings show. (…)
(…) China Evergrande is quickly becoming the biggest financial worry in a nation with no shortage of financial worries. Even as a selloff in Chinese technology stocks grabs global attention, China hands are anxiously watching Evergrande. From Hong Kong to New York, the same question keeps coming up: Just how bad could this get?
The short answer: very bad. (…)
Time is short. Next March, only eight months from now, $2 billion of Evergrande’s outstanding bonds come due, followed by $1.45 billion the following month. (…)
With $300 billion in liabilities and links to myriad banks, the world’s most-indebted developer would send shock waves through the financial system and the broader economy should calamity strike. The reverberations would also be felt by many millions of Chinese homeowners. (…)
Whether key Chinese companies are still considered too big to fail — and what happens if they’re not — has become a prickly question for global investors. (…)
Three banks with combined exposure to Evergrande of $7.1 billion recently decided not to renew some loans when they mature this year. Major onshore creditors including China Minsheng Banking Corp. plan to gather soon to discuss what to do about their Evergrande loans and are awaiting guidance from authorities, according to a person familiar with the plans.
And just last week, at least four major Hong Kong banks stopped extending mortgages for two Evergrande apartment developments in the former British colony, concerned that Evergrande lacks liquidity to finish the construction. The banks subsequently reconsidered after the Hong Kong Monetary Authority questioned the moves, people familiar said. (…)
The company has some $80 billion worth of equity in non-property businesses, according to Agnes Wong, a Hong Kong-based analyst at BNP Paribas SA.
Evergrande has already raised nearly $8 billion this year, selling stakes in its electric vehicle unit, its internet operation, a Hangzhou property firm and online platform FCB Group. That’s helped the firm cut debt by about 20% to 570 billion yuan ($88 billion) as of the end of June. (…)
In the end, Evergrande’s fate may lie with Beijing, or with provincial governments or state-owned enterprises that could step in with some sort of lifeline or forced restructuring. (…)
Still, there are reasons to think Beijing or other state entities or provinces won’t let Evergrande completely fail. Just last week, the vice mayor of a city in northern China urged state enterprises to boost their stakes in Shengjing Bank, in which Evergrande holds a 36% stake.
In many ways, the company has made itself too big to fail — literally “ever grande” — with its massive land holdings, and with real estate now accounting for 13% of the economy from just 5% in 1995, according to Marc Rubinstein, a former hedge fund manager who now writes about finance. (…)