VIPs

• Over the last week, IHS Markit has lowered its Q3 GDP estimate (as has the Atlanta Fed), from 3.6% to 1.5%, a far cry from Bloomberg’s 5.0%; driving the downgrade is a stall in private demand, which is working against increasing government spending and inventories
• In both the manufacturing and services sectors, the Backlog-Employment Spread, per IHS Markit, is at a historically high z-score; although both are likely to continue seeing wage pressures, the issue is most acute in manufacturing, a function of its innate cyclical nature
• The National Association of Credit Management found more firms expanding their credit lines in September in order to stockpile and address supply chain stability concerns; though higher leverage may be needed to weather higher costs, it also creates added right-tail risks

What has 12 million monthly shoppers, generated savings of more than $8.7 billion and been in business for 21 years? If you said Slickdeals.net, you know your shopping sites. Slickdeals is a social platform for shopping that harnesses the power of crowdsourcing. Every deal is sourced and shared by real people. The Slickdeals online community and team of skilled editors do their level best to uncover great products and layers of savings. In 2019, CNBC picked up a Slickdeals-researched story on rock star household budget busters. It asked 2,000 adults about their budgeting habits and weekly spending. The top 10 budget killers were as follows (percent of respondents): online shopping (40%), grocery shopping (39%), subscription services (37%), technology products (36%), buying lunch everyday (35%), household essentials (32%), coffee (32%), food delivery (32%), gym memberships (30%), entertainment like movies and concerts (29%).

Black Friday has been falling earlier on the calendar for years. This year, vendors have pre-warned shoppers that the wait will be so long it will likely spoil the holidays.  Shopping sites such as Slickdeals will thus attract more clicks in advance. Would-be shoppers are trying to safeguard their budgets. The same cannot be said for businesses across the U.S. economy.

Faced with higher costs beyond their control, many firms have likely burned much of the midnight oil (that’s in short supply) in their financial planning and analysis (FP&A) departments. One anonymous source from a long-standing wholesaler/distributor to a regional supermarket shared with Dr. Gates that his establishment has gone through three rewrites of its budget and not one has yet been approved. This is the first time this has ever happened in the company’s 35-year history. Translation: Hard decisions are coming down the line on the cost side.

Not every corporation is faced with the same circumstances. Some are even resorting to expanding budgets through increased borrowing to compete in the present economic environment. The September National Association of Credit Management’s (NACM) Credit Managers’ Index explained that companies seem to be ordering more than is normal, and thereby requiring additional credit, adding that “although an increase in demand could be the reason, businesses are likely stockpiling materials due to concerns about the stability of supply chains.”

As noted yesterday, it’s taking longer and longer to source said materials. This grabby quality could lead to too much supply against the backdrop of slowing demand. In fact, the experts at IHS Markit hinted at just that in their latest real-time tracking of the U.S. economy. Over the last week, IHS Markit economists (and those, we would add, at the Atlanta Fed), have been taking down their estimate for third-quarter gross domestic product (GDP) from 3.6% on September 30 to 1.5% on October 5. Their latest GDP tracking is a far cry from Bloomberg’s 5.0% consensus forecast.

In short, a stall in private demand has generated IHS’s downgrade. Household spending, business investment and international trade look to have amalgamated to a collective drag on economic activity that could fail to offset the expansion in government spending during the quarter. Inventories is the lone bright spot in the mix, accounting for more than the entire gain in GDP. But this asterisk is no cause for celebration.

When supply drives the GDP bus and final demand shifts into reverse (even if slightly) in a given quarter, it creates a reflex action by Street economists: slash the next quarter’s growth. That’s how you get a slowdown narrative to manifest. Watch for the consensus to start chasing third-quarter growth estimates down, then follow through with cuts to the fourth quarter after the GDP numbers go public on October 28.

We highlight this risk three weeks out because it feeds the outlook for the near-term revenue environment once we get into the third quarter earnings season. While revenues are always beyond a company’s control, wages are a constant operating cost that can be adjusted on the fly, either up or down.

That brings us to the two charts du jour. Both illustrate the same two metrics — one from the view of the manufacturing sector and the other from the perspective of the broader service sector. The two series from the National Association of Credit Management (NACM) depict the demand for new credit and proxy oscillations of movements in the borrowing department. We chose IHS Markit business surveys instead of those from the Institute for Supply Management (ISM) because the coverage is wider by firm size and the access reaches into C-suites. We applied our favorite normalizer – the z-score, or deviation from the mean adjusted for volatility — to level the playing field.

What we discovered was that both manufacturing and service sectors are facing the same issues regarding work piling up and not enough warm bodies to fill positions to get tasks done. The situation is more acute in the industrial sector so these cyclical industries will face more significant wage pressures. But the divergence is similarly substantial implying bigger carrots may need to be dangled to whittle down inboxes.

One way to combat a budget bust is to stare it down and lever up, which the factory sector will eagerly embrace. Service industries’ step down the production chain in wholesaling; transportation and warehousing shouldn’t be too far behind. Higher leverage will be needed to weather higher costs in the most cyclical parts of the economy. Got right tail problems?

VIPs

• Per ISM, September’s 92-day average lead time for production materials was the highest since October 1974; deliveries also slowed after three months of progress, with more than 50% of respondents reporting slower deliveries for just the seventh time since the mid-1970s
• Crude oil spot prices have seen YoY gains of more than 60% for the last eight months, echoing the run-up to the 2008 financial crisis; should persistence extend to nine months, the comparison to 1974, which saw 12 months north of 60% YoY gains, will be more relevant
• Bad News Heard: Energy Crisis has barely registered in recent years of UMich’s Survey of Consumers; while Google searches for “energy crisis” in the U.S. were at a 19 out of 100 in October, worldwide interest hit 100, a sign that an energy crisis is underpriced here at home

What do you get when you throw together an airport restaurant cook in an Amsterdam police traffic warden? In the world of pop rock jams, a legend. “Get Ready for This” from the Dutch techno, dance-pop duo 2 Unlimited. Rapper Ray Slijngaard and vocalist Anita Doth didn’t know what hit them in the aftermath of the song’s September 1991 release. Sports fans worldwide react as Pavlov predicted the well-trained would when they hear this call to get on their feet to pump up their teams. “Get Ready for This” peaked in the Top 10 in Australia, Belgium, Canada, Ireland, the Netherlands, Spain, the U.K. and Zimbabwe. The success of the single paved the way for the 1992 album Get Ready to sell three million copies worldwide. The movie and television business also grabbed this intellectual property for such big screen flicks as Space Jam, Flubber and How to Eat Fried Worms and for such small screen shows as Friends, The Big Bang Theory and Brooklyn Nine-Nine.

“Y’all ready for this?” This iconic hook applies to today’s economy. Are we reliving the 1970s? Today’s left chart factors lag into the inflation equation using upstream lead time. Over history, when it’s taken longer to source inputs, the most cyclical part of inflation — durable goods — has run hotter. Conversely, the supply chain’s speeding up created an environment for durable goods deflation from 1995 until COVID-19.

We highlight durable goods pricing because it’s key to determining whether inflation will be transitory. Federal Reserve Chair Jerome Powell singled this out in his Jackson Hole speech (bolding ours): “Booming demand for goods and the strength and speed of the reopening have led to shortages and bottlenecks, leaving the COVID-constrained supply side unable to keep up. The result has been elevated inflation in durable goods—a sector that has experienced an annual inflation rate well below zero over the past quarter century.”

How quickly a different sort of time flies considering Powell’s odds of renomination were closing in on their peak of September 12^th’s 92%; as the insider trading scandal has erupted, his odds have fallen to 63% according to PredictIt. But we digress…

September’s 92-day average lead time for production materials was the highest since October 1974 (light blue line), rivaling the episode with the longest lead times in postwar history. Over the 17-month period from June 1973 to October 1974, this buried nugget from the Institute for Supply Management (ISM) manufacturing survey ran at or above the September 2021 level. A year and a half? Sorry folks, that’s not transitory.

The following excerpt from last Friday’s ISM report sheds more light on the supply chain backdrop: It noted that deliveries slowed at a faster rate compared to the previous month, reversing a three-month trend of improvement. Suppliers continued to have difficulties in meeting demand. Five factors were listed including (1) ongoing supplier hiring challenges, (2) extended raw materials lead times at all tiers, (3) increasing levels of input material shortages, (4) stubbornly high prices and (5) inconsistent transportation availability. Rewind a few words. What’s a synonym for “stubborn”? “Persistent.” ISM said it.

Moreover, in September, the percentage of respondents indicating slower supplier delivery times broke above 50% for only the seventh time since the mid-1970s, a 99^th percentile event (orange line). Most of these outliers have occurred in a post-pandemic world; we can add the current year’s March, April, May and June to the tally.

Today’s ISM Services report also informs this theme from the broader economy’s vista. The share of participants observing worsening vendor performance has only breached the 50% mark once, during the height of COVID, at 58.3% in April 2020 (green line). Should this metric reach a simple majority again in September, it would be just the second time since the survey’s 1997 inception that breadth was this intense with reference to whole-economy bottlenecks. The difference between 2020 and 2021? Last year was involuntary. This year is not.

History doesn’t repeat itself, but it can rhyme. You can’t make comparisons to the 1970s without incorporating energy prices into the discussion. The Arab oil embargo was the root cause of the 1973-74 oil price shock. Today’s situation is different. But the parallel of persistence would marry the two episodes.

For the entire year of 1974, year-over-year (YoY) gains in spot crude oil prices exceeded 60% for 12 straight months. This duration was duplicated again during the 1979 oil embargo. The current episode has seen the 60% mark exceeded for eight months (including October). An eight-month stretch can be compared more closely to the run-up in oil prices in 2008 during the Great Recession. Should the persistence grow to nine months, then – and only then – can this oil chapter be compared to those of the 1970s.

“Y’all ready for this?” As you see on today’s right chart, U.S. households DO NOT have an energy crisis on their collective radar screens. Bad news heard about an energy crisis barely registered a whisper for years, according to the University of Michigan consumer survey (blue line). Maybe that’s because it’s not trending here. Google Trends U.S. search interest for the term ‘energy crisis’ registered a modest 19 so far in October. Widen the view and worldwide search interest spiked to 100 this month, north of that seen in the Great Recession. Is an energy crisis underpriced here at home? You bet.

VIPs

• At a seasonally adjusted annualized rate of $787 billion, residential construction in August hit its highest print since at least 1993; while housing prices rose 23% YoY to a median $342,350 in July, per the Atlanta Fed, median incomes of $67,031 are up just 3% YoY
• Nonresidential construction has fallen for three consecutive months, from a $460 billion SAAR in May to $456 billion in August; similarly, the Dodge Construction Momentum Index also fell for a third straight month in August as nonresidential demand remains weak
• Though August’s consumer spending rose 0.8% MoM, this gain was offset by both inflation and the 0.4% downward revision to July’s -0.1% print; meanwhile, the savings rate fell to 9.4% in August from July’s 10.1% as inflation drives the increase in nominal spending

As one Twitter follower, veiled in anonymity as sell-siders must be, sweetly reminisced, “His metaphors and jokes kept me going through 6-7 meetings a day with him. I never wrote them down as I always expected to hear them again on our next trip. I’ll miss him dearly.” Born July 18, 1961, Tobias turned 60 forty-four days before being struck at 6:03 am on September 1st on his way to synagogue. Of the memories shared of his co-workers, which I’m the closest description-wise despite never having worked together at Citi (though he did right before COVID offer to spearhead a Senatorial-run fund), the most repeated characteristic was “self-deprecating.” It was what we did not see in Bloomberg and CNBC snippets that were Tobias’ essence – his deep faith that introduced me to so many kosher haunts in New York I’ve lost count, his extraordinary love and devotion to his family, from wife to children to especially his grandchildren, to his not politically-correct jokes that were somehow still harmless and yes, to his incessant self-deprecation.

It’s difficult to transition to the nuts and bolts of economics and markets as I write this, but Tobias was a consummate and consistent professional producer of stellar analysis and would expect nothing less. With that as shaky preamble, in hard numbers, the highly visible construction sector directly contributes less than 5% of GDP. While not graphed on a quarterly basis in today’s charts, for context, its recent GDP input peaked at 4.7% in 2007 as homebuilders over their skis frantically tried to pull back projects before the bottom fell out. Five years on, the sector had atrophied to 3.4% of GDP and then recovered to 4.3% to end 2020. Since the pandemic hit, however, construction has splintered into the ‘have’ of residential and the ‘have not’ of nonresidential. We’ve touched on this disconnect a few times in the post-February 2020 era and have detected the slightest of shifts in the interim. To preface the latest update, we should remind readers add that the U.S. and global economy were slowing prior to COVID. This is amply reflected in nonresidential’s peak $582 billion contribution seasonally adjusted annualized rate (SAAR) in 2019’s third quarter; it subsequently bottomed at $456 billion in 2020’s final three months and stabilized at $458 billion in this year’s second quarter.

We wish we could report vast improvement on both the housing and non-housing fronts. Alas, it’s still the case that only residential is on fire. August’s print of a $787 billion SAAR is the highest since at least 1993, when Census first started keeping records of the broken-out series (blue line). Backing these nosebleed levels, it’s difficult to see how residential could be weak when, according to the Atlanta Fed — using a three-month average of median home prices from CoreLogic Inc. and the Census’ median household incomes — July median home prices rose to $342,350, up 23% from the year before, vis-à-vis median incomes of $67,031, up 3%. Little wonder those who see it’s a good time to buy a house compared to a year ago has been halved per Fannie Mae data.

Nonresidential remains the counternarrative – it’s fallen sequentially for three months from a $460 billion SAAR rate in May to August’s $456 billion SAAR (red line). While not big monthly moves, neither are they in the desired direction. There is, in so many words, little faith in long-term economic growth prospects in the U.S. even as housing speculation continues to run off the rails. Counting cranes is not the spectator sport it was a few years ago. Punctuating the slowdown, the Dodge Construction Momentum Index, which leads nonresidential by 12 months (yellow line), fell for a third straight month in August. Optimistically, Dodge ventured that, “Demand for nonresidential buildings remains weak, but the recent rising number of new COVID cases should not cause the same amount of disruption as previous waves did.”

We hope Dodge is right. We suspect the bigger factor is the lack of further stimulus. The fact is, U.S. households’ wherewithal to continue driving the economy is what’s relevant above all other factors given consumption fuels two-thirds of the GDP train’s engine. To that end, Friday’s August Personal Income and Spending data might have gone unnoticed given spending ticked up by 0.8%, a big departure from July’s -0.1% reading. But then QI friend Peter Boockvar made the following observation that could not be ignored: “Spending was up by .8% month-over-month, one tenth more than expected but completely offset and then some by the four-tenths downward revision to July. Thus, ALL of the nominal spending increase in July and August was driven by inflation.”

As if not sufficiently daunting, the saving rate delved back into negative territory, to 9.4% versus July’s 10.1%. A bit of perspective – the rate was 19.9% in January and hit a post-pandemic high of 24.8% in May 2020. The best color: the dollar level of savings slipped below its pre-pandemic level after a record 43.2% of U.S. GDP was direct (deposit)-injected into the economy’s veins. We concur with Boockvar’s bottom line that, “higher inflation is eating into income and is about fully explaining the rise in (nominal) spending.” Adjust it all for inflation, as we did in today’s left chart, and there’s not much to be said. For today, as Tuvia would have expected, we’ve also had our say. RIP, my dear, dear friend.

VIPs

• Though the child tax credit has boosted spending through a $550 monthly boost, BofA credit card data suggests the unemployed cohort is pulling back; though a backlog is likely keeping PUA claims elevated, the cohort has nearly vanished from their May peak of 1.35 million
• Weekly initial state jobless claims have now risen for three straight weeks, a streak not seen since April 2020; a model from the St. Louis Fed using data from Homebase suggests that hiring could’ve been negative in September, with a seasonally adjusted decline of 810,000
• Per ISM, the Chicago PMI saw Backlogs decline in September while its Employment Index rose; the Backlog-Employment spread is now down from August’s record high of 30.8 to a five-month low of 13.1, an encouraging sign that the labor shortage is starting to see relief

Can you imagine rubbing horsehair in between your teeth? What a distasteful thought. Thank heavens for Dr. Levi Spear Parmly for liberating our oral health with something much lovelier. In 1815, the New Orleans dentist and author of A Practical Guide to the Management of Teeth invented a thin, waxen silk thread to help his grateful patients clean between their teeth. All of that fresh breath emanating from the French Quarter was a minor sensation, sweeping the country. Commercialization was inevitable. In 1882, the Codman and Shurtleft Company began to manufacture unwaxed silk dental floss. Why a patent was not secured is a mystery. New Jersey-based Johnson & Johnson tended to that task for its own benefit some 16 years on patenting a dental floss made from the same silk materials doctors used to stitch up boo-boos, big and small. The pesky tendency of silk to shred brought about the biggest innovation – nylon, which was conveniently waxed to ease the process.

Today, most of us Glide through this necessary routine to remove plaque from places our toothbrushes can’t Reach, thus preventing the buildup bacteria that wears on your teeth’s enamel and can even end in gum disease, which has to be ickier than horsehair. On the subject of horses…U.S. politicians are once again at a stalemate about the nation’s unhealthy buildup of debt, which financial dentists attest can culminate in the loss of reserve currency status. We wish we could say that nobility or integrity was driving the GOP to insist the Democrats “own” the nearly $7 trillion in debt that’s racked up since July 2019. But the fact is, there’s no lie in claiming that the two parties collectively incurred said debt.

That said, Standard & Poor’s cited the entitlement-debt disease when it downgraded the U.S. sovereign rating a decade ago amidst another debt limit skirmish. Though markets pitched a fit at that surprise, the only thing (largely unfunded) entitlement debt has done since is grow. And the GOP has a point in saying that raising the debt limit for the 79th time since 1960 will glide path passage along strict party lines of a $3.5 trillion social spending bill that, depending on whether it’s the Congressional Budget Office or Office of Management and Budget doing a rudimentary scoring of the bill could cost $5 billion or as much as $5.5 trillion over 10 years. And as every American voter knows, social spending programs, once enacted, never find their way to a grave.

If nothing else, there was some legislating on the Hill Thursday – the government shutdown was averted in the nick of time. Because most of the social spending and hard infrastructure bills are spread out over so many years, the only direct impact passage would have is making permanent cash payments of the child tax credit, which is estimated to have sent $50 billion to U.S. households since mid-July. That one line item in the proposed spending bill is $1.1 trillion. Revelations that Joe Manchin is on board for a much-slimmed down $1.5 trillion package suggest the credit in its current form would not survive.

The good news for consumption is that the average $550 monthly household budget booster via the tax credit is padding the effect of veering over the fiscal cliff. Per proprietary data via Bank of America, “the bad news is that the unemployed cohort is pulling back on spending owing to the expiration of federal unemployment insurance, particularly for the lower income cohort” (upper right chart). Thursday gave us the first glance of what the unemployment insurance ranks will soon be. Presumably, a backlog of claims to be processed is holding up the number of Pandemic Unemployment Assistance applicants (green line) given the program expired three weeks ago. But they’ve nearly vanished in the context of their May weekly peak of 1.35 million.

While state initial unemployment benefits are a pittance of their post-pandemic highs, it is notable that we’ve seen increases for three weeks running, a stretch we’ve not seen since April 2020. According to the St. Louis Fed, something could be amiss in the job market. Using scheduling software company Homebase real-time data, September hiring “could be weak or even negative in September.” Without seasonal adjustment, Homebase’s estimate is a decline of 500,000; the seasonally adjusted decline could be 810,000. While there’s “a lot of uncertainty around these figures,” the model has tracked data “quite well” through the summer.

You would have thought markets would have celebrated the implication that Jerome Powell will be quick to pull any tapering plans if such a print materializes. It’s evident, however, that the dissension within the ranks of the Democratic party preventing a Thursday vote on the bipartisan infrastructure bill and the prospect that the government could run out of money in 17 days, were perceived as a bigger threat to historically highly valued risky assets.

Overlooked in Thursday’s data were declines in the Chicago PMI backlogs (red line) and a rise in its employment index (blue line). The concerted moves pulled down the Backlog-Employment Spread from August’s record high 30.8 to a five-month low of 13.1 last month. It would appear Chi-town firms are finally able to start whittling down their logjammed inboxes by stocking up on staff, a promising sign that the labor shortage is starting to abate. With any luck, next on the docket is addressing the shortage of fiscal prudence inside the Beltway.