VIPs

• Since peaking in July 2020 at a 11.5 million SAAR, U.S. Light Vehicle Production has fallen to a 7.5 million pace, the worst since March 2020; meanwhile, October is set to mark a 6th consecutive month of falling Light Vehicle Sales, not seen since the height of the GFC
• At 0.96, the Inventories-to-Shipments Ratio for Autos is at its highest since May 2020, while the same ratio for Non-Autos has slipped from 2.4 in April to 2.0; the latest prints of the Empire State and Philly Fed Mfg. surveys confirm a rise in inventories and urge to stockpile
• Though Deloitte projects a 5% rise in holiday spending vs. 2020, the higher-income cohort plans to spend 15% more vs. 22% less by the lower-income cohort; absent a further stimulus injection, the threat of continued weakness remains due to demand being pulled forward

Tails don’t hold a candle to outliers, defined as observations that lie an abnormal distance from other values in a random sample. The key to identifying abnormality is defining normality, which involves the bell curve. In business school Statistics, outliers were living, breathing human beings – those engineering undergraduates from the Midwest who played rugby by day, partied all night, slept through their classes and could only be bothered with waking to take exams. Once the test results were announced, these outwardly seeming slouches inevitably ‘blew the curve’ and promptly fell back asleep to store energy for the long night of beer-bonging that awaited. While there was little in the way of controversy surrounding these irritants cum curve blowers, historical statisticians have long debated the deeper question of whether we’re living an outlier existence borne of no world wars since 1945. Statistically speaking, despite the uber-violent century that preceded World War II, peace would have to persist for another hundred years before our mutual existence could be classified as a historical outlier.

Conversely, weather, economic data and financial market valuations haven’t escaped outlier territory for years, which is oxymoronic. Be that as it may, Texas has frozen solid three times in the last decade tossing the notion of 100-year storms on its arse. Real yields on junk bonds out to the furthest tenor on the maturity spectrum are negative. And fiscal and monetary policy generated a flash recession that practically ended before it began inducing the biggest demand pull-forward in the history of U.S. consumption. Yesterday, QI’s Dr. Gates identified yet another outlier, illustrated in today’s charts.

To presage his finding, if you will, on October 12th, Cox Automotive Chief Economist Jonathan Smoke opined that, “It could be that October is the bottom for the sales pace, and we start to see gradual improvement – emphasis gradual – in inventory and new-vehicle sales to come.” Hurricane Ida alone should suffice in the “gradual” manifestation department. At the peril of demoting the supply chain disruption, which has undeniably harmed the U.S. auto sector more than any other within industrials, Light Vehicle Production (red line) peaked in July 2020 at an 11.5 million seasonally adjusted annualized (SAAR) rate; it has since slumped to a 7.5-million-unit pace, the lowest since March 2020’s smackdown month.

At the risk of blaspheming, there’s more to see here than a semiconductor shortage.

This is where the reality of outliers steps in. After peaking at an 18.3-million-unit SAAR this past April, the pace of sales has fallen to 12.2 million units (blue line). According to Cox’s estimates, October will mark a sixth consecutive month of declining sales, a 99.4th percentile event. We’ve only the precedents of March and April 2008 and February 2009, three months engulfed by the Great Financial Crisis (GFC).

You may recall the specter of permanent unemployment was a thing back then. We would argue that the same may be occurring right before our eyes today, obfuscated by the sound and fury of reopening and the vestiges of fiscal stimulus spending gone wild. As hinted, we will continue to work on the idea of accelerated automation rendering redundant unknown millions of U.S. jobs since COVID-19 washed ashore as companies fight to mitigate margin damage.

Broadening out, with a hat tip to Simplify’s Michael Green, the number of homes under construction is the highest since 1974. Today’s release of the latest episode of Down the Middle features a deep demographic dive with Zelman Associates’ co-founder Dennis McGill. His exhaustive work, based on years of research married to the most recent Census decennial data, has found that the National Association of Realtors’ estimate of a deficit of 6.8 million homes is too high by a factor of five.

To once again harken the Lacy Hunt rule of cycles, housing and autos lead economies in and out of recession. With more homes under construction than any time in nearly the past half-century, we may be staring down the double barrel of oversupply in both housing and autos at a time of waning demand, to put it politely.

At 0.96, the Inventories-to-Shipment Ratio of Autos within the latest reads on manufacturing we’ve got on hand (yellow line) is the highest since May 2020, when the nation’s automakers were in a whittle-down Defcon 1 mode. That same ratio for non-auto durables (green line) has drifted down to 2.0 from April 2020’s recent high mark of 2.4-times. We add that inventories have been on the rise in the latest prints out of the Empire State and Philly Fed readings.

The urge to stockpile is palpable, and understandably so. “Just in time” is synonymous with “twice burned” in a post-trade-war and post-pandemic world. The risks of being caught off guard with too much inventory on hand have not, however, been diminished if demand destruction as payback for demand pull forward is what we’re witnessing.

Today’s flash Markit PMIs on U.S. manufacturing and services will provide more clues as to where we are in the cycle. We know from Deloitte’s latest survey that holiday spending is anticipated to be up 5% over 2020 this season. This average conceals the fact that higher income earners will do more than their fair share, upping what they shell out by 15%, while those in the lower-income cohort plan to spend 22% less. Absent a big stimulus injection, much of the demand going forward is in the rearview mirror.

VIPs

• The top four concerns in August & September’s BofA’s Global Fund Manager survey were Inflation, Tantrum, Bubble and COVID-19 – none of which got more than 25% of responses; clarity on risks emerged in October, with Inflation the clear winner at 48% and China at 23%
• At 31%, investors view inflation and the Fed as the primary drivers of 2022 asset markets; with China at a distant fifth place with 8% of responses, deflation is an underpriced risk reflected in the yuan’s appreciation to 6.3930, which defies the deflation narrative
• Per BofA, the net percent of investors expecting a steeper yield curve fell to 23% in October, the lowest since June 2019 and well below September’s 48%; though deflation is not the consensus view, opportunities exist should China tail risk probability grow in importance

Know any Rock and Roll Hall of Famers who are Nobel Prize in Literature winners? Bob Dylan is revered as one of the greatest songwriters of all time. One of his works spoke to us today. Recorded in October 1963, “The Times They Are a-Changin’” became an anthem for the era’s frustrated youth, a call to action to the anti-establishment that would earn the moniker of “hippies.” Of the song, Dylan wrote, “I wanted to write a big song, some kind of theme song, with short, concise verses that piled up on each other in a hypnotic way. This is definitely a song with purpose.” Fate being the wild card it is, less than a month after Dylan recorded the song, President Kennedy was assassinated. The night that followed that dark day, Dylan opened his set with the tune. He said that he had to sing it: “Something had just gone haywire in the country and they were applauding the song,” he recalled, and he couldn’t understand why, “it was just insane.”

The same cannot be said of the financial markets. Over the 18 months ended September 2021, the S&P 500 posted monthly gains in 14. The first two-thirds of October indicate the streak is set to extend to 15 of 19 months. It helps that investors have central banks at their backs. The Fed’s balance sheet expanded $3.2 trillion to almost $8.5 trillion from March 2020 to September 2021. A broader measure incorporating the European Central Bank, Bank of Japan, Bank of England, Swiss National Bank and the People’s Bank of China with the Fed rose $9.6 trillion to $33.0 trillion. That’s insane.

Either way, market narratives over the last year and a half have pivoted from Coronavirus topping the Wall of Worry in 2020 to this year in which Inflation and Bond Tantrum jockeying for the top spot. Observe the left chart. Number one Inflation and number two Tantrum both peaked in March and have faded through the summer months. Asset bubble, now number four, has been relatively constant, but a lesser concern. COVID-19 rose recently due to the Delta variant but stepped back in September.

Wavering conviction signals new narratives brewing. In August and September, the Bank of America (BofA) Global Fund Manager Survey revealed low conviction about the largest tail risks. Of the top four choices – Inflation (light blue line), Tantrum (green line), Bubble (purple line) and COVID-19 (orange line) – not one garnered at least a 25% share of fund manager responses. Fans of the game show Who Wants to Be a Millionaire would be familiar with this concept. When contestants use a lifeline to ask the audience and there’s no clear cut “winner” of the four choices, it’s like the masses answering, “I don’t know.”

Then October happened, and fund managers downed a tall swig of clarity.  At 48%, Inflation was a clear and decisive top tail risk. The other three – Tantrum (0%), Bubble (9%) and COVID-19 (3%, lowest since the pandemic hit) – faded. Not illustrated in the left chart was the second biggest tail risk — China, at 23%. To emphasize a point, both Inflation and China were well ahead of all the remaining choices the survey record 430 panelists had to choose from. Write this down: China is a Deflationary tail risk. Evergrande surfaced, and the pace of economic growth slowed. Investors are in a classic tug-of-war set up between Inflation in the right tail and, to a lesser extent, Deflation in the left tail.

As you see on the right, Inflation is also top-of-mind for fund managers as the biggest factor for asset markets next year. Trading the dominant Inflation narrative will dictate investor positioning. In that same vein, the Fed being tethered to Inflation is synonymous with the higher short rate volatility we flagged Tuesday.

Looking down the list, China was a distant fifth. Investors believe (1) deflation will not be a significant influence next year and (2) deflation is an underpriced risk right now. The Chinese yuan’s continued appreciation through yesterday’s close of 6.3930 does not back the deflation narrative. For perspective, a greater inflationary pressure would build should the Chinese currency break below the May 28th post-pandemic low of 6.3685.

The narratives they are a-changin.’ A critical mass of investors has put Inflation at center stage. They also see inflation prescribing financial market positioning into next year. With the Fed also a main driver, it reinforces the notion of a bear flattening in the yield curve, that is, with rising short rates doing more of the work. It’s no wonder that BofA also indicated that the net percent of investors now expecting a steeper yield curve collapsed to 23% in October, the lowest since June 2019, and well south of the 48% surveyed in September.

At the highest level, to lean on a term that’s held throughout today’s missive, broad positioning is insane. “We’ll let our friend David Rosenberg’s tweet from yesterday bottom-line it “Cognitive dissonance? BofA survey shows global PMs with weakest economic outlook since April 2020 and yet they have retained a huge net overweight in the equity market — and record underweight in bonds.”

Deflation risk expressed through the China narrative that would bull flatten the yield curve is not front and center. But since deflation is not a consensus-like view, it presents “lottery ticket” opportunities for those with capacity and nimble portfolios should China tail risk probability grow in importance.

VIPs

• The median price of a single-family new home rose to a record $390,900 in August, an unprecedented 26% jump from April 2020; as a result of affordability challenges, UMich’s consumer home buying conditions index has held at record levels of negativity since May
• Since 1993, the National Association of Home Builders’ sentiment index has had a 0.92 correlation with UMich home selling conditions vs. 0.08 with buying conditions; in the last 12 months, that correlation has flipped to -0.77 and 0.81 for selling and buying conditions
• Historically, the MBA’s average home purchase loan size has tracked with single family building permits; loan size appears to have stalled around $400,000, while single family permits fell back in September to July 2020 levels in the face of retracting demand

“I assume that Congress fully understands that the fur industry cannot, and would not if it could, pay this tax, wherever it is placed. If conditions improve enough to create a seller’s market, the tax will be passed on, with costs to the consumer, in the retail price. If conditions remain as they are, namely, getting worse by the day, the tax will come out of the farmer’s pocket.” – David C. Mills, Director of the American Raw Fur Institute (Revenue Act of 1932 hearings before the U.S. Senate Finance Committee). As defined, a “seller’s market” is a market in which goods are scarce, buyers have a limited range of choice and prices are high. As Mr. Mills argued to the Committee, the tax was aimed at the “well-to-do” but would fly “straight as an arrow at the poorest people in the country,” the fur farmer. And so it was.

Home builders are no fur farmers. They construct the largest financial commitment the average U.S. household makes. The median price of a single-family new home rose from a post-COVID 19 low of $310,100 in April 2020 to a record high $390,900 this past August. Historically speaking, the 26% advance over the 16-month stretch was an extreme; the sole precedents are episodes in 1973 and 2013. Even the outsized 14% gain in personal income, excluding transfer payments over the same period, didn’t match the home price spike.

This discrepancy highlights the specter of housing affordability. While not directly comparable to the new home market, the National Association of Realtors (NAR) Housing Affordability Index, which gauges homebuyers’ wherewithal to finance median-priced homes fell more than 17% in that same April 2020 to August 2021 span. Moreover, demand challenges presented by higher home prices drove the University of Michigan’s (UMich) consumer home buying conditions index to a net atrocious time to buy setting in May of this year. Most remarkably, it’s sustained this intense negativity for the six months through October (red line).

Usually, home builders don’t blink at variations in home buying conditions. Since the inception of the UMich home selling conditions index in November 1992, the correlation to the National Association of Home Builders (NAHB) home builder sentiment index has been a stout .92. Alternatively, the same calculation against home buying conditions was .08.

There’s nothing like a global pandemic to further snarl a supply chain that was already a mess thanks to that first Trump tweet that ignited a trade war, which so few can recall sent world trade into contraction for the full year 2019. The supply chain being turned upside down in 2021 has altered the dynamic on the homebuilding front. Not only did confidence hit an all-time high last November; in the subsequent 12 months through October, the historical correlation has flipped — buying conditions scored 0.81 (previously .08), and selling conditions nosedived to a -.77 (from that ‘stout’ +0.92).

Though buying conditions have mattered more than selling conditions of late, this hasn’t staunched home builders’ optimism. They are sellers. Sellers love to sell in a rising market, especially one where supply constraints are not easily rectified and are likely to persist — it makes for more profitable transactions even if you are selling fewer units…up to a point, which few homebuilding cowboys remember from past cycles.

NAHB Chairman Chuck Fowke characterized conditions as such: “Although demand and home sales remain strong, builders continue to grapple with ongoing supply chain disruptions and labor shortages that are delaying completion times and putting upward pressure on building material and home prices.” Read between the lines — home builders are passing higher costs along to buyers.

No doubt, the Fed’s keeping emergency settings for $40 billion per month in mortgage-backed securities of quantitative easing (QE) has overheated the housing market. Home prices are the smoking gun. Homebuilders’ perspective is, however, as such: falling joblessness equates to household creditworthiness becoming more worthy with every one-tenth decline in the official unemployment rate. It’s a classic right-tail problem of higher inflation, not a textbook left-tail problem of higher unemployment.

You know we’re incapable of presenting one side of the story. A fresh body of work we’re undertaking at QI is accelerated automation eradicating untold millions of U.S. jobs from the workforce. Topping that premise is an exhaustive analysis undertaken by QI guru Dennis McGill of Zelman Associates on demographics that runs the gamut from who we’ve lost in terms of would-be buyers to an epidemic of young deaths to the extraordinary, and growing, ranks of adults living with and multi-generationally bunking up with their parents, to the nearly 750,000 Americans whose lives have been taken by COVID-19.

With this as backdrop, the Mortgage Bankers Association (MBA) average home purchase loan size (light blue line) first breached the $400,000 threshold in 2021. While this series has consistently predicted single-family building permits (purple line) and the average home purchase loan size has leveled off, it’s yet to signal a down cycle. Getting to that point would require crimped demand, increased supply or some combination thereof (welcome to where we are today).

Join the masses — assign the pull-back in September single family permits to a July 2020 low to idiosyncratic and unforgiving Hurricane Ida. You’d be joined by builders, especially of the publicly traded nature, who won’t retract their shovels despite macroeconomic headwinds, even in the face of supply chain and labor challenges.

VIPs

• The spread between the 5-year note and 30-year bond fell below 100 basis points over the last week, hitting 85 bps in yesterday’s trading session; after the 1990, 2001, and 2007-09 recessions, the 100 bps level served as a demarcation line from early to middle/late cycle
• As firms battle wage pressures via M&A activity, U.S. deal counts have reached successive records in Q2 and Q3; the October-to-date deal count is tracking to 2,200 by the end of the month, which would be the fourth highest on record behind September, June, and August
• As a z-score, the Outlook Gap, or spread between CEO and Consumer Expectations, looks to be coming down as it usually does when expansions mature; however, rising wage pressures remain an opposing headwind that is making consumers relatively more optimistic

Joel Spira was aiming for mood lighting. He created an industry. It was the late 1950s, and not only were Americans buying tons of new homes, they were hosting dinner parties with mood music. To Spria’s thinking, the right lighting would further enhance the ambience. Objective identified, he commandeered his apartment’s spare bedroom and set out to complete the moody mission. At that time, lighting control was a complicated and expensive affair, requiring bulky rheostats that used a lot of energy and generated a great deal of heat. Spira’s 1959 emergence from his lab with a solid-state dimmer that could replace the light switch in a standard residential switch box radicalized the lighting scene. His company Lutron was the first to mass-market the dimmer and has never wavered on its undertaking to innovate within the space — the firm’s product lineup has expanded from two products to more than 15,000.

Business cycles work on mood lighting too. Growth momentum burns the brightest coming out of recession and cools as the cycle matures from early to middle to late phases. The forward view from the C-suite also is sunniest early on as productivity and cost saving initiatives drive the outlook for corporate earnings. Not every cycle follows the same script — some, as in the current one, are hyper-compressed, which is evident in the yield curve.

Yield curves steepen at recovery’s outset and flatten as when the expansion begins to exhaust itself. For completeness, the end of cycle signal surfaces when curves invert. To be sure, we’re not there yet. That said, the spread between the 5-year note and 30-year bond fell below the 100-basis point (bp) mark over the last week in decisive fashion. The 5s30s curve tested the 100-bp threshold on September 22 and 23, snap-steepened back to the 112 bps on October 5, and then compressed sharply to near 85 bps in yesterday’s trading session.

For what it’s worth, there’s something about the 100-bp level that marks it as a milestone in cycles. After the 1990 recession, when 5s30s went sub-100, it moved the expansion from early to middle/late. After the 2001 recession, 100 was a demarcation line between early and late. After the 2007-09 Great Recession, 100 divided early/middle with late. It’s not definitive if we are mid-cycle or late cycle, but it’s pretty clear that we are no longer in the Kansas of the early phase.

That brings us to a refresh of a concept we can observe but once a quarter, the Outlook Gap, which compares the spread between the expectations of CEOs and consumers. It peaks early in economic recoveries and grinds down as expansions mature before bottoming into the next recession, echoing the yield curve’s path. We depict the Gap in today’s left chart using our favorite normalizer — the z-score, or deviation from the mean adjusted for volatility (blue line).

The compression of the current cycle driven by the temporary nature of the pandemic suggests the duration of the yield curve flattening and Outlook Gap narrowing might be shorter than in the past too. At a minimum, the fourth quarter-to-date 5s30s curve is flagging mid-cycle. We would anticipate a similar construct for the Outlook Gap once the autumn quarter figures print. One factor that’s made consumers relatively more optimistic than company heads is rising wages.* Whether it’s small, medium or large companies, anecdotal evidence from business surveys corroborate the trend.

*The one caveat we’d place on that last note, with a hat tip to QI Canadian friend David Rosenberg, is that the latest University of Michigan print showed households’ assessments of the job market at an 8-month low. We won’t know the long term damage exacted by post-pandemic automation acceleration for some time.

Many firms are battling wage pressures via the merger and acquisition (M&A) channel. U.S. deal counts have vaulted to successive records in the second and third quarters (yellow line) as the most accommodative financial conditions on record underpinned this dynamic. The Goldman Sachs U.S. Financial Conditions Index remains ridiculously easy (green line).

As of this writing, the October-to-date deal count is tracking north of 2,200 for the full month. This would land it as the fourth highest on record behind September, June and August of this year. If financial conditions start tightening in a more persistent fashion, conviction would rise for calling a top in M&A, signs which are emerging.

Yesterday, Bloomberg ran a story titled, “Short-Dated U.S. Rate Volatility Spike Follows Fed Pricing Shift.” The U.S. dollar swaption volatility surface revealed that short-dated volatility on front-end rates indicated a hawkish re-pricing of Fed rate hike expectations. Over the last week, the short end of the swaption curve moved from pricing one hike by the end of next year to two, with about half a hike priced into the June 2022 Fed meeting. In addition, 6-month volatility on 2-year rates hit the 60-bp mark, the highest since March 2020.

Rotating the dimmer switch, the compression in the yield curve is pointing to a further fading of the Outlook Gap. A turn in financial conditions would reinforce the shifting mood and signal a top in M&A activity. We would add that Bloomberg one-year forward U.S. recession probability moved off its maximum bullish setting of 10% to 15% in October. All told, these factors imply a less friendly investment environment for risk assets in coming months.

VIPs

• U.S. retail sales surprised to the upside in September, seeing a 0.7% MoM gain vs. the -0.2% consensus while July and August saw a combined 0.4% upward revision; in response, equities rallied led by cyclicals, while Treasuries sold off with higher yields in 10s than in 2s
• Real retail sales, excluding food services and deflating with the CPI for commodities, saw volume gains of 0.4% MoM in August and 0.2% in September; thus, price increases drove roughly 60% of August’s headline retail sales increase and 75% of September’s advance
• Little notice was given to the downside in October’s NY Fed Empire State Manufacturing report, which saw new orders, employees, and hours worked all fall; meanwhile, UMich’s Survey of Consumers saw sentiment fall to its second-lowest level since 2011 in October

Great advertising slogans should leave a permanent imprint that immediately conjures the product. “M’m! M’m! Good!” Campbell Soup, of course. “The Breakfast of Champions” should out Wheaties on the brain. “Just Do It” is to Nike as “The Quicker Picker Upper” is to Bounty paper towels. And we all know what America runs on – “Dunkin.” In the 1970s, the tag line “How do you spell relief?” became synonymous “R-O-L-A-I-D-S.” Rolaids, an American brand of calcium and magnesium-based antacid, is produced by Chattem. Invented by American chemist Irvine W. Grote in the late 1920s, manufacturing originated in Chattanooga, Tennessee under one of Chattem’s forerunner companies, which produced the brand for Warner-Lambert, which, in turn, merged with Pfizer in 2000. Ask a Gen X-er the question, and the seven-letter answer will roll off the tongue. Anyone who answers “R-E-L-I-E-F” was born too late to have ever had their brains ingrained.

Investors who were born yesterday – or for the sake of argument, this past Friday – spelled relief with six letters: R-E-T-A-I-L. U.S. retail sales defied the gravity the consensus believed would exert on September spending. The 0.7% month-over-month (MoM) gain significantly surprised the -0.2% Bloomberg consensus and surpassed all but three of the 68 estimates in the survey. When you add in the net 0.4% upward revision to July and August combined, all the new news was the equivalent of a 1.1% print hitting the tape.

This fundamental upside induced a textbook response with equities rallying led by cyclicals, especially the consumer discretionary sector. Treasuries sold off in bear steepening fashion with higher yields in 10s than in 2s. Real yields provided more lift to the 10-year yields vis-à-vis inflation expectations. These moves bolstered optimism for consumer spending, which accounts for a mere 69% of U.S. GDP.

With deference, you’ll have to pardon us for waxing skeptical. It’s time for a check of the R-E-A-L-I-T-Y kind. U.S. retail sales are reported in nominal dollars. These values are the product of the price (P) and quantity (Q) of goods sold in a given month. However, the Census Bureau does not disaggregate the P and the Q. To take out the guess work, one must wrap numbers around the variables to determine if retail’s gains were driven more by inflation than volume.

Today’s left chart depicts MoM changes in real retail sales excluding food services & drinking places to get a purer read on goods spending. The CPI for commodities was used to deflate the retail series. Volume gains occurred in both August, at 0.4% MoM, and September, at 0.2% MoM. In both months, however, prices added 0.6% to the dollar value of retail sales ex-restaurants & bars producing nominal gains of 1.0% and 0.8%, respectively. Simply stated, prices accounted for about 60% of the August increase and more than 75% of September’s advance.

Properly contextualizing the inflation-adjusted performance, the last two months of the third quarter (0.6% combined) did little to reverse the four-month losing streak from April to July (7.3% combined). This doesn’t sway us to grab the retail bull by the horns. Moreover, we think there’s still more dust to settle after March’s supercharged, stimulus check spending spree that saw a 10.0% volume gain.

Shifting to the right chart brings a longer-term perspective by illustrating the longer-run path in real (inflation-adjusted) retail sales over the prior expansion, from 2010 to 2019, through the COVID-19 flash recession, and finally, the post-pandemic recovery/expansion (yellow line). The trend line (in green) acts as a “fair value” indicator. Deviations above and below fair value reveal whether retail sales data are “rich” or “cheap,” thus distinguishing the phases of retail sales’ recovery.

The involuntary phase began with last spring’s shutdowns and ended after the subsequent reopening in December 2020 when the yellow line fell back to the green line. The second voluntary phase started after fiscal stimulus was pumped into the household sector in January and again in March, blowing a massive sugar-high spending bubble through the end of 2021’s first quarter. The second-quarter fallback and modest showing to end the third quarter still leave the level of real retail sales 2.7% above trend.

The last chapter of normalization has yet to be written casting doubts on the durability of Friday’s flurry of optimism. Little notice was given to the downside in October’s Empire State manufacturing report. New orders, the number of employees and work hours all fell as did prices received even as prices paid rose and delivery times skipped to a fresh record high. Moreover, the Langer Weekly Consumer Comfort index continued its slide which started just as summer was ending. Most notably, the mood of those who are employed full-time fell for a fourth straight week.

Corroborating the narrative was University of Michigan consumer survey head Richard Curtin, who flagged the Delta variant, supply chain shortages and reduced labor force participation rates in October, all of which sent sentiment to the second-lowest level since 2011 and dimmed the outlook for consumer spending into 2022. Per Curtin: “When asked to describe in their own words why (buying) conditions were unfavorable, net price increases were cited more frequently than any time since inflation peaked at over 10% in 1978-1980.” With consumers expecting to rise 4.8% in the coming 12 months, the highest since 2008, premature bullishness could send, dare we say “irrationally exuberant” investors reaching for those Rolaids.

VIPs

• Per data from the Association of American Railroads, intermodal trailer traffic, a proxy for truck output, downshifted from double-digit expansion to contraction from June to October; a driver shortage, as well as a lack of chassis at ports, are impeding trucking industry growth
• Every month since March has seen average weekly hours in truck transportation at or above prior record highs; despite the PPI for truck transportation posting YoY prints in the teens since April of this year, the S&P 500: Trucking continues to post elevated annual returns
• Rail traffic has been down YoY since September, driven by intermodal containers rather than traditional rail carloads; however, given the S&P:500 Railroads has posted double-digit YoY gains since August 2020, investors seem to view any slowdown in activity as temporary

Space, the final frontier
These are the voyages of the Starship Enterprise
Its five year mission
To explore strange new worlds
To seek out new life
And new civilizations
To boldly go where no man has gone before

On September 8, 1966, Captain James T. Kirk and crew did just that in the inaugural episode of Star Trek: The Original Series. During its initial run, it was nominated for the Hugo Award for Best Dramatic Presentation multiple times, winning twice. Believe it or not, on June 3, 1969, the Sci-Fi series was canceled by NBC after three seasons and 79 episodes. Canceled or not, the cult lives on. Just yesterday, William Shatner made headlines as the oldest person ever to go to space, care of Jeff Bezos’s Blue Origin rocket. He and three other astronauts hit a maximum velocity of 2,235 mph and reached a height of 347,539 feet on their 10-minute trip to the cold, black beyond before touching back down on the blue marble in West Texas.

Beam me up, Scotty. One of the Star Trek’s innovations was the transporter room, a teleportation chamber that decomposed cells and reassembled them in another place almost instantaneously. In 2021, teleportation is still a thing of science fiction. Not even Jeff Bezos with his $190.6 billion in net worth can conjure up a home teleportation device on his e-commerce empire; a quick search for “teleportation” on Amazon.com yielded only books.

Right about now the supply chain wishes it had some of Blue Origin’s rocket-science escape velocity and/or the luxury of a teleportation device. Yes, “supply chain” is trending. It has shown up in our missives more often recently, search interest is rising rapidly on Google Trends and Bloomberg reported yesterday that supply-chain chatter hit a record high on earnings calls.

With this in mind, we decided to take a look at the trucking and rail industries more closely. Enter today’s charts du jour. Each one looks at similar metrics for each sub-group of the transportation sector. Volume of activity is depicted using rail traffic from the Association of American Railroads (AAR). Pricing trends are illustrated through the U.S. producer price index (PPI). Financial market performance is portrayed by the S&P 500 sub-industry stock price indices. All series are normalized with year-over-year (YoY) comparisons.

The path of trucking activity has taken a noticeable step backward so far in the second half of this year. Intermodal trailer traffic on America’s railroads, a proxy for trucking output, downshifted from steady double-digit expansion to contraction from June through October (yellow line). Granted base effects account for some of this swing into negative territory, but not all of it.

A shortage of truck drivers picked up in the September Institute for Supply Management (ISM) Services survey is one impediment to the trucking industry operating at more productive capacity levels. A Business Insider deep-dive interview from this Tuesday with a veteran California longshoreman provided perspective from the truckers’ point of view. It noted that truck drivers have complained about the lack of chassis at ports. This factor limits the number of shipping containers that can be carried out of the yard. It leads to slower growth in the trucking business not just in California, but across the distribution chain as well.

The multiple strains on trucking capacity have seen drivers working record long hours per week. In every month since March 2021, average weekly hours in truck transportation were at or above past record longs in this corner of the transport sector. All told, pricing pressures have become well entrenched since then and sustained at unmatched inflation rates that have persisted in the teens since April of this year (red line). While there has been a step back in equity performance, annual returns remain elevated (blue line).

Switching to rails, the picture looks similar. Rail traffic through modes also was down versus last year in September and so far in October (orange line). However, this was due to intermodal containers and trailers and not traditional rail carloads. Pricing power has picked up, but is not extreme (green line). Stock performance has been a stalwart, posting double digit YoY gains in every month since last August (purple line).

AAR noted that most of the disruptions facing the U.S. supply chain today began due to forces outside of railroads’ control. Despite external challenges, railroads have kept traffic moving, particularly through the nation’s busiest rail hub in Chicago. After the White House convened a meeting with supply and logistics execs, AAR applauded freight railroads’ partners newly announced expanded service hours to ease congestion near the Ports of Los Angeles and Long Beach. “This move will capitalize on the long-standing 24/7 railroad operations and available capacity to accommodate additional containers at intermodal rail yards serving those key West Coast ports.”

It doesn’t take the captain of a starship to understand it will take time to resolve supply chain issues. However, both of today’s graphics tell us that investors are viewing any slowdown in activity as temporary (and maybe putting more weight on things like base effects). That is why equity performance for both trucking and railroads hasn’t cratered with the slippage in rail traffic. It has been supported by increased pricing instead.

VIPs

• The second and third quarters of 2021 saw CPI for toys post positive YoY prints for the first time since Q4 1996 and Q1 1997; California PMI Supplier Deliveries Index should continue to surge into Q4, with Chapman University expecting times to slow at a record high rate
• Cox Transportation recently announced that shipments have declined by nearly 5% as a result of supply chain issues; coincidentally, the only bright spot in August’s job openings data was in trade/transportation/utilities, with all other major sectors seeing declines
• In the NY Fed’s Survey of Consumer Expectations, household income growth and spending expectations both turned negative in August and September; this poses downside risk for real consumer spending, with the consensus at 2.1% and 4.2% for Q3 and Q4, respectively

October is leaf peeper season in the Northeast. If you get caught between an autumn leaf weekend and New York City, we recommend a detour to Springfield, Massachusetts, especially if your progeny has an affinity for reading. Right off Interstate 91 North is The Amazing World of Dr. Seuss Museum, honoring local native Theodor Geisel, a.k.a. Dr. Seuss. The two-story complex features family friendly, interactive exhibits exploring Dr. Seuss’s Springfield roots. Opportunities abound to experiment with new sounds and vocabulary, play rhyming games, and invent stories – all in line with Geisel’s revolutionary role in how we learn to read. It also replicates Geisel’s studio and living room – with the furniture and art materials he actually used – and features never before publicly displayed art, family photographs and letters as well as the original Geisel Grove sign which used to hang in nearby Forest Park. You can even find Theophrastus, the toy stuffed dog Geisel’s mother gave her son when he was a wee one.

Speaking of toys, October also marks the month we plan ahead to stuff stockings and fill the space underneath the Christmas tree. We know Halloween is a few weeks off, but this year especially, it doesn’t hurts to start early. Retailers have already made a mockery of “Black Friday,” which now encompasses the full month of November. Costco has their Christmas trees out and lit up earlier and earlier each year on the main floor.

Spoiler alert: Not all toys come from Santa’s North Pole workshop. The U.S. Toy Association, which represents 950 toy firms with a U.S. footprint, has members that sell three billion toys a year, 85% of which come from China. The not-for-profit trade association founded in 1916 represents businesses that design, produce, license, and deliver toys and youth entertainment products for kids of all ages.

#ShopEarly4Toys. On September 21, the Toy Association warned that the shipping crisis in California could affect many of its members going into the all-important holiday shopping season. In a virtual event with the Port of Los Angeles, the Toy Association discussed the negative impact the logistical challenges are having on toys sold in the U.S., then spoke directly to consumers (bolding ours):

“Get out and buy toys now. Right now, toy manufacturers are doing everything in their power to ensure a good supply in stores for the holidays, but we just don’t know what’s going to happen down the road as we get closer to Christmas.”

The Toy Association’s PR resulted in coast-to-coast coverage from media outlets such as Good Morning America, Los Angeles Times, KTLA and the New York Post. We call it raising inflation psychology by inciting a buy-now mentality. Though the Association may have its constituents in mind, alerting the masses coincided with a regime shift for retail toy pricing. In the second and third quarters of 2021, the CPI for toys posted back-to-back (positive) inflation readings for the first time since 1996’s fourth quarter and the first quarter of 1997. The interim period was 24 years of deflation (light blue line).

Pushing a buy-now mentality suggests toy producers give credence to the idea that higher prices will have some measure of staying power. With most of the imported toys entering the U.S. through Pacific Coast gateways, the California purchasing managers’ index (PMI) provides a direct look at the scale of bottlenecks. We’ve all heard how many container ships are backed up in San Pedro Bay, near the ports of Los Angeles and Long Beach. The lower frequency quarterly California PMI Supplier Deliveries index continued to surge in 2021’s fourth quarter (purple line). Chapman University, who compiles the data, indicated that delivery times are expected to slow at the highest rate ever recorded, a very Grinch-like supply chain, indeed.

As if on cue for the holiday show, Cox Transportation announced that the bottlenecks are so rife, they’ve caused shipments to decline by nearly 5%. Per Cox: “This supply & demand dynamic we’re witnessing along with the cost of fuel and other factors has caused the average cost of a shipment (not the same as rates) to spike to a +31.4% change.”Cox added that ocean freight is not included in its data. Is it any wonder that the only bright spot in August’s job openings were in trade/transport/utilities? Aside from this exception and “other services,” openings fell in all other sectors and geographic regions.

Buying toys is one thing. Challenging broader purchasing power is another altogether. That’s exactly what the New York Fed’s Survey of Consumer Expectations revealed this week. Household income growth expectations and consumer spending expectations, both adjusted for the jump in inflation expectations, turned negative in August and September (red and yellow lines). This Grinchly guidance suggests downside risks for actual consumer spending (blue line) might be closer than they appear. The consensus for real consumer spending remains complacent, with sequential quarter-over-quarter annualized gains for the third quarter and fourth quarter reading 2.1% and (a faster) 4.2%, respectively.

You’re a mean one, Mr. Grinch. You really are a heel… That “heel” may be in for a disappointment. More expensive toys mean less under the tree for the Grinch to steal. Is that what this holiday season has in store? No sense disappointing Cindy Lou Who. The context of inflation risks and the subsequent near-term hits to purchasing power could generate the opposite of a Santa Claus rally for consumer discretionary stocks.

VIPs

• ADP’s September jobs report saw businesses with 500 or more employees gain 390,000 jobs vs. 178,000 for smaller businesses; the 212,000 difference was the fourth largest on record, and reversed the trend of smaller businesses seeing larger job gains over the prior 12 months
• Per Vistage, 63% of surveyed CEOs are lifting wages and 21% are offering hiring bonuses as a labor retention method; meanwhile, the NFIB reports a net -14% of small businesses seeing higher earnings this quarter, well off June’s -5% high and February 2020’s pre-pandemic -4%
• Since 1993, the MOVE index of implied U.S. Treasury volatility has had a -0.63 correlation with the Russell 2000; should tapering become a reality in November, more short duration rate volatility could kick in as fast money starts wagering on the timing of the first rate hike

When I was younger, so much younger than today
I never needed anybody’s help in any way
But now these days are gone, I’m not so self assured
Now I find I’ve changed my mind and opened up the doors

Help me if you can, I’m feeling down
And I do appreciate you being ’round
Help me get my feet back on the ground
Won’t you please, please help me?
Help me? Help me? Ooh

The Beatles “Help!” released in 1965 runs just two minutes and eighteen seconds, but packs in 267 words, making it one of the most lyrically dense hits of the era. There are only a few seconds in the song where somebody isn’t singing. While not John Lennon’s intent, The Beatles sped up the tempo to make it more radio friendly. Have a listen. You’ll see what we mean. Marketers have also demanded “Help!” over the years. In 1985, Ford applied the ditty to sell cars, a Beatles first.

“Help!” is reserved for more than your listening pleasure; it drives the economy forward. Recruiting fresh help expands businesses’ headcount and is intended to boost productivity, especially for small and medium businesses where labor is a relatively greater input into final output. Recent trends suggest large corporations are winning the battle to sign on talent, while establishments down the size scale are significantly more challenged.

Per ADP’s September National Employment Report, large businesses (500 employees or more) added 390,000 private sector jobs; that compared to the 178,000 gain for small and medium-sized concerns. While this divergence is not typical, the 212,000 gap of large over small/medium qualified was the fourth largest on record. For perspective, the differential was flipped favoring small/medium hiring over large in the prior 12 months ended August 2021.

Vistage validates. The world’s largest executive coaching and peer advisory organization for small and midsize business leaders’ quarterly CEO confidence index expands on the labor issues ADP flagged. Third-quarter results indicated that more than two-thirds of CEOs said that hiring challenges are impacting their ability to operate at full capacity. That’s called a revenue problem. Vistage expanded: “The pressure to retain existing workers is intense as more than a quarter of CEOs report decreased retention rates since the beginning of the year. Replacing a lost worker will take longer and cost more than ever…there is a direct correlation between retention rates and revenue.”

Clearly, some of the 0.4 post-pandemic increase in the workweek to September’s 34.8 hours we highlighted in Monday’s nonfarm payroll recap reflects employers extracting as much as humanly possible, and then some, from their existing employees. Of course, there’s nothing free about squeezing blood out of rocks when rocks are in short supply. As Vistage reported, 63% of CEOs are responding to the challenges posed by lifting wages and 21% are tossing in hiring bonuses. Nearly half of small/medium businesses have recently raised wages by 4% or more. With the bottom line being sacrificed to underpin the top line, save for the involuntary shutdown during 2020’s second quarter, CEO expectations for earnings growth fell to the lowest since the last three months of 2012.

The National Federation of Independent Business (NFIB) confirms weakening profits. Illustrated in today’s left chart, a net -14% of small businesses reported higher earnings this quarter (yellow line), a deterioration from June 2021’s high of -5% and an unfavorable comparison to February 2020’s pre-pandemic -4%. It follows that a record high 62% bemoaned few or no qualified applicants (blue line). Moreover, the small business wage curve is steep, with a record 48% raising worker compensation and a record 30% planning to up the ante in the next three months.

QI mentor and NFIB Chief Economist Bill Dunkelberg explained that owners are clearly trying to hire but failing despite immense wage pressures even as “inflation is squeezing profits (the major source of operating capital for small firms) so firms are raising selling prices.”

In a slowing economy, raising selling prices to compensate for falling revenues is akin to hope being a strategy. In a fresh update Monday afternoon, Cox Automotive economist Jonathan Smoke struck a hopeful tone: “It could be October is the bottom for the sales pace.” September’s 12.2-million seasonally adjusted annualized rate (SAAR) was a 16-month low, off by a quarter from last year’s 16.3 million and 29% below September’s 2019’s 17.2 million. And it’s not just rental car providers, commercial fleets and government buyers that appear to have replenished their stocks as sales to this cohort fell 21% over the prior 12 months. The balance of retail sales fell by a deeper 23% to a SAAR of 10.7 million, which was down from 14.0 million in September 2020 and 13.8 million in September 2019.

You don’t need “Help!” to connect the dots that higher prices induced by rising wages risk not only a slowing economy but amplified rate volatility. Since 1993, the MOVE index of implied U.S. Treasury volatility (red line) has a -.63 correlation to the Russell 2000 stock index (green line). We know the MOVE has moved off its September lows. If the terrible taper becomes a reality November 3rd even as DC brinkmanship heightens further, more short duration rate volatility could kick in as fast money starts wagering on the timing of the Fed’s first rate hike.

VIPs

• Canada saw 157,000 jobs gained last month, more than 2.5 times the consensus and above every estimate in the Bloomberg survey; the 0.8% MoM pushed employment back to pre-pandemic levels and would have translated to a proportional 1.2 million bump in the U.S.
• Unlike in the U.S., Canada’s labor shock appears to have gone a full cycle, with both temporary layoffs and permanent job losers seeing a recovery; labor force participation has returned to 65.5%, and the labor progress made has led the BoC to taper three times already
• Per the CFIB, in the six months through September small business’ average price plans over the next year have run north of 3%; at present, CPI trim and CPI median are both above the BoC’s 2% target at 3.3% and 2.6%, respectively, risking cost pressures flowing downstream

Such is the fastidiousness of Toronto’s bureaucrats, that one can track the number of potholes filled at www.toronto.ca. Thus far in 2021, just 100,432 potholes have been filled, well off the count of the last three years when 163,988, 165,393 and 218,089 were filled in 2020, 2019 and 2018, respectively. Toronto’s road maintenance department explains that the total number of potholes repaired varies from year-to-year depending on winter conditions. A milder winter will have higher number of freeze-thaw cycles, where temperatures fall below freezing and quickly rebound above it, resulting in a higher annual pothole toll. But if it’s freezing all through the winter, the relative dearth of freeze-thaw cycles creates fewer road hazards. Filling potholes might border on sport in Canada’s largest metropolis. It’s such a common occurrence, the City has given its citizens four ways – online form, phone call, tweet, email – to report one to the thorough authorities. The uniqueness of the last 18 months, however, opens the possibility that fewer drivers on the roads made for less wear and tear, culminating in the 39% year-over-year decline in potholes filled.

Regardless of the explanation, there was one pothole filled last Friday that set a significant economic milestone. The Canadian employment pothole has been refilled, regaining its pre-pandemic level with a 157,000 gain that was more than two and a half times greater than consensus and bested every estimate in the Bloomberg survey. For perspective, the 0.8% month-over-month increase would have translated to a proportional 1.2 million advance for U.S. nonfarm payroll employment.

Statistics Canada added some interesting color to the report. First, employment among primary working-aged women (between 25 to 54) was 49,000 (0.8%) above its February 2020 level; a similar take could be told for core-aged men. Second, the numbers of public- and private-sector employees were at or the same timestamp, while a deficit for the self-employed of -241,000 (-8.4%) remained. Third, employment in the service-providing sector surpassed its pre-COVID level in September, while that of the goods-producing sector remained shy by -128,000 (3.2%).

Critically, the labor force participation rate had fully recovered to its former 65.5%, a stark contrast to that of its neighbor to the south. Save the recovery in goods-producing jobs, every one of the details spelled out above are the exact opposite in the U.S. A deeper dive into the Canadian unemployment figures adds even more to the discrepancies between these two USMCA trading partners.

As you see on the left, Canada’s labor shock has gone a full cycle. Measures for both temporary layoffs and permanent job losers have recovered, unlike the corresponding metrics for the U.S. which continue to suffer substantial shortfalls. The spike in the purple line and subsequent sharp fall back reinforces the temporary nature of the COVID shock. The accelerated return to normal for the orange line, however, suggests that the Canadian labor market might be set on mid- to late-cycle and not an early phase recovery.

Canada’s labor progress would qualify as substantial relative to the U.S. It also helps explain why the Bank of Canada (BoC) has tapered three times already. While the labor tailwinds are nice to have, employment is not the central bank’s main mandate. Inflation is.

On that count, price pressures along Main Street, Canada are inducing major impediments to growth. For the month of September, the Canadian Federation of Independent Business (CFIB) reported four significant sources which have combined to juice inflation. CFIB asks participants in its monthly survey, “What factors are limiting your ability to increase sales or production?” The four biggest concerns are shortages of inputs (red line), production distribution constraints (green line), shortages of unskilled labor (blue line) and a similar scarcity of skilled labor (yellow line). All series are depicted as z-scores (deviation from the mean adjusted for volatility) to show how different the current environment is vis-à-vis the past decade.

Sustained supply chain and labor market pressures increase the risk of pass through to small business owners trying to compete for the next slice of revenue against a more challenging backdrop. In the six months through September, Canadian small businesses’ average price plans over the next year (not illustrated) have run north of 3% and ended the half-year period closer to 4%. For context, since this gauge’s February 2009 inception through March 2021, this series 1-3% range has remained within the BoC’s target.

We continue to closely monitor Bloomberg’s Nanos Canadian Confidence Index. This weekly pulse of Canadians has steadily declined since early August and reveals that nearly a third believe the nation’s economy will weaken over the next six months. It won’t matter how the alert is delivered; there’s no paving over Canada’s persistent inflation risk. At present, two out of three of the BoC’s key inflation guides – CPI trim (3.3%) and CPI median (2.6%) – are running north of the 2% target. Upstream cost pressures risk flowing downstream at a time when the labor market has moved from recovery to expansion.

All told, a continued tapering of BoC asset purchases has been reinforced by the latest batch of data. Shorter term rates along the Canadian curve also should remain above those in the U.S. as rate hike expectations are more advanced north of the borders. Substantial labor progress has been made, and inflation is the BoC’s focus. The Canadian yields curve should remain flatter than its U.S. cousin and Canadian dollar bulls should feel more confident in their stance.

VIPs

• The unemployed have fallen by 1.8 million in the last three months, a decline that compares solely to 2020’s post-pandemic reopening; permanent job losers are down by 936,000 and account for more than half the improvement, a confidence vote for a sustainable expansion
• While September’s gain of 194,000 jobs disappointed, education headcounts fell while total private employment rose by 317,000; though 4.8 million jobs remain to be recovered, the yield curve steepened, signaling the Fed should be on track to launch its taper in November
• Wages for production/distribution workers have seen an 8.4% annualized gain in the six months ended September, the highest since the early 1980s; small businesses are also feeling pressure, per Paychex, seeing three-month annualized gains between 5.2% and 5.4%

Levi Hutchins lived firmly by one rule: Wake before sunrise – 4:00 a.m. to be exact. Listening to the early bird inside his head, this American invented the mechanical alarm clock in 1787. Of his design, he said, “It was the idea of a clock that could sound an alarm that was difficult, not the execution of the idea. It was simplicity itself to arrange for the bell to sound at the predetermined hour.” It would seem Hutchins was more interested in beating the rooster than benefiting monetarily — he never secured a patent. And though a half a century on, Frenchman Antoine Redier did patent an adjustable alarm clock, it didn’t make it across the ocean leaving American Seth E. Thomas to stake legal claim to his own version in 1876. His eponymous company mass-produced the alarm clock, delivering the innovation to the general public and putting roosters out of business once and for all.

Speaking of unemployment lines, they’ve shortened considerably. July, August and September yielded decreases in the total unemployed of 782,000, 318,000 and 710,000, respectively. The three-month cumulative 1.8-million decline compares solely to 2020’s post-pandemic reopening. Permanent job losers, down an unmatched 936,000 over this period, accounted for half the improvement, a confidence vote for a sustainable expansion.

For the official unemployment rate, the 1.1 percentage point drop in the three months ended September has pre-pandemic precedent in the 1950s. This year, there’s also a voluntary aspect to the rise in labor resource utilization, especially with the cessation of special unemployment checks across many states shifting the opportunity cost, shall we say, to collecting a paycheck again.

We’re not dismissing the “disappointment” in September nonfarm payrolls (NFP). The 194,000 advance was light versus the 500,000 consensus. A closer look revealed literally and figurately got schooled. In a reversal of July’s massive seasonal upside in the sector, both public and private education headcounts declined. At 317,000, private employment did all the lifting, which gets you closer to the forecast with the caveat, via QI friend and labor guru Philippa Dunne, that the print is still 335,000 below the last three months’ private sector average.

To Jerome Powell’s chagrin, the yield curve steepened, signaling the Fed should remain on track to launch its taper November 3rd. Not even the most dovish monetary policymaker can refute the 5.05 million total nonfarm jobs added thus far in 2021, a record in absolute terms for a first-nine-months stretch. With a remaining deficit of 4.8 million jobs still to be recovered, the biggest unknown is whether we’re as far away from full pre-pandemic employment levels as recent numbers would suggest. If this gap fills, the specter of persistent wage inflation could force the Fed to tighten more aggressively and expeditiously than markets anticipate.

Last Tuesday, we used ISM’s production material commitment lead times to warn that a parallel with the 1970s energy crisis could be in the making. The Disco era also taught us that new inflation regimes require a confluence of factors, not just higher input and freight costs. We’d be remiss on this last point to omit signs that freight charges may be peaking. With a hat tip to QI fishing buddy Brent Donnelly, a reliable real-time way to track shipping is through the share prices of Cosco and Maersk, two of the world’s three biggest shipping companies. Of late, Cosco has failed to make new highs while Maersk did take out its June highs, but has since slipped below that level.

This potential tide turn does not negate the need to be alert to the missing ingredient of higher wages. At first glance, today’s charts may look like twins. Upon closer inspection, the left one depicts short-term trends (i.e., six months) and the right, the more conventional 12-month comparison.

Companies closest to the supply chain are battling the fiercest wage pressures. As defined, workers in production and distribution include the cyclical industries of manufacturing, wholesale, retail and transportation & warehousing. Usually, we track wages in these industries separately as they’re reported individually by the Bureau of Labor Statistics. Aggregating them culminates in an 8.4% annualized gain in the six months ended September (green line), the highest since the early-1980s. Could the rise in the Fed’s preferred underlying inflation gauge, the core PCE price index (orange line), be attributable to more than a handful of anomalous items?

Wage data from payroll provider Paychex confirms the recent surge is more than a big company phenomenon. Paychex small business wage data through September showed three-month annualized gains of between 5.6% and 5.8% for the industries cited above. Over a 12-month span, the advances range between 4.2% and 4.7%. The asterisk is these levels are margin killers and could flag employers hitting their pain thresholds, which is also evident in persistently high hours worked, which indicates an unwillingness to take on more workers by squeezing more out of existing employees. Per Dunne, hiring healing still has a long haul ahead: “To get back to February 2020’s Employment to Population Ratio of 61.1%, we’d need to add another 6.4 million jobs.”

A chat with a high yield portfolio manager by QI’s Dr. Gates bound the macro to the micro, which is essential to making inflation persistence stick. Think of the python that ate not one, but three pigs — material, transport and wagecosts.” Perhaps