Published May 3, 2024
Below we have a grab bag of information from recent economic and earnings reports. Taken together, the information paints a picture of a normalizing economy as the pandemic dislocations continue to ebb. Many inputs are now back to pre-pandemic levels.
First up, remember when companies couldn’t find workers because labor became more mobile? Then, for the first time in decades, workers had the bargaining power to push for higher wages. That whole picture is reverting to normalcy as shown in the series of charts below. Job openings remain on a steady decline to pre-pandemic levels while workers are not moving around nearly as much as they were a year or two ago. Wages remain about +4% higher year-over-year, part of the stubborn inflation picture. But higher wages is certainly not a bad thing economically as the rises are largely going to lower-wage workers who tend to spend a bigger chunk of their earnings.
From Blake Millard’s post:
“Job openings across America continued its gradual 2-year descent lower, falling -3.7% in March from the prior month to 8.5 million and down -11.8% from one year ago.
This measure has steadily declined since hitting the cyclical peak of 12.0 million in March 2022 when the Federal Reserve initiated its tightening cycle, but the number of job openings still remains ~27% higher than 3-year period pre-COVID. The report illustrates the kind of cooling that the Federal Reserve would like to see, with demand for workers slowing through fewer openings rather than outright job losses.
The report showed that the ratio of job openings/unemployed Americans edged down to 1.32 from 1.36 in the prior month – well below the cycle peak of 2.1 but still a touch higher than the general pre-pandemic levels and the 1.23 level in February 2020.
Elsewhere, Quits also fell in March, bringing the Quit Rate down to 2.1% – its lowest level since August 2020 and below the pre-pandemic rate of 2.3%. The peak of this cycle topped at 3.0%. See chart below.
This reflects reduced labor turnover and less worker confidence in their job prospects. It also implies a continued squeeze of the pay premium of job switchers over job stayers, which should contribute to overall wage growth moderation in the near-term.
The Fed is closely watching the progress of labor demand/supply rebalancing. The labor market has certainly moved toward better balance, but overall conditions continue to be tight.”
Source: U.S. Bureau of Labor Statistics, Ned Davis Research, Bloomberg, Advisor Perspectives
Companies, by and large, have good news on the macroeconomic front. Here are some quotes from recent earnings reports:
So many other great comments and reads from this earning’s season across multiple industries last week…
- GM posted quarterly results that topped consensus and raised its annual forecast, citing stable pricing and demand for its gas-engine vehicles. CEO: “We delivered double-digit EBIT margins in North America, pricing has been steady, and we gained retail market share with incentives much lower than the industry average” (Hammerstone)
- Kimberly-Clark boosted its FY sales and profit forecasts on higher prices and strong demand after beating Q1 expectations with sales of $5.15B above the $5.09B estimate and better EPS of $2.01; guides 2024 organic sales to rise in mid-single digits vs prior forecast of low- to mid-single digit rise. (Hammerstone)
- “I would say the consumer globally, we think is very resilient. And we see it in, as you saw from our international business performance. And it’s basically supported by two facts, very low unemployment or quite low unemployment globally and wages growing at a good pace in majority of the countries where we participate.” – PepsiCo CEO Ramon Laguarta (The Transcript)
- Toothpaste maker Colgate-Palmolive, raised forecast for annual organic sales growth on Friday, banking on resilient demand for its highly priced self-care and pet nutrition products. Demand for Colgate-Palmolive’s products, including personal care and pet food, held strong as consumers stretched their budgets to spend on daily essentials… Colgate-Palmolive now expects full-year organic sales growth in the range of 5% to 7%, compared with its prior forecast of 3% to 5% growth. Benefits from price hikes and easing costs of raw and packaging materials helped the company expand its margins by 310 basis points to 60%. (Reuters)
- Packaging Corp: “Throughout the quarter, containerboard and corrugated products demand exceeded our expectations…Despite these efforts, with the higher demand, we ended the quarter at a record low weeks-of-inventory supply for this time of year.” (@conorsen)
- Watsco CEO (HVAC equipment): “While softer market conditions persisted during what is essentially the low-season for product sales, we are currently experiencing growth in end-market demand as we enter the summer selling season. (Trade The News)
- GE raised its full-year profit forecast on strong demand for jet-engine parts and services as carriers keep their older planes in the air to tide over a shortage of new commercial aircraft. (Hammerstone)
- Steel Dynamics CEO (steel producer and recycler): Underlying steel demand was steady in the quarter; however, we experienced some steel order volatility early in the quarter as customer inventories remain incredibly low and scrap prices declined month over month in the quarter. Customer orders rebounded strongly in March supporting increased pricing and solid order backlogs, especially within our value-added coated flat rolled steel products portfolio. (Trade The News)
- Tractor Supply CEO: “We saw several positive signs in our business during the quarter, including ongoing market share gains, transaction growth and strength in big ticket sales. Most importantly, we believe that our customer base remains healthy and engaged” (@TheTranscript_)
- “Consumer spend across all segments from low to high spend has remained relatively stable. Our data does not indicate any meaningful behavior change across consumer segments.” – Visa CFO Christopher Suh (The Transcript)
- Fiserv CEO: “The Fiserv Small Business Index, based upon the spending activity at 2M small merchants in the US, shows spending rose 3.4% in Q1 24, up from 2.5% in Q4. The early read on April is that growth is tracking slightly ahead of the Q1 average” (@TheTranscript_)
- Avalon Bay Communities $AVB: “We’ve been surprised, as I mentioned in my prepared remarks, about Seattle. The trends and the firming in Seattle certainly seems to have sort of a greater foundation to it than what we’ve seen in the Bay Area just yet.” (@conorsen)
- MSFT Total Azure growth accelerated to 31%, well ahead of consensus estimates, while within this AI-related Azure, revenue contributed 7% to growth, implying a $4B annual run-rate, which was up from 6% last quarter while core Azure grew 24%, an acceleration from 22% a quarter ago. Op-margins 140 bps ahead (gross-margin strong, headcount ex-ATVI down 1% YoY) and FCF ~$6.8B better. MSFT Intelligent Cloud revenue grew +21% y/y to $26.7B, driven by Azure & Other Cloud Services growth of +31% y/y. MSFT Mar Q capital expenditures grew +66% y/y to $11.0B (cash paid for PP&E) to support demand for MSFT’s cloud and AI offerings. (Hammerstone)
(Multiple news wires and sources)
Meanwhile, AI-driven spending can’t help but boost the economy. Look at the rise in capital expenditures from two of the nation’s biggest companies. That’s a 2x jump in little more than a year.
Some of that AI-driven spending is going to old line industrial and utility work as demand for AI data centers blasts off.
Got Electricity?
Data center power demand likely to rise 160% by the end of the decade vs. 2023 from 1%-2% to 3%-4% of overall global power demand by 2030. If all of the projected data center electricity demand growth was concentrated into a new country, it would be among the top 10 power consuming countries. Our US Utilities Research team sees US power demand growth accelerating to a 2.7% 5-year CAGR by 2030 vs. 0% for the past 10 years, with data centers driving 0.9% CAGR increase and representing 8% of US power demand by 2030 (vs. 3% in 2022). In Europe, our Utilities Research team sees EU-27 power demand accelerating to a 3.7% 5-year CAGR by 2030 from 0% for the past decade.
Goldman Sachs
All the AI spending will create bottlenecks and shortages as the Wall Street Journal described in detail last week…
The frenzy to build data centers to serve the exploding demand for artificial intelligence is causing a shortage of the parts, property and power that the sprawling warehouses of supercomputers require.
The lead time to get custom cooling systems is five times longer than a few years ago, data center executives say. Delivery times for backup generators have gone from as little as a month to as long as two years.
A dearth of inexpensive real estate with easy access to sufficient power and data connectivity has builders scouring the globe and getting creative. New data centers are planned next to a volcano in El Salvador and inside shipping containers parked in West Texas and Africa.
Earlier this year, data-center operator Hydra Host found itself in a bind, searching for 15 megawatts of power needed to operate a planned facility with 10,000 AI chips.
The company went from Phoenix to Houston to Kansas City, Mo., to New York to North Carolina to find the right space. It is still on the hunt.
The locations that had the power didn’t have the right cooling systems required to keep the servers operational. New cooling systems would take six to eight months to arrive, thanks to a supply crunch. Meanwhile, buildings that had the cooling didn’t have the transformers required to receive the additional power—those would take up to a year to arrive.
WSJ
Who would have thought five years ago that the HVAC industry was going to catch the AI tiger by the tail?
@bluff_capital: $CARR Carrier – Data Center Opportunity
The above table certainly explains the enthusiasm around the stock prices of HVAC makers Carrier and Trane.
Finally, in potentially very big news this week, Chinese stocks caught a BIG bid. Will China finally get its stimulative plan right? Markets are showing fresh optimism. Success there would be a big feather in the cap of global stock markets.
H/t to Blaine Rollins for his always-excellent roundup.
Market Update
The first week of May promised earnings from consumer bellweathers Apple and Amazon along with a Fed meeting and the monthly jobs report, any of which could substantially push investors out of their recent choppy, range-bound trade. Monday saw a +0.4% gain for stocks as Tesla got the nod from China to roll out their full self-driving software. The electric automaker’s stock rose +15% on the news though it remains sharply lower year-to-date. But Tuesday found stocks down -1.6% to close a weak month of April. The S&P 500 gave back -4% for the month. A report on worker compensation showed wages still up +4% on an annual basis, a sticking point for investors looking for interest rates to ease. Wednesday gave us the Federal Reserve’s latest thoughts on interest rates. As expected, the central bank held rates firm noting that elevated inflation risks remain while the economy continues to post solid results. Amazon rose +2% on good earnings. Stocks pushed higher by +1.5% Thursday as Apple announced a massive stock buyback leaving that stock +7% higher. Chinese shares broke out on recent news of the nation’s government pushing more stimulative policies. Friday delivered a lower than expected jobs report which resulted in interest rates falling and stocks rising. The S&P posted a +1.2% gain while the QQQ rose +2% as interest rates fell sharply. The employment data resulted in a shift in investor expectations to a reduction in interest rates at the September Fed meeting.
Another up and down week left the S&P 500 (SPY) higher by +0.60% while the Nasdaq 100 (QQQ) got a +1.04% boost. Smallcap stocks (IWM) rose +1.78% on the sharp drop in interest rates. The 10-year U.S. Treasury rate tumbled from 4.7% to 4.5% this week.
Warm wishes and until next week.