WASHINGTON — The U.S. economy “downshifted slightly” in August as the renewed surge of the coronavirus hit dining, travel and tourism, the Federal Reserve reported Wednesday, but the economy overall remained in the throes of a post-pandemic rush of rising prices, labor shortages and stilted hiring.
“The deceleration in economic activity was largely attributable to a pullback in dining out, travel, and tourism in most Districts, reflecting safety concerns due to the rise of the Delta variant, and, in a few cases, international travel restrictions,” the Fed reported in its latest Beige Book compendium of anecdotal information about the economy.
Still the document, summing up information collected through Aug. 30 that will be part of the deliberations at the Fed’s Sept. 21-22 policy meeting, reported continued strong demand for workers and hiring made more difficult by “increased turnover, early retirements, childcare needs, challenges in negotiating job offers, and enhanced unemployment benefits. Some Districts noted that return-to-work schedules were pushed back due to the increase in the Delta variant.”
Jobs openings were so plentiful, the Atlanta Fed noted, that restaurants were beset by “ghosting coasting,” where employees take a job for few days then quit with no notice and move on to the next restaurant.
Prices, Fed officials reported, continued to rise.
“Inflation was reported to be steady at an elevated pace,” with Fed districts saying it was either moderate or strong, with costs for metals, freight, construction materials and other industrial staples rising in most districts.
“With pervasive resource shortages, input price pressures continued to be widespread,” the Fed reported, causing headaches across industries as disparate as beer brewing and wedding apparel.
“One contact reported refunding several bridal parties because dresses did not arrive on time for weddings,” the Richmond Fed reported. In the St. Louis Fed district “a regional brewery reported that their supplier increased prices twice between order and delivery for a pallet of aluminum.”
The report describes a difficult landscape for the U.S. economy and the Fed heading into a fall season when it was hoped the recovery from the pandemic would take clearer shape.
The risks of sustained price increases remains real, rather than fading as quickly as Fed officials had hoped.
On the other hand “all Districts continued to report rising employment overall,” possibly alleviating concerns that weak job growth of just 235,000 new positions in August was the edge of a broader slowdown in employment given the spread of the coronavirus Delta variant. Analysts had expected in excess of 700,000 new jobs last month.
HOPING FOR MORE CLARITY ON JOBS
Fed officials are grappling with when to reduce their $120 billion in monthly bond purchases as a first step in a coming shift to post-pandemic monetary policy, and while a decision remains likely this year the August job reading may require further confirmation that hiring will stay on track.
“The Delta variant is weighing on consumer spending and jobs, and the pace of growth appears to be slowing,” New York Fed president John Williams said Wednesday.
“I will want to see more improvement” in the labor market before deciding the economy is ready for the Fed to trim one of its signature pandemic programs, Williams said.
“It could be appropriate to start reducing the pace of asset purchases this year,” Williams said, but concluded “it’s clear that the pandemic is far from over, both in terms of its effects on health and its effects on the economy.”
New data released Wednesday showed the strength that had been building in the jobs market through the summer, with a record 10.9 million job openings in July. That eclipsed the number of people unemployed and left some officials convinced hiring will remain strong and allow the Fed to begin its bond “taper” soon.
“There is plenty of demand for workers and there are more job openings than there are unemployed,” St. Louis Federal Reserve president James Bullard said in an interview published Tuesday in the Financial Times.
Reports from the Fed’s districts indicated that the August slowdown in job creation may have been driven more by trouble matching workers to positions at a wage they would accept rather than ebbing demand for new employees.
“Employment grew strongly but hiring demand continued to outstrip labor response by a wide margin,” the Minneapolis Fed reported. “Workforce development professionals in Montana also highlighted housing and childcare affordability as major challenges faced by job seekers. COVID-19 exposure remained a big concern among workers and job seekers.”
Even as the consumer and business services sectors “deteriorated somewhat,” the San Francisco Fed reported, “labor shortages have severely reduced capacity at some hotels, airlines, and restaurants, with one hotel in the Mountain West having to close off several floors due to a lack of housekeeping staff.”
(Reporting by Howard Schneider and Ann Saphir; Additional reporting by Lindsay Dunsmuir; Editing by Andrea Ricci)
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In-depth reporting on the innovation economy from The Logic, brought to you in partnership with the Financial Post.
Property developer China Evergrande Group is teetering on the brink of collapse, weighed down by a giant debt load and billions of dollars of real estate it can’t sell as quickly or as profitably as anticipated.
While trouble has been brewing for a year, it’s coming to a head now, as the conglomerate missed one loan payment in June and more are expected. The company’s offices were the site of angry protests this week, and things could get even uglier on Monday when the company is likely to miss another key interest payment to its increasingly concerned financiers.
Evergrande’s possible collapse is sparking fears that it could take other parts of China’s housing market down with it — and impact business interests outside China, too.
Here’s a brief explainer of what you need to know about the story.
What is Evergrande?
Founded in 1996 in the Chinese city of Shenzhen, across the border from Hong Kong, Evergrande is mostly a property developer, whose core business is buying up land and turning it into residential real estate. Company founder Hui Ka Yan is a former steel worker who rode China’s 21st century real estate boom to a fortune that was at one point last year worth $30 billion US, good enough for the title of third-richest man in China.
The company has built more than 1,300 housing developments in 280 cities in China, with plans for another 3,000 projects underway in various cities across the country.
But like any good conglomerate, it has expanded into all sort of other businesses, including bottled water and food, electric vehicles, theme parks, a Netflix-like streaming service with almost 40 million customers — and even a professional soccer team.
Why are they in trouble?
Debt — and lots of it. The company has almost two trillion yuan of debt on its books, the equivalent of more than $300 billion US. The company aggressively borrowed money to buy more land to develop, and sold apartments quickly at low margins to raise enough cash to start the cycle up again. Which works fine as a business model — until it doesn’t.
In late 2020, new rules brought more scrutiny to the company’s finances, which revealed higher-than-expected debt loads. That, coupled with mounting construction delays spooked buyers, setting up a vicious cycle. The company began its descent to pariah status as lenders and buyers lost their nerve in lockstep with each other.
Every attempt by the company since then to distract from its problems only served to draw more attention to them. Lenders got more and more unsettled. Existing owners got upset. New sales slowed, which created a feedback loop that got lenders even more jittery.
WATCH | Investors angrily protest at Evergrande offices:
Buyers at Chinese property developer Evergrande are demanding answers from the company management, as fears mount that the company may collapse under its debt load. (David Kirton/Reuters) 0:34
According to data compiled by Bloomberg, on the 19th of July, presales at two projects in Hunan were halted. Three days later, Hong Kong banks stopped offering mortgages on any incomplete projects by the company in the city. On August 9, two more projects in Kunming stopped construction due to missed payments, followed by similar halts at projects in Nanjing and Chengdu. Things have snowballed ever since. The company’s stock price has cratered by 90 per cent in the past year, and most of their bonds are in junk status.
The company is behind on its obligations to more than 70,000 investors. More than one million buyers of unfinished projects are in limbo. And the pace of problems is picking up. “Sales could slump further as the developer may struggle to restore potential homebuyers’ confidence,” said Lisa Zhou, an analyst with Bloomberg Intelligence.
Monday figures to be an inflection point for the company as Evergrande is supposed to make an $80 million interest payment on one of its many loans, and there’s next to no chance it will pay that, which could start the clock ticking toward some undesirable outcomes.
So what could happen?
A number of bleak B words are on the table — bankruptcy, breakup, buyout, or bailout — and none of them are ideal.
The first option would be the most painful.
“If, as expected, Evergrande is defaulting on its debt and goes through a restructuring, I don’t see why it would be contained,” Michel Lowy of distressed debt investment firm SC Lowy, told Reuters.
But because of the Chinese government’s long-standing desire for stability, that’s also the least likely outcome. The company owes money to 128 different banks, and was behind almost one out of every 20 property sales in China in the past five years. Evergrande permanently employs almost 200,000 people, but hires almost four million people a year to work on various projects.
With a reach that wide, analysts who cover the sector are confident that Beijing won’t let the company simply collapse. “Evergrande’s escalating crisis may prompt government action to prevent social instability,” Zhou said.
More likely is some version of the next two options, a breakup or buyout, where the company sells assets to raise cash and help is brought in to run things. “State-owned enterprises or other developers may also take over Evergrande’s projects, after Chinese officials sent accounting and legal experts to examine the company’s finances,” Zhou said.
Economist Art Woo with Bank of Montreal said in a note on Friday that he also doubts a bailout is coming. “As for who could bear the losses, that’s frankly tricky to predict, but we think it’s reasonable to believe that the authorities are unlikely to bail out equity holders or creditors in an effort to prevent moral hazard from increasing and improve financial discipline,” he said.
More likely is some sort of organized wind down, to keep damage to a minimum. “We do not believe the government has an incentive to bail out Evergrande (which is a private-owned enterprise),” Nomura analyst Iris Chen said in a note to clients.
“But they will also not actively push Evergrande down and will supervise a more orderly default, if any, in our view.”
WATCH | CBC reported on China’s ‘ghost cities’ of empty towers nearly a decade ago:
CBC’s Adrienne Arsenault explains how empty skyscrapers are casting shadows on the Canadian economy. 2:31
China has been in a housing boom for more than two decades now, as more and more people put money into residential real estate — almost regardless of the price and demand for the underlying asset.
Video went viral on social media this month of a 15-tower condo development in Kunming being dynamited to the ground because it was a ghost city with no actual residents, eight years after being built.
While that wasn’t an Evergrande project, the worry is that there are many others out there like it.
Re-upping the stunning demolition videos showcasing housing oversupply in China: 15 skyscrapers in China that were part of the Liyang Star City Phase II Project were just demolished after sitting unfinished for eight years due to absent market demand. <a href=”https://t.co/UByqjk8QXX”>pic.twitter.com/UByqjk8QXX</a>
The 2009 financial crisis was sparked by the failure of two investment banks, Bear Stearns and then Lehman Brothers, which exposed just how much bad debt there was in the system, and caused a chain reaction of worry down the line
That may be far fetched for the economy as a whole this time around, but it’s certainly on the table for China’s housing market at least.
“Lehman (was) very different as it went across the financial system, freezing activity,” said Patrick Perret-Green, an independent London-based analyst.
“Millions of contracts with multiple counterparties, everyone was trying to work out their exposure,” he said. “With Evergrande it depresses the entire real estate sector.”
“There are other developers that are suffering from the same problem of no access to liquidity and have extended themselves too much,” Lowy said.
Simon MacAdam, an economist with Capital Economics, says the Lehman parables are unwarranted.
“The China’s Lehman moment narrative is wide of the mark,” he said. “Even if it were the first of many property developers to go bust in China, we suspect it would take a policy misstep for this to cause a sharp slowdown in its economy.”
Regardless, the Evergrande saga is a cautionary tale about the down side of unrestrained real estate speculation anywhere.
As Woo put it: “A default or bankruptcy does not pose a Lehman-type threat … but it’s still bad news for the economy.”
Lakshman Achuthan, co-founder of the Economic Cycle Research Institute, says the currency markets are now confirming his call.
“We made that earlier global Industrial downturn call, and that meant that you were going to see this slowdown in industrial materials price inflation, industrial commodity price inflation and the top line of the chart shows that,” Achuthan told CNBC’s “Trading Nation” on Thursday.
ECRI’s industrial materials price index shows the growth rate at its lowest level in around a year after a sharp runup from mid-2020 to early 2021.
“That weakness in industrial materials inflation, commodity price inflation, is also negative for commodity currencies like the Canadian dollar or the Australian dollar because those are commodity-exporting countries and they rely more on commodity exports,” said Achuthan.
The Canadian and Australian dollar, both commodity currencies, are closely tied to commodity price inflation, and the fact they have begun to roll over confirms the downturn in industrial price inflation, he said. The Canadian dollar is closely tied to oil prices, while the Aussie dollar has a high correlation with oil and gold.
That could portend trouble for the commodity trade as well as other areas of the market, Achuthan said.
“A lot of people are excited about the runup in commodities. We’re saying directionally you got to look the other way. It has knock-on effects to commodity currencies vis-a-vis the dollar. And that has knock-on effects I think for other asset classes — what’s going on with some of those currencies can obviously impact commodities themselves, bonds, even stocks,” he said.
A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here.
London (CNN Business)“Delta? What Delta?”
That was the take from Ian Shepherdson, chief economist at Pantheon Macroeconomics, after seeing the data on US retail sales for August.
What’s happening: Contrary to expectations, US retail sales increased last month as consumers continued to shell out on clothing, furniture and groceries.
It’s a promising sign heading into the crucial holiday shopping season, and indicates that the US economy is demonstrating resilience despite a spike in coronavirus cases triggered by the Delta variant.
“We see only very modest evidence that the spread of the Delta variant is having an impact on demand,” Citi’s Veronica Clark and Andrew Hollenhorst said in a note to clients.
Another signal: There were 332,000 initial jobless claims in the United States last week. That’s only a slight uptick from the week prior, when claims hit a pandemic low.
The four-week moving average has now dropped to 335,800 claims, its best level in the Covid-19 era, according to Jim Reid of Deutsche Bank.
That’s not to say the Delta variant isn’t having any impact. Seatings at restaurants in the United States appear to have dropped sharply in recent days, according to data from OpenTable.
On the radar: In August, spending at restaurants was flat month-over-month. Grocery store spending also climbed 1.8%, suggesting that Americans were opting to dine more at home again.
And we can’t forget the jarring US jobs report for August, when just 235,000 positions were added. Restaurants and bars registered a loss of 42,000 jobs.
Big picture: The data is promising, but also messy. Rising prices due to inflation could be contributing to higher retail sales, muddying the picture. Plus, there’s a huge element of uncertainty about the economic trajectory as colder weather sets in. The Federal Reserve, which meets next week, doesn’t have an easy job charting the path forward.
For the time being, many are choosing to look on the bright side. New variants may weigh on the economic recovery, but could be far less damaging than early in the pandemic, as vaccinations help consumers feel more confident and allow governments to avoid reimposing strict rules.
“You’ll see more resilience with each wave,” Jeffrey Sacks, head of investment strategy for Europe, the Middle East and Africa at Citi Private Bank, predicted earlier this week.
Wall Street is unfazed by China’s potential ‘Lehman moment’
The implosion of Lehman Brothers 13 years ago this week showed how the collapse of a single business can send shockwaves around the world.
Now, more than a decade later, policymakers and investors in the United States are watching closely as a massive property developer thousands of miles away teeters on the brink of default, my CNN Business colleague Matt Egan reports.
Catch up: The risk is that the collapse of Evergrande, a Chinese real estate company with a staggering $300 billion of debt outstanding, could set off a chain reaction that spreads overseas.
“Some fear an Evergrande meltdown will have systemic risks on par with the impact Lehman Brothers’ demise had on the US stock market,” Ed Yardeni, president of Yardeni Research, wrote in a note to clients Thursday.
Like Lehman in its heyday, Evergrande is massive. It’s one of the world’s biggest businesses by revenue, and employs about 200,000 people.
But for now, investors are confident that authorities in Beijing would use their vast control over the Chinese economy to limit the damage. So far, there’s no evidence of contagion in US markets.
“I don’t think the Evergrande meltdown, and the financial problems of Chinese property companies more broadly, will reverberate back on the US economy,” Mark Zandi, chief economist at Moody’s Analytics, told CNN Business.
Not alone: “We think that the ‘China’s Lehman moment’ narrative is wide of the mark,” Simon MacAdam, senior global economist at Capital Economics, wrote in a note on Thursday. MacAdam said even a “messy collapse” of Evergrande would have “little global impact beyond some market turbulence.”
Only time will tell, however, how systemically important the company really is — and what Beijing may do to cushion the blow.
These were the week’s hottest IPOs
Companies that made their public market debuts in the United States this week are generating tons of hype, benefiting from investor enthusiasm for new stocks in industries ranging from software to athletic wear.
The highlights: ForgeRock, a San Francisco-based company that makes identity verification software, hauled in $275 million through its stock sale. Its shares also enjoyed a huge pop in their first day of trading on the New York Stock Exchange, jumping 46% on Thursday.
Stock in Swiss sportswear brand On, which is backed by tennis superstar Roger Federer, has surged 56% above the company’s initial public offering price since Wednesday.
And Thoughtworks, a tech consultancy, has seen its stock on the Nasdaq jump almost 50% in its first two days of trading.
Bloomberg calculates that IPOs on US exchanges — excluding special-purpose acquisition companies, or SPACS — raised almost $4.4 billion this week.
Step back: Buzzy IPOs have generated mixed returns this year. The Renaissance IPO exchange-traded fund, which tracks the biggest newly-listed public companies in the United States, is up just 7.3% year-to-date, compared to a 19.1% rise in the S&P 500. Its top holdings include Snowflake, Palantir, Datadog and Coinbase.
But newer stocks have started to perform better in recent months. The Renaissance IPO ETF has climbed 4.6% in the third quarter, versus a 4.1% increase in the S&P 500.
Manchester United(MANU) reports results before US markets open.
Also today: The University of Michigan’s survey of consumer sentiment posts at 10 a.m. ET.
Coming next week: The Federal Reserve holds a policy meeting as investors scrutinize the central bank’s next steps.
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