Limited Labor

As recently as 1980, it took S&P 500 firms, on average, eight employees to produce $1 million in inflation-adjusted revenue. By 1990, it was six people, and by 2000, four. Lest you think productivity slowed, by 2010 it took just 2.5 workers and today it takes just 2. Over the last forty years, the number of workers needed to produce the same output keeps falling by half every twenty years.

Imposing Inflation

While inflation fell from 6.5% Y-o-Y in 12/22 to 6.4% in 1/23, and core inflation similarly declined from 5.7% to 5.6%, its fourth straight decline, the declines are moderating. Worse, core-services inflation, which excludes energy and is the Fed’s favorite measure, has not declined for 17 straight months and is up 7.2% Y-o-Y. Inflation is migrating to services, and the Fed will surely raise rates 25bps in March and May.

Wild Wheels

Used-car prices are down 7% Y-o-Y, but up 4.3% M-o-M, the third month in a row of M-o-M increases, and the largest February rise since 2008. The car market remains about five million units short from the computer chip shortage, which is lessening. A short-term price driver is always seasonality, but currently strong demand for used cars from car rental firms as they continue fleet rebuilding is key.

House Hunting

Home sales eased for the 12th straight month in 1/23, the longest streak of monthly declines since 1999 when data collection began. Sales fell to a seasonally adjusted annualized rate of 4 million, from 4.03 million in December, and 4.1 million in November. The increasingly tiny declines suggest the sales bottom is here or fast approaching. Prices rose 1.3% Y-o-Y, the smallest rise since 2/12. Y-o-Y prices will soon decline.

Rocking Rentals

In 22Q4, for the first time since at least 1974 when data became available, the quarterly number of housing units built-for-rent at 133,000 exceeded the number of single-family units built-for-sale at 126,000. Historically, the only times these numbers came close were during the recessions of 1982 and 2008/09 when single-family production collapsed. Single-family built-for-sales starts are down about 40% from their recent peaks, built-for-rent activity is nearing its 1986 high.

Limited Lessening

Monetary policy works most quickly via the most interest rate sensitive sectors of the economy, autos and housing. However, for very different reasons, both sectors have successfully resisted the impact of higher rates. Car sales are rising as semiconductor supply improves, and while housing starts are way down, the number of units, both single-family and multifamily, under construction is staggeringly high, and thus construction employment has yet to decline.

Car Crunch

At the end of 2022, 9.3% of subprime borrowers, those with FICO scores below 660, were 30 days or more behind on their car payments. This is the highest rate since 2010. In addition to being squeezed financially, it’s partly because used car prices are falling, and when used car prices peaked some dealers sold vehicles that were in very bad condition, making nonpayment financially very advantageous and appealing.

Discharge Data

While many firms are laying off staff, be it Amazon winnowing 18,000 or Disney culling 7,000, they all cut roughly 5% of their workforce. These firms probably decided in late 2022 based on economic conditions to start layoffs in early 2023. Others took advantage of layoffs elsewhere to implement opportunistic layoffs to mollify investors, while some overhired. If the cuts are much deeper, that suggests something more company specific.

Rate Readings

22Q4 GDP came in at 2.7%, down from 3.2% in 22Q3, primarily due to softening consumer spending, suggesting weakening. However, in January the Fed’s favorite inflation measure meaningfully rose, with December’s reading being revised upwards. Consumer spending jumped 1.8% M-o-M, the largest rise in two years, probably aided by mandated minimum wage increases, annual pay raises, and Social Security inflation-adjustments of 9%. All that said, let the rate hikes continue.

Food Frequency

The Friday File - The first restaurant to allow drivers to take meals “to go” was an In-N-Out Burger that opened in 1948. Jack in the Box followed in 1951. McDonald’s first drive-through opened in 1975. In 2022, 85% of fast-food orders were taken to-go, down from 90% in 2020, but up from 76% pre-Covid. Among full-service restaurants, 33% of orders are now to-go, almost double the pre-Covid rate.

Pounded Profits

With 23Q1 earnings season almost over, it appears net profits for S&P 500 firms will be 11.3%. While this would be the sixth straight quarterly decline, and well down from their 21Q2 13% peak, it returns profits to where they were in CY2019. Despite higher sale prices, elevated labor, materials, and energy costs are being felt. Lower profits could lead to reduced corporate investment, lower investor payouts, and layoffs.

Presidential Performance

The state with the most presidents’ births is Virginia with eight, followed by Ohio with seven, New York with five, and Massachusetts with four. Those states account for 52.2% of all presidents. New Jersey and Vermont both have three, and North Carolina, Pennsylvania and Texas have two each. Eight presidents have been born west of the Mississippi, and 25 states have not had a presidential birth.

Traffic Trouble

The Friday File: The city with the worst traffic is London where the average travel time per 10 kilometers (6.21 miles) is 36 minutes 20 seconds. In second is Bengaluru, India, at a time of 29 minutes 10 seconds. Third is Dublin at 28 minutes 30 seconds. New York is 19th at a zippy 24 minutes 30 seconds. London also has the slowest rush hour speed of 14km/hr (8.7 mph).