Member Briefing August 16, 2023
Empire State Manufacturing Survey – Activity Falls, Optimism Rises
Manufacturing activity declined in August in New York State. The general business conditions index fell twenty points to -19.0, its first negative reading since May. Sixteen percent of respondents reported that conditions had improved over the month, while thirty-five percent reported that conditions had worsened. Here are some key findings.
- The new orders index fell twenty-three points to -19.9.
- The shipments index dropped twenty-six points to -12.3, pointing to a moderate decline.
- The unfilled orders index remained negative at -6.8, a sign that unfilled orders continued to decline.
- The inventories index also remained negative at -9.7, indicating that inventories moved lower.
- The delivery times index came in at 1.9, suggesting delivery times were steady.
- The index for number of employees came in at -1.4, indicating little change in employment levels.
- The average workweek index fell to -10.7, indicating a decline in hours worked.
- Both the input and selling price indexes moved up several points, pointing to a modest pickup in the pace of price increases.
- The index for future business conditions rose six points to 19.9, its highest level in more than a year.
- New orders and shipments are expected to increase significantly, and employment is expected to grow considerably.
- Input price increases are expected to pick up.
War in Ukraine Headlines
- Ukraine and Russia: The Latest News – The Guardian
- Ukraine Reports Fierce Fighting, 'Some Success' in Counteroffensive - Reuters
- Kremlin Tightens Squeeze on Ukraine’s Global Grain Share - Politico
- Russia Raises Interest Rates to 12% to Halt Collapse in Rouble – Financial Times
- Russia Will Struggle to Cope With a Sinking Rouble – The Economist
- Missile Hits Swedish SKF Factory in Ukraine, Killing Three – Reuters
- U.K. Arrests Bulgarian Trio Suspected of Spying for Russia - WSJ
- 'Stop Machine' - Russia Releases Video Showing Navy Boarding Cargo Ship in Black Sea - Reuters
- Without F-16s, Ukraine’s Counteroffensive Is Missing a Key Piece - NYT
- Interactive Map: Assessed Control of Terrain in Ukraine – Institute for the Study of War
- Map – Tracking Russia’s Invasion of Ukraine – Live Universal Awareness Map
Fitch Warns it May be Forced to Downgrade Dozens of Banks
A Fitch Ratings analyst warned that the U.S. banking industry has inched closer to another source of turbulence — the risk of sweeping rating downgrades on dozens of U.S. banks that could even include the likes of JPMorgan Chase. The ratings agency cut its assessment of the industry’s health in June, a move that analyst Chris Wolfe said went largely unnoticed because it didn’t trigger downgrades on banks. But another one-notch downgrade of the industry’s score, to A+ from AA-, would force Fitch to reevaluate ratings on each of the more than 70 U.S. banks it covers.
In terms of what could push Fitch to downgrade the industry, the biggest factor is the path of interest rates. Higher rates for longer than expected would pressure the industry’s profit margins. A related issue is if the industry’s loan defaults rise beyond what Fitch considers a historically normal level of losses, said Wolfe. Defaults tend to rise in a rate-hiking environment, and Fitch has expressed concern on the impact of office loan defaults on smaller banks.
US Retail Sales Bounce With Online Spending Boost
US consumer spending rose more than anticipated in July, according to government data released Tuesday, showing resilience even as the economy cools on the back of a boost from online spending. Retail sales advanced 0.7 percent to $696.4 billion last month, up from a revised 0.3 percent rise in June, said the Commerce Department. Consumption has proven more robust than expected in the United States as households dip into savings accumulated during the pandemic, supporting growth while business activity slowed in recent months. While there was a jump in the headline figure, economists have pointed out that consumers are drawing down on their excess savings while higher interest rates bite.
Analysts noted that spending deals offered on Amazon Prime Day -- which took place in July -- likely buoyed consumer purchases online. Official data released Tuesday showed that the overall increase came on the back of a 1.9 percent rise at non-store retailers, while sales at restaurants and bars picked up 1.4 percent from June. But sales at auto dealers dipped 0.3 percent from June to July, while that at gasoline stations picked up 0.4 percent.
COVID Update - What We Know About 'Eris,' From Symptoms to How Fast it's Spreading
Eris, formally known as EG.5, was thought to have accounted for fewer than 1% of COVID-19 cases in the US at the end of April, according to the Centers for Disease Control and Prevention. But it is now estimated to account for 17.3% of new US COVID-19 cases, the CDC says. Eris hasn't resulted in more deaths than the XBB strain of Omicron, for example. Still, the CDC reported a 12.5% rise in hospitalizations from COVID-19 at the end of July.
So far, symptoms of Eris seem virtually identical to those caused by other coronavirus strains, according to Swartzberg. Eris, like other strains that cause COVID-19, can lead to a loss of taste or smell, cough, fever, chills, shortness of breath, fatigue, body aches, and headaches. Those most at risk include older people, people with compromised immune systems, and those with chronic diseases, Swartzberg said. Eris may be more contagious than other strains, but it doesn't appear to be deadlier.
All About the Chinese Economy
China Reported Disappointing Retail Sales, Industrial Production, and Investment Data in July - China reported July data that broadly missed expectations. The National Bureau of Statistics report also did not include the unemployment figure for young people, which has soared to record highs in recent months.
Retail sales rose by 2.5% in July from a year ago, below expectations for a 4.5% increase, according to analysts polled by Reuters. Industrial production rose by 3.7% in July from a year ago, below the 4.4% increase analysts had expected. Fixed asset investment rose by 3.4% for the first seven months of the year from a year ago, below the 3.8% forecast by the Reuters poll. On a year-to-date basis, real estate investment fell by 8.5% from a year ago as of July, a greater decline than as of June. Read More at Politico
China Halts Youth Jobless Data as Economy Falters - China has stopped releasing youth unemployment figures, which were seen by some as a key indication of the country's slowdown. The decision is due to changes in the world's second largest economy and its society, a government spokesman said. In June, China's jobless rate for 16 to 24 year olds in urban areas hit a record high of more than 20%. Official figures published on Tuesday showed China's overall unemployment rate had risen to 5.3% in July.
A spokesman for the National Bureau of Statistics said the method of calculating unemployment among young people needed to be reconsidered. "The economy and society are constantly developing and changing. Statistical work needs continuous improvement", Fu Linghui told a news conference in Beijing. Mr Fu hinted that the growth in the number of students between 16 and 24 years of age had affected unemployment figures, but China has never counted those in education as unemployed. Read more at The BBC
China Central Bank Unexpectedly Cuts Key Rates as Economy Slumps - China’s central bank unexpectedly cut rates on Tuesday, as policymakers continued to ramp up support for its struggling economy. Early Tuesday, the People’s Bank of China trimmed the interest rate on 401 billion yuan ($55.25 billion) worth of one-year medium-term lending facility (MLF) loans from 2.65% to 2.50. It was the second rate cut in three months. in the late afternoon, the PBOC cut short term rates. Overnight, seven-day, and one-month standing lending facility rates were each trimmed by 10 basis points to 2.65%, 2.8% and 3.15%, respectively.
China’s policymakers recently announced a raft of measures to boost consumption, private sector investment and foreign investment. Still, the overall approach to additional stimulus has been cautious. The move toward stimulus has been “more targeted, more specific,” Louise Loo, lead economist at Oxford Economics said. “They’ve very clearly wanted to target the big ticket items in terms of consumption. Is that really enough to lift consumer sentiment, business sentiment? I really don’t think that they’ve been doing enough.” Read more at CNBC
NYS Redistricting Case to be Argued Before Court of Appeals in November
The battle for control of Congress next year could hinge on the outcome of a court battle over New York’s political boundaries. The case, filed on behalf of the Democratic Congressional Campaign Committee, could lead to the redrawing of the boundaries for New York’s 26 congressional districts. Democratic petitioners have until Sept. 18 to file their legal briefs at the Court of Appeals. The Republicans have until Oct. 23 to file their response. The case is set to be argued before the Court of Appeals in mid-November.
Democratic petitioners have until Sept. 18 to file their legal briefs at the Court of Appeals. The Republicans have until Oct. 23 to file their response. The case is set to be argued before the Court of Appeals in mid-November. Democrats have argued the congressional map should be redrawn because the map created last year was only a temporary fix. Republicans have argued the congressional map should stay in place for the remainder of the decade because the state constitution does not allow for a wholesale change of the map after its been put into place. The boundaries have politically benefited Republicans and hurt Democrats, although neither side has argued in court that the case is political.
Giant Subsidies and Rising Protectionism are Hurting Smaller Countries from the U.K. to Singapore
New tax credits for manufacturing batteries, solar-power equipment and other green technology are drawing a flood of capital to the U.S. The European Union is trying to respond with its own green-energy support package. Japan has announced plans for $150 billion of borrowing to finance a wave of investment in green technology. All of them are working to become less dependent on China, which has a big lead in areas including batteries and the minerals to make them.
Now, some smaller players are getting left behind. Many are nimble economies that were on the rise during decades of free trade, but are at a disadvantage in a new era of aggressive industrial policy. Industrialized nations such as the U.K. and Singapore lack the scale to compete against the biggest economic blocs in offering subsidies. Emerging markets such as Indonesia, which had hoped to use its natural resources to climb the economic ladder, are also threatened by the shift.
AI HR Programs May Lead to Title VII Discrimination Claims
The use of artificial intelligence (AI) programs to make employment-related decisions creates a risk for employers to be subject to Title VII discrimination claims. AI programs are complex machines that can potentially generate biased results against protected groups of people. Employers are becoming vastly dependent on AI programs to make decisions in hiring, promotions, terminations, and monitoring employee performance. The risk of bias in conjunction with employers’ increased dependence on AI programs is leading to greater regulations and potential liabilities.
Under EEOC guidance, AI programs that “make or inform decisions” pertaining to employment related selections will be treated as a selection procedure in Title VII discrimination claims. Regardless of an employer’s intent, selection procedures are discriminatory when individuals in a protected group are selected at a “substantially” different rate than the selection rate of individuals in a nonprotected group.
Esmark Bids for U.S. Steel, Setting Up Potential Battle for Steelmaker
Esmark said it made an all-cash offer to acquire United States Steel, ratcheting up competition to acquire the century-old steelmaker. Esmark said it offered $35 a share Monday to acquire all issued and outstanding shares in U.S. Steel. Esmark is a Pennsylvania-based industrial conglomerate with deep ties to the steel industry. The privately owned company is headed by James Bouchard, a former vice president for U.S. Steel’ European business and operates steel processing and distribution businesses.
U.S. Steel, founded in 1901, dominated the steel industry for decades as a top supplier of steel to carmakers, the appliance industry and construction companies. The company is now the focus of multiple offers aiming to fold its mills and iron ore mines into other steel companies, after rival steelmaker Cleveland-Cliffs said on Sunday that it separately offered to acquire U.S. Steel in a cash and stock deal. While U.S. Steel is considered one of the steel industry’s high-cost producers, analysts said parts of the company appeal to other steel industry players. U.S. Steel has large reserves of iron ore, which is increasingly in demand as scrap steel supplies tighten.
Pratt & Whitney Engine Issue Adds to Airline Challenges
Adding to the challenges facing the airline industry are new inspections needed on a class of Airbus planes that may suffer from microscopic "contamination" of metals used to manufacture Pratt & Whitney engines. Pratt & Whitney's parent company, RTX, formerly Raytheon, announced on July 25 that a "significant portion" of the Airbus A320neo fleet will "require accelerated removals and inspections within the next nine to 12 months."
Company officials described the issue as one of quality control, stressing that there is no immediate risk to flight safety. They blamed a "rare condition in powder metal used to manufacture certain engine parts." The defect could affect 1,200 Pratt engines made between late 2015 and mid-2021. In total, the company has produced 3,000 of the engines. RTX said it will begin inspecting 200 jets by mid-September. It did not say how long the inspections would require. To speed the process, Pratt potentially could replace the engines with newer versions, but supply-chain problems have limited the company's output.
Machine Tool Orders Bump Higher in June, Still Down for the Year
U.S. manufacturers’ new orders for machine tools increased rose to $411.3 million during June 2023, up 12.6% from May, but that result fell -1.7% from last year’s June result. More significant, the new figure brings U.S. machine tool orders to $2.44 billion for the first half of 2023, -12.7% lower than the January June 2022 total. The figures are reported by AMT – the Association for Manufacturing Technology, which tracks orders for metal cutting and metal forming/fabricating machinery on a monthly basis for its U.S. Manufacturing Technology Orders report.
AMT reported that job shops - the largest segment of the market for new machine tools - increased their investments by just 4.2% from May to June, and also reduced the number of new machine tools orders during the month. Half of the geographic regions – Southeast (-20.5%), South Central (-20.5%), and North Central-West (-8.0%) – recorded decreases in new-order value for June. The Northeast (+22.9%) and West (+7.2%) delivered positive order data for the month.