Member Briefing June 1, 2023
House Passes Debt Ceiling Extension – Bill Heads to Senate
The House voted to pass Speaker Kevin McCarthy's debt ceiling deal with President Joe Biden tonight on a 314-117 vote. The bill will now go to the Senate ahead of Monday’s deadline to act or risk a catastrophic default on the nation's debt. The vote was a major test for McCarthy, R-Calif., who narrowly won the speakership in January and has faced threats to his gavel from far-right members.
The bill passed with bipartisan support after clearing a key procedural vote earlier Wednesday. If it becomes law, the bill would suspend the debt ceiling for two years, through the next presidential election, along with some modest spending cuts and policy provisions.
War in Ukraine Headlines
- Ukraine and Russia: The Latest News – The Guardian
- Could Russia's Economy Finally be Feeling the Heat Because of Sanctions Over the War? - NPR
- Drones Attack Russian Oil Refineries Near Major Oil Port Novorossiisk - Reuters
- Russia Says Destroyed Ukraine’s ‘Last Warship’ – USA Today
- Drone Attack Draws Moscow Closer to Ukraine’s Front Line – France24
- UN Nuclear Chief Urges Russia and Ukraine to Ban Attacks at Europe’s Largest Nuclear Power Plant - AP
- Macron Backs NATO Membership 'Path' for Ukraine – Financial Times
- Top Russian Official Says British Politicians Now a Legitimate Military Target – Politico
- Prigozhin Asks Prosecutors to Investigate 'Crimes' by Top Russian Defence Officials – Reuters
- 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
China's Factory Activity Falls Faster than Expected as Recovery Stumbles
China's factory activity shrank faster than expected in May on weakening demand, heaping pressure on policymakers to shore up a patchy economic recovery and knocking Asian financial markets lower. The official manufacturing purchasing managers' index (PMI) fell to a five-month low of 48.8, the National Bureau of Statistics (NBS) said on Wednesday, down from 49.2 in April and below the 50-point mark that separates expansion from contraction. Service sector activity expanded at the slowest pace in four months in May, with the official non-manufacturing PMI falling to 54.5 from 56.4.
The PMI subindexes for May showed factory output swung to contraction from an expansion while new orders, including new exports, fell for the second month. Chemical, ferrous metal smelting and rolling processing industries faced significant declines in production and demand, said NBS.
U.S. Manufacturers Seek China Alternatives as Tensions Rise
Fears of military conflict and increasing security worries have some U.S. manufacturers re-evaluating their reliance on China. Executives are plotting alternate supply chains or devising products that can be made elsewhere should China’s hundreds of thousands of factories become inaccessible. That prospect became more conceivable, they said, after the 2022 invasion of Ukraine prompted companies to sever ties with Russia, sometimes taking huge write-downs.
U.S. companies were further rattled after Chinese authorities recently questioned workers at Boston-based consulting firm Bain & Co. and raided the Beijing offices of Mintz Group, a due-diligence firm based in New York. The government has also barred major Chinese firms from buying products made by U.S. semiconductor company Micron Technology, citing national-security risks. Some businesses are plotting a departure, he said, but are finding no easy equivalent to their setups in China.
COVID News: How Worried Should the World Be With Chinas Recent Outbreak?
China has been facing a new COVID-19 wave fueled by the XBB variant since April. Data from Zhong Nanshan—a respiratory disease doctor who was among the first to confirm COVID-19’s easy transmissibility—provided a rare insight into how the disease could possibly be spreading in China almost six months after Beijing abruptly ended its draconian zero-COVID strategy. Since April, Zhong’s modeling revealed that the XBB variant is expected to cause 40 million infections weekly by May, going up to 65 million in June. This goes against the grain of Chinese health officials’ estimate that the wave had peaked in April. In Beijing, the number of new infections recorded between May 15 and 21 grew four times in four weeks.
Yanzhong Huang, senior fellow for global health at the Council on Foreign Relations, tells TIME that although only mass testing can detect the true extent of the COVID-19 surge, the population has obtained some immunity from the preceding wave. “We shouldn’t worry if China doesn’t worry,” Huang says. “Public health officials try to downplay the severity of this second wave. The Chinese people seem to have learned to co-exist with the virus. There’s that social adaptability.”
NYS COVID Update
The Governor updated COVID data for the week ending May 26.
- Weekly: 34
- Total Reported to CDC: 79,628
- Average Daily Patients in Hospital statewide: 581
- Average Daily Patients in ICU Statewide: 55
7 Day Average Cases per 100K population
- 2.2 positive cases per 100,00 population, Statewide
- 2.4 positive cases per 100,00 population, Mid-Hudson
- Read the Press Release (no press release this week)
- Visit the NYS COVID-19 Data Hub
- NYS Vaccination Tracker
Texas, Chicago Manufacturing Barometers Go Lower
Texas factory activity remained relatively flat in May, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, inched down from 0.9 to -1.3, with the near-zero reading suggestive of little change in output from last month. Other measures of manufacturing activity showed declines in May. The new orders index has now been in negative territory for a year and pushed down further from -9.6 to -16.1. The growth rate of orders index also fell, declining 10 points to -20.7, its lowest value since mid-2020. The capacity utilization index moved down from 3.9 to -4.9, while the shipments index was unchanged at -3.0.
The latest Chicago Purchasing Manager's Index (Chicago Business Barometer) regressed to 40.4 in May from 48.6 in April. This is the ninth straight month in contraction territory. This reading comes in below the forecast of 47.0. The Chicago PMI assess the business conditions and the economic health of the manufacturing sector in the Chicago region.
Non-compete Clauses Violate Labor Law, NLRB Lawyer Says
National Labor Relations Board (NLRB) General Counsel Jennifer Abruzzo in a memo to agency lawyers said so-called "non-compete agreements" discourage workers from exercising their rights under U.S. labor law to advocate for better working conditions. Abruzzo, an appointee of Democratic President Joe Biden, in Tuesday's memo said non-competes violate labor law "unless the provision is narrowly tailored to special circumstances justifying the infringement on employee rights." Specifically, the pacts could prevent workers from resigning or threatening to do so to demand higher wages or other improvements at the workplace, Abruzzo wrote.
The NLRB general counsel acts as a prosecutor and brings unfair labor practice cases to the separate five-member board, which currently has a Democratic majority. The U.S. Federal Trade Commission, which enforces antitrust law, proposed a rule in January that would ban companies from requiring workers to sign non-compete provisions. The proposal is pending. Business groups have said non-competes are a crucial way for companies to protect trade secrets and that they promote competitiveness.
Supply Chain Issues Will Linger for 'Made in America' Semiconductors
A recent report found that reshoring initiatives have become so successful that companies who have taken a wait-and-see approach in the past are now scrambling to find manufacturing operations in the United States and Mexico. However, the report does recognize that reshoring is much harder than many companies expected and requires thorough preparation and strategic planning. In the realm of cleantech, the importance of rare earth minerals used in electric vehicle motors and offshore wind turbines cannot be overlooked.
Currently, around 60% of all mined rare-earth minerals come from China, and China dominates the rare-earth supply chain. The current geopolitical tensions raise concerns about how reliance on China for rare earth minerals could affect production and exports. Mining and processing facilities are being established in the U.S. but ramping up production and building expertise in this field takes time. Therefore, it’s crucial to recognize that a significant portion of the rare-earth supply chain still resides in China, making it difficult to fully commit to “Made in America” in the short term.
More Rate Hikes Mixed With Collapsing Commodity Prices to Trigger 'Severe Economic Reset
The Fed that keeps raising rates in the face of falling commodity prices could spell out a severe economic reset, Bloomberg Intelligence warned in its June metals outlook. In the last two weeks, market expectations shifted towards a rate hike at the June 13-14 monetary policy meeting. The CME FedWatch Tool now sees the market pricing in a 65% chance of another 25-basis-point hike next month.
"The fact that the Federal Reserve and most central banks remain focused on tightening despite collapsing commodities, producer prices and bank deposits may portend a severe economic reset," Bloomberg Intelligence senior macro strategist Mike McGlone said in the June outlook. "Our base case for a severe economic reset is gaining fuel as China data disappoint and liquidity by most measures continues to contract."
The AI Boom Runs on Chips, but It Can’t Get Enough
A shortage of the kind of advanced chips that are the lifeblood of new generative AI systems has set off a race to lock down computing power and find workarounds. The graphics chips, or GPUs, used for AI are almost all made by Nvidia NVDA 2.99%increase; green up pointing triangle. But the boom in demand for them has far outpaced supply with the viral success of ChatGPT, a chatbot that is able to respond to questions in humanlike ways.
That situation has restricted the processing power that cloud-service providers like Amazon.com and Microsoft can offer to clients such as OpenAI, the company behind ChatGPT. AI developers need the server capacity to develop and operate their increasingly complex models and help other companies build AI services. Even the most connected tech entrepreneurs in the world are struggling to secure capacity. “GPUs at this point are considerably harder to get than drugs,” Elon Musk told The Wall Street Journal CEO Council Summit on May 23.
Terminator - AI Could Cause Human ‘Extinction,’ Tech Leaders Warn
Tackling the “risk of extinction” posed by artificial intelligence should be a global priority on par with averting catastrophes like nuclear war, a group of tech leaders and experts warned on Tuesday, the latest high-profile call for caution as concern about the potential harms of AI grow and increasingly advanced systems are rolled out. The statement was published by the U.S.-based nonprofit the Center for AI Safety, which works to reduce society-level risks associated with AI by conducting safety research and advocating for safety standards.
The terse statement is the latest of several high-profile warnings from leaders across civil society, academia and industry to warn about the potential risks AI poses, including a letter signed by the likes of Elon Musk and Steve Wozniak calling for a six-month pause to take stock of the risks posed by AI. Though many signatories have spoken about the existential risk from AI for many years—including Skype cofounder Jaan Tallinn and acclaimed British physicist Martin Rees—the widespread rollout of generative AI systems like ChatGPT have added urgency to the debate, particularly as companies race to develop, build and deploy better systems faster than their rivals.
Toyota’s Kentucky Plant Will Assemble New Electric SUV
Toyota is set to begin assembling a new battery electric SUV at its manufacturing plant in Georgetown, the company announced Wednesday. Starting in 2025, Toyota Kentucky will begin assembling a new, three-row, battery electric SUV, Toyota said. Toyota said the Kentucky plant will lead the company’s carbon reduction efforts with this new initiative to assemble the electric vehicles. The new vehicle advances the company’s “commitment to vehicle electrification” and moves to reduce its carbon emissions, Toyota said.
This vehicle will be the company’s first U.S.-assembled battery electric vehicle, and it will use batteries from a new Toyota battery manufacturing plant North Carolina. The North Carolina plant begins battery production in 2025, Toyota said.
Mortgage Demand Drops to the Lowest Level in Three Months
Mortgage rates shot higher last week. In turn, mortgage demand dropped to the lowest level since the end of February. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) increased to 6.91% from 6.69%, with points rising to 0.83 from 0.66 (including the origination fee) for loans with a 20% down payment. That was the weekly average according to the Mortgage Bankers Association, but other daily reads saw the rate head over 7%.
As a result, mortgage applications to refinance a home loan, which are most sensitive to rate changes, decreased by 7% last week from the previous week, seasonally adjusted. Application volume was 45% lower than the same week one year ago.
Musk Visits China Amid Increased Tensions With US
Elon Musk, Chief Executive of Tesla, is making a visit to China this week. As the electric vehicle company's second-largest market and a crucial player in its supply chain, the country holds significant importance for Tesla. After a meeting with the Chinese foreign minister, Musk was reported to have expressed his opposition to the idea of "decoupling" the world's two leading economies.
China accounts for 50% of Tesla’s vehicle sales and 20% of its production capacity, and this visit would “set the story straight, to make sure he was on the same page as the [Chinese Communist Party],” said Anthony Sassine, senior investment strategist at investment manager Kraneshares.
Increased Climate Disclosure Burden Coming for Federal Contractors
Federal contractors are awaiting issuance of new procurement regulations targeted at ensuring public disclosure of greenhouse gas, or GHG, emissions and climate-related financial risk and also setting science-based GHG reduction targets. Under the currently proposed rule, non-excepted contractors who do not comply with the rules could be presumed non-responsible and thus ineligible to receive federal awards. The proposed rule is intended to understand and reduce supply chain vulnerabilities through greater transparency and goal setting.
Under the proposed rule issued this past November, contractors must represent whether they are a “major contractor” — more than $50 million in federal contract obligations in the prior fiscal year — or a “significant contractor” — between $7.5 and $50 million in federal contract obligations in the prior fiscal year. If the contractor meets either of those definitions, it must complete a GHG analysis and report its findings in the System for Award Management, or SAM.
EV Affordability Is a Problem that Won’t Magically Go Away on the EPA’s Timeline
Taxpayer-based incentives to manufacturers and consumers will increase BEV sales in the United States. The Inflation Reduction Act’s “carrots” are expected to lift U.S. battery-electric sales to 4.03 million units by the end of the decade, or 24.2% of the light-vehicle market. This outlook is far below the 50% vision pitched by the White House. The reasoning is straightforward: BEV (lack of) affordability and purchase alternatives.
Price parity with gasoline versions will be difficult to achieve even with battery costs of $100 kWh (vs. $150 today). At the lower battery-cost level, the price of battery-electric vehicles will still average 20% above comparable gasoline models through 2026 (without credits). Why? Because shareholders want profits. The affordability problem is obvious. Consumers will also have a wide choice of hybrids from Ford, Stellantis and Asian brands that eliminate any public charging or recharging-time anxiety—at a lower price. Additionally, while the demand for passenger cars has declined significantly, the need to provide affordable transportation to lower-income consumers will still be a core part of the market. This income group may not do the cost-of-ownership calculations that economists love and, more concerned with monthly payments, could overextend themselves.