Member Briefing March 20, 2023
U.S. Manufacturing Output Ticks Up in February
Data released by the Federal Reserve Friday showed production at factories edged up in February and output in the prior month was stronger than previously thought. Manufacturing output gained 0.1% last month, the Fed said. Data for January was revised up to show production at factories increasing 1.3% instead of the previously reported 1.0% rise. Output fell 1.0% on a year-on-year basis in February and was on track to contract for a third straight quarter. Regional Fed surveys this week showed manufacturing in New York state and the mid-Atlantic area remained depressed in March.
Manufacturing, which accounts for 11.3% of the U.S. economy, contracted in the third and fourth quarters of 2022 as higher rates undercut demand for goods, which are typically bought on credit. Last month, there were increases in the output of consumer goods, defense and space equipment and materials. But production of business equipment, construction supplies and business supplies declined. Durable manufacturing production nudged up 0.1%, while nondurable manufacturing output climbed 0.2%.
War in Ukraine Headlines
- Ukraine and Russia: The Latest News – The Guardian
- What Xi and Putin Want to Gain from Their Joint Meeting Today – The Hill
- ICC Judges Seek Putin's Arrest Citing War Crimes in Ukraine - Reuters
- Putin Pays Visit to Occupied Mariupol, State Media Reports -BBC
- Putin Visits Crimea on Anniversary of its Annexation From Ukraine - Reuters
- Who Blew Up Nord Stream? Investigators Focus on Six Mysterious Passengers on a Yacht - WSJ
- Slovakia, Poland to Send Ukraine MiG Fighter Jets in Major Shift - CNBC
- Black Sea Drones Show U.S. Involvement in Conflict Against Russia, Says Kremlin – Reuters
- Finland Gears up for Turkey’s NATO Blessing, as Sweden Gets Left Behind - Politico
- Wagner’s Convicts Tell of Horrors of Ukraine War and Loyalty to Their Leader - Reuters
- How Moscow Squandered Its Power and Influence – Foreign Affairs
- 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
Siena College Upstate New York Business Leader Survey: Pessimism Reigns
Fifty-four percent of Upstate New York CEOs say business conditions have worsened over the last year and only 19%, down from 36% a year ago, expect improvement in the coming year according to the 16th annual Upstate New York Business Leader Survey from Siena College Research Institute (SCRI) sponsored by the Business Council of New York State, Inc. Only 23% of CEOs say the economy has improved this year and 54% up from 41% last year see worsening conditions in the next year.
Thirty-eight percent, down from 47% last year, predict increasing revenues in 2023 while 26%, down from 34%, anticipate growing profits in the year ahead. Still, unchanged from last year, over half, 55%, intend to invest in fixed assets in 2023. Eighty-five percent say inflation is having a negative impact on profitability. Seventy-five percent are having difficulty recruiting for their open positions despite 72% offering increased wages and 53% being flexible with work hours.
Fed Finds Itself in Lose-Lose Situation Ahead of This Week's FOMC Meeting
Fed chair Powell had been widely signaling a 50bps hike in the lead-up to the March FOMC meeting, but worsening fears about the health of the financial sector in the past week paved the way for a more restrained view for monetary policy. Even with turmoil in the banking industry and uncertainty ahead, the Federal Reserve likely will approve a quarter-percentage-point interest rate increase next week, according to market pricing and many Wall Street experts.
Whichever way the Fed goes, it’s likely to face criticism. “This might be one of those times where there’s a difference between what they should do and what I think they will do. They definitely should not tighten policy,” said Mark Zandi, chief economist at Moody’s Analytics. “People are really on edge, and any little thing might push them over the edge, so I just don’t get it. Why can’t you just pivot here a little and focus on financial stability?”
COVID News – Down, Down, Down
The US CDC is reporting:
- 7 million cumulative cases
- 1 million deaths
- 170,576 cases week of March 8 (down from previous week)
- 1,862 deaths week of March 8 (down from previous week)
- 3% weekly decrease in new hospital admissions
- 5% weekly decrease in current hospitalizations
The Omicron sublineages XBB.1.5 (90%), BQ.1.1 (5%), and XBB (2%) currently account for a majority of all new sequenced specimens, with various other Omicron subvariants accounting for the remainder of cases.
NYS COVID Update – Declining Cases
The Governor updated COVID data through March 17.
- Daily: 11
- Total Reported to CDC: 78,962
- Patients Currently in Hospital statewide: 1,340
- Patients Currently in ICU Statewide: 146
7 Day Average Positivity Rate - Cases per 100K population
- Statewide 2.54% - 5.36 positive cases per 100,00 population
- Mid-Hudson: 1.57% - 5.20 positive cases per 100,00 population
What’s Wrong With the Banks?
Fourteen years since the financial crisis, questions are once again swirling about how fragile banks are, and whether regulators have been caught out.A ferocious run at Silicon Valley Bank on March 9th saw $42bn in deposits flee in a day. SVB was just one of three American lenders to collapse in the space of a week. Regulators worked frantically over the weekend to devise a rescue. Even so, customers are asking once again if their money is safe.
Fully $229bn has been wiped off the market value of America’s banks so far this month, a fall of 17%. Treasury yields have tumbled and markets now reckon the Federal Reserve will begin cutting interest rates in the summer. Share prices of banks in Europe and Japan have plunged, too. Credit Suisse, which faces other woes, saw its stock fall by 24% on March 15th and on March 16th it sought liquidity support from the Swiss central bank. Fourteen years since the financial crisis, questions are once again swirling about how fragile banks are, and whether regulators have been caught out.
UBS Agrees to Buy Credit Suisse for More Than $3 Billion
UBS Group AG agreed to take over its longtime rival Credit Suisse Group AG for more than $3 billion, pushed into the biggest banking deal in years by regulators eager to halt a dangerous decline in confidence in the global banking system. The deal between the twin pillars of Swiss finance is the first megamerger of systemically important global banks since the 2008 financial crisis when institutions across the banking landscape were carved up and matched with rivals, often at the behest of regulators.
The Swiss government said it would provide more than $9 billion to backstop some losses that UBS may incur by taking over Credit Suisse. The Swiss National Bank also provided more than $100 billion of liquidity to UBS to help facilitate the deal. Swiss authorities had to walk a fine line, needing to get the two banks’ boards to agree to the deal and avoiding the alternative, a regulator-led winddown of Credit Suisse, which could have proven more protracted and painful for the financial system.
One House Budget Bills Include Manufacturing Alliance Priorities
Two major legislative priorities of Manufacturers Alliance of New York have been included in the Senate and Assembly one house budgets, a key step toward their inclusion in the final budget which is due by April 1st. The Senate included funding for the Manufacturing Intermediary Apprentice Program (MIAP) which provides support for the Council of Industry and other associations across the state to facilitate apprentice programs for our member firms. This funding has originated in the Senate budget since the program’s inception in 2016.
The Assembly bill includes a phase in of the second legislative priority – “tax parity.” The bill phases out the tax rate on Pass-Through Manufacturers over three years. Currently manufacturers organized as “C” corporations do not pay income tax in the state but “S” corporations and partnerships do. That will change under this proposal and all manufacturers will be exempt from income taxes. More work remains to get these proposals included in the final budget and we will be calling on you to contact your legislator in the coming weeks.
Read more from Ostroff Associates
U.S. Single-Family Housing Starts, Building Permits Rebound in February
U.S. single-family homebuilding and permits for future construction rebounded in February, offering hope that the housing market was probably stabilizing after being hammered by higher mortgage rates. Single-family housing starts, which account for the bulk of homebuilding, increased 1.1% to a seasonally adjusted annual rate of 830,000 units last month, the Commerce Department said on Thursday. Data for January was revised down to show single-family homebuilding falling to a rate of 821,000 units instead of the previously reported 841,000 unit-pace.
Single-family homebuilding increased in the Northeast and West, but tumbled in the densely populated South as well as the Midwest. Single-family housing starts dropped 31.6% on a year-on-year basis in February.
Jobless Claims Fall More Than Expected
The number of Americans filing new claims for unemployment benefits fell more than expected last week, pointing to continued labor market strength, though financial markets turmoil is casting a shadow over the economy. Initial claims for state unemployment benefits decreased 20,000 to a seasonally adjusted 192,000 for the week ended March 11, the Labor Department said. The drop was the largest since July. Economists polled by Reuters had forecast 205,000 claims for the latest week.
Unadjusted claims declined 21,396 to 217,444 last week. Claims in New York tumbled 15,305, reversing the prior week's jump, which had been attributed to a mid-winter school break. There were notable declines in filings in California, Georgia, Oregon and Minnesota, offsetting significant increases in Indiana and Ohio.
ECB Defies Mounting Banking Strains With Half-Point Rate Rise
The European Central Bank raised interest rates by a half percentage point, pressing ahead with its fight against inflation despite concerns that this could exacerbate strains in the financial system. The ECB’s decision provides an early glimpse into how major central banks, including the Federal Reserve, might respond to recent signs of market distress that started with the collapse of two large U.S. banks last week. Both the Fed and Bank of England are set to hold their policy meetings next week.
The ECB said in a statement that it would increase its key rate to 3%, the highest level since 2008, while promising to provide liquidity support to the financial system if needed. The move follows consecutive half-point rate increases in February and December. Many investors had been betting that the ECB might unveil a smaller, quarter-point rate increase on Thursday after last week’s turmoil in the U.S. banking sector spread to Europe.
French Opposition MPs File Multiparty No-Confidence Motion Over Pension Reform
A day after French President Emmanuel Macron rammed a pension reform through parliament without a vote, opposition lawmakers on Friday tabled a no-confidence motion against the government. The centrist group Liot tabled a multiparty no-confidence motion in the National Assembly, France’s lower house of parliament, which was co-signed by the far-left NUPES (New Ecological and Social Popular Union) alliance. Hours later, France's far-right National Rally party, which has 88 members in the National Assembly, also filed a no-confidence motion.
Under French law, parliamentarians can vote on more than one no-confidence motions in the chamber. A no-confidence vote requires a majority, which means a minimum of 287 votes in the National Assembly. Macron pushed through the contentious pension reform by invoking Article 49.3 of the constitution. Article 49.3 grants the government executive privilege to pass a bill without a parliamentary vote. Invoking Article 49.3 also permits the opposition to respond with a no-confidence motion.
FedEx Hikes 2023 Earnings Forecast as Cost-Cutting Initiatives Bear Fruit
FedEx on Thursday hiked its full-year earnings forecast as it said cost-cutting measures offset continued demand weakness at units including FedEx Express. FedEx now expects adjusted earnings per share for fiscal year 2023 of between $14.60 and $15.20, up from a prior forecast of between $13.00 and $14.00. Wall Street had expected full-year EPS of $13.56, according to Refinitiv consensus estimates.
The company reported earnings per shar of $3.41 adjusted vs. $2.73 expected and revenue of $22.17 billion vs. $22.74 billion expected, a slight decrease from last year’s $23.6 billion during the fiscal third quarter of 2022. FedEx reported net income of $771 million for the period, down from $1.11 billion during the same quarter a year earlier. Adjusting for one-time items, FedEx posted per-share earnings of $3.41, which beat estimates but marked a dramatic year over year decline from the $4.59 per share it reported for the same period last year.
Carriers and Forwarders Say Sustainable Supply-Chain Goals are Faltering at the Procurement Stage
Freight operators are rolling out a growing array of options for shippers looking to reduce pollution, from low-carbon aviation and marine fuels to electric trucks. But some shipping executives say companies are proving reluctant to pay the higher prices for alternative fuels and zero-emissions vehicles that can easily double or triple transport costs. Tim Scharwath, chief executive of DHL Global Forwarding, Freight, part of Deutsche Post AG, said talk about sustainability gains often falters when decisions reach procurement departments, where suggestions to use aviation and marine biofuels for transport are vetoed in favor of heavier-polluting but cheaper options.
The gap between environmental goals and implementation highlights a growing fault line in the logistics arena as research on sustainable alternatives to traditional freight transport starts moving into real-world operations.
Surging Chinese Oil Demand Pushes Shipping Costs Sharply Higher
China is on an oil-supertanker hiring spree, a sign energy demand has sped up after the world’s second-largest economy limped out of its Covid-19 lockdowns. Traders carry crude to China, the world’s biggest oil importer, in Eiffel Tower-size tankers called Very Large Crude Carriers that each lug two million barrels of oil. The cost of chartering the most coveted type of these tankers, featuring modern exhaust systems, has shot up to nearly $100,000 a day, ship brokers say. That is double the rate from a month ago.
Behind the rise is a spurt of crude demand in China’s oil-refining industry, where U.S. oil is in particularly high demand right now. Chinese crude imports are on track to match or surpass the record level from June 2020, according to commodity-tracking firm Kpler. That is a boon for tanker owners that rent ships out, including New York-listed Frontline PLC, Euronav NV and Teekay Tankers Ltd.
Small Businesses Face Big Tax Bills From Research-Deduction Change
A piece of the 2017 tax law that requires companies to spread deductions for research costs over five years instead of taking them immediately is taking effect now. For many biotech companies, contract manufacturers and software firms, the law means losing the ability to deduct the bulk of their expenses on the tax returns they are about to file. That means some businesses that broke even or lost money in 2022 are considered profitable for tax purposes—and are finding they owe money to the Internal Revenue Service.
For large companies, such as Northrop Grumman Corp. and Moderna Inc., the change is a cash-flow challenge, one that gets easier after several years even if Congress doesn’t act. It is a much bigger hurdle for small and medium-size firms that can’t tap reserves or borrow easily. Congress included the change for research-expense deductions in the 2017 tax law to help pay for cutting the corporate tax rate. The 2022 start date has been on the books for years, but many business owners and accountants assumed Congress would change the law before it took effect.