Member Briefing May 25, 2022

May 25, 2022

Posted By: Harold King in Daily Briefing,

Fortune 500 CEO Survey: The leaders of America’s Biggest Companies Are Bracing for a Recession

The annual survey of Fortune 500 CEOs shows the pessimism pervades. Seventy-five percent expect a recession this year or next. On average, they also expect inflation to remain (slightly) over 5% next year. Inflation, recession and talent shortages are the three greatest threats they face—ranking above geopolitics, cybersecurity, the pandemic and climate. CEOs say they’re working hard on the labor side of the economic equation. A talent shortage was the problem chosen by the most CEOs as the No. 1 threat to their business, and more than two-thirds said they had experienced high rates of attrition among their employees. Most say they’re striving to mitigate the Great Resignation by staying flexible about how and where people work.

In a big change from last year companies are backing off vocal public positions on social and political issues. Some 72% said CEOS “have recently gotten too involved in commenting on social and political issues, and need to pull back,” while only 28% said CEOs “have a responsibility to speak out on important social and political issues, and should continue to do so.” Last year, the exact same question revealed a 50-50 split. Disney’s recent experience with Florida are likely to blame.

Invasion of Ukraine Headlines

New Home Sales Plunged to 591,000 in April From a Downwardly Revised 709,000

On year on year basis, new home sales dropped 26.9% in April. Median sales prices of new houses sold in April 2022 was $450.6K, up from $436.7K in March. The average sales price of $570.3K climbed from $523.9K in the prior month. The seasonally adjusted estimate of new houses for sale at the end of April was 444K, representing a supply of 9.0 months at the current sales rate vs. the 6.4 months of supply in March. As interest rates rise and home prices continue to increase, home affordability becomes even more challenging, especially for first-time homebuyers.

“Rising mortgage rates and rising home prices have combined causing the market to level off at more balanced supply and demand conditions,” said Kelly Mangold of RCLCO Real Estate Consulting. Demand hasn’t evaporated, though. “Millennial households continue to demand for-sale housing, and many are migrating from high-cost coastal markets to high-growth Sunbelt markets where builder inventory is higher,” Mangold said.

Biden: Recession is “Not Inevitable”

President Biden on Monday acknowledged the United States is facing economic headwinds with high gasoline and food prices, but he rejected the idea that a recession is inevitable. The president said he would continue to work with Middle Eastern nations to boost oil supply, and he said he would continue to pursue policies that spur growth domestically. Biden further argued that passing his domestic agenda to lower child care and family care costs would lower inflation, but that legislation has stalled in the Senate, where moderate Democrats are reluctant to approve more spending.

Polls have shown voters do not approve of Biden’s handling of the economy, and plunges in the stock market in recent days have only fueled concerns about a looming downturn.

US COVID – Cases are Rising, Masking Increasing

As of May 19, at least 45% of the US population lived in areas experiencing medium-to-high COVID-19 community levels, meaning people should be wearing masks or considering masking based on their personal risk. COVID-19 community levels are calculated using new COVID-19 hospital admissions and percent of inpatient beds occupied by patients with COVID-19, both lagging indicators of COVID-19 transmission.

But the agency’s data on community transmission shows more than 75% of the country is experiencing high or substantial numbers of new cases, suggesting much of the nation should be wearing masks in indoor public spaces and prompting some experts to recommend localities, businesses, and other entities reinstate mask mandates. The 7-day moving average of new daily cases is at 102,940 as of May 22, rising over 100,000 cases for the first time since February.

Covid-19 Vaccine and Drug Sales, Once Booming, Plateau

The gold rush for drugmakers making Covid-19 vaccines and treatments might be over, as demand plateaus, supplies turn ample and the pandemic evolves. Merck & Co. and Johnson & Johnson are among the companies cutting sales expectations for pandemic products this year as they assess the outlook.

Analysts, meantime, are lowering sales estimates for Covid-19 drugs such as Pfizer Inc.’s antiviral Paxlovid, citing softening demand and few new supply deals. The situation marks a new phase in the pandemic, according to analysts, one without the record sales that certain companies such as Pfizer and Moderna Inc. notched just a few months ago. Meantime, vaccine sales have slowed now that many governments, which had competed for vaccine contracts to lock in supplies while manufacturers ramped up production, don’t need as much with many people vaccinated.

FDA Panel to Meet on Vaccines for Young Kids in June

The FDA announced its Vaccines and Related Biological Products Advisory Committee (VRBPAC) will meet on June 14 and June 15 to review Emergency Use Authorizations (EUA) requests from both Moderna and Pfizer-BioNTech. On June 14, the committee will discuss Moderna’s request for EUA of its SARS-CoV-2 mRNA vaccine for older children and adolescents aged 6 to 17 years, and on June 15, the committee will review the companies’ data on the youngest children.

Children under 5 are the last group for which the FDA has not yet authorized a SARS-CoV-2 vaccine, and the agency is under increasing pressure to do so. Some parents are eager to vaccinate their children, although many do not plan to vaccinate their children unless required to do so, according to polls. As of May 18, about 35% of US children ages 5 to 11 years had received at least 1 dose of vaccine and 28% had completed the 2-dose series. If the VRBPAC recommends either or both vaccines for young children, the FDA could quickly authorize the vaccines, making it possible toddlers and kindergartners could be eligible to begin receiving their shots by the summer.

Antonio Delgado To Be Sworn In as Lieutenant Governor Today, May 25 – Special Election for NY-19 in August

Representative Antonio Delgado will be sworn in as Lieutenant Governor on Wednesday, May 25. Upon Representative Delgado’s resignation from Congress, Governor Hochul will follow the process set out by law and issue a proclamation declaring a special election that will align with the recently set August election date.

The special election is open to all registered voters regardless of party, who are currently in the 19th district as it stands today. The district looks very different following last week’s release of the new Congressional redistricting map. The election is likely to pit to popular Hudson Valley County Executives against one another. Ulster County’s Pat Ryan (D) vs Dutchess County’s Marcus Molinaro (R)

McKinsey: To Build Supply Chain Resilience, Manage Proactively

Clogged ports, expensive cargo capacity, and emergency shipments became prevalent during the COVID-19 pandemic. Since then, the conflict in Ukraine has also contributed to product-line closures, transport delays, and spiraling input costs. These issues have contributed to large increases in commodity prices and a troublesome spike in inflation and in expectations for higher prices around the globe.

Yet these immediate effects are only part of the story. In fact, they may be overtaken in the long term by slower-moving but more permanent effects on supply chains occurring beneath the surface. Supply chain leaders could face challenges with short-term shocks while installing the building blocks of deeper structural reform. Nonetheless, structural reform may be the only way for leaders to restore the resilience that companies depend on from their supply chains, as is evident from several of the short- and longer-term implications of the disruptions.

Where Is Inflation Headed? Nine Signs to Watch

Inflation is close to a 40-year high—a development that is challenging households, companies and government policy makers. Is the wave of unusually high price increases near a peak? If so, how soon will inflation slow and by how much? And most important of all, where will inflation settle in the longer-run?

Economists are especially interested in what current price pressures bode for the longer term. Here are the signals that economists are watching to anticipate how the U.S. inflation outlook is shaping up:

Euro Zone PMI: Business Growth Slowed in May But Still Resilient

Growth in euro zone business activity slowed this month but was still relatively strong despite a cost of living crisis putting a dent in consumer spending power and a shortage of raw materials holding back expansion in manufacturing, a preliminary survey showed. S&P Global’s flash Composite Purchasing Managers’ Index (PMI), released on Tuesday and seen as a good guide to overall economic health, fell to 54.9 in May from 55.8 in April, lower than the 55.3 predicted in a Reuters poll.

“The small fall in the euro zone Composite PMI in May suggests that activity is holding up better than we had feared. But the services rebound is likely to run out of steam amid high inflation and the drop in new orders bodes ill for industry,” said Jessica Hinds at Capital Economics.

Electronics Are Set to Get Even More Expensive as Chip Giants Hike Their Prices

The world’s biggest foundries — including Taiwan Semiconductor Manufacturing Company, Samsung and Intel — are considering further price hikes, analysts told CNBC. “Foundries have already increased prices 10-20% in the past year,” Bain semiconductor analyst Peter Hanbury told CNBC. “We expect a further round of price increases this year, but smaller (i.e. 5-7%).”

The foundries are increasing their prices partly because they can, but also because it’s becoming more expensive for them to fund their growing operations. “The chemicals used in [chip] manufacturing have increased 10-20%,” Hanbury said. “Similarly, the labor required to build new semiconductor facilities has also seen shortages and increased wage rates.” Samsung is set to increase its chipmaking prices by up to 20%, according to a Bloomberg report last Friday.

Deere’s Supply Chain Issues Hit Revenue

Deere & Co last week missed Wall Street revenue targets and said it was having difficulty securing parts for its heavy machinery, sending shares down 14%. Deere gave a strong profit forecast for the full year that was overshadowed by comments that many of the machines it intended to sell were on hold because of supply-chain issues

Although the machinery giant has weathered the storm of supply-chain bottlenecks, revenue nearly 9% below analysts consensus suggest that raw material shortages, compounded by inflationary pressures, are starting to take their toll. Company executives told analysts on a conference call that supply chain snafus will last through the year.

Report: Electric Car Sales Soar But Raw Materials a Concern

At 6.6 million last year, electric vehicles sales more than doubled, and they now account for one in 10 new cars sold, according to the International Energy Agency’s annual report on the sector. China alone accounted for half of those sales. Electric vehicle sales continue to soar, rising by 75% in the first quarter of this year compared to the same period last year.

But supply constraints and rising prices risk putting brakes on the sector’s growth. China currently produces three quarters of the world’s lithium-ion batteries, the main type used in cars and small electronic devices, and has half of the global refining capacity for lithium and other key elements such as cobalt and graphite. Supplies of lithium are inadequate if electric vehicles are to displace those internal combustion engines. The IEA estimates a six-fold jump in output is needed by 2030, with the opening of 50 new mines.

Toyota Cutting Global Production Due to Semiconductor Shortage

Toyota announced on Tuesday that the company is reducing its production plans in June by “tens of thousands of units globally” due to the semiconductor shortage brought on by the COVID-19 pandemic. It also announced the suspension of production at various times in May and June as a result of parts shortages caused by the pandemic lockdown in Shanghai, noting that 16 lines in 10 plants would be affected.

“The shortage of semiconductors, spread of COVID-19 and other factors are making it difficult to look ahead, but we will continue to make every effort possible to deliver as many vehicles to our customers at the earliest date,” a statement added. While the manufacturer apologized for the inconvenience caused to its customers and suppliers, it said that its yearly estimate of producing about 9.7 million vehicles worldwide by next March remains unchanged.