Member Briefing September 12, 2023
Manufacturing Labor Productivity Rebounds in Q2, Remains Sluggish
Manufacturing labor productivity rose 2.9% at the annual rate in the second quarter, rebounding after declining in the previous three quarters and the largest quarterly gain in two years. Yet, labor productivity in the sector was estimated originally to be up 4.0% for the quarter. Similarly, output in the sector increased 0.8% following declines in the two prior quarters. At the same time, the number of hours worked fell 2.1%, with hourly compensation jumping 8.0% in the second quarter. Unit labor costs among manufacturers increased 4.9%, rising for the ninth straight quarter.
Labor productivity for durable goods rose 4.5% in the second quarter, the first increase in one year, with output expanding 3.2%. Nondurable goods labor productivity rose a modest 2.0%. Manufacturing sector labor productivity has increased at an annual rate of 0.2 percent during the current business cycle, which began in the fourth quarter of 2019. This rate reflects output and hours worked growing at annual rates of 0.3 percent and 0.1 percent, respectively. This slow productivity growth rate follows the 0.0-percent annual rate of growth during the last business cycle that spanned the fourth quarter of 2007 through fourth-quarter 2019.
War in Ukraine Headlines
- Ukraine and Russia: The Latest News – The Guardian
- The Three Roadblocks Keeping Ukraine Mired in War - WSJ
- Moscow and Pyongyang Confirm North Korean Leader Kim Jong Un Will Visit Russia to Meet with Putin
- Biden Closer to Decision on Supplying Ukraine with Long-Range Missiles – Financial Times
- Russia Might Restart Production Of The T-80 Tank. Don’t Expect It To Happen Soon
- Russia Sees Resilient Economy Despite War on Ukraine, Sanctions
- Ukraine and the U.S. Appear at Odds Over Russia Offensive - NBC
- For Western Firms, the Risk of Leaving Russia Could be Higher Than Staying - CNBC
- Ukraine Filled a Tank With Explosives and Sent it Toward Russian Positions, a Brigade Said
- Russian Commission Says Ruling Party Won Most Votes in Occupied Ukraine Regions in Disputed Elections – The Hill
- 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
U.S. Unit Labor Costs Higher in Second Quarter Than Initially Thought
Unit-labor costs, a gauge of wage inflation, rose at a revised 2.2% annual rate in the second quarter, up from the initial estimate of a 1.6% pace, the U.S. Labor Department said. The government released revised productivity data that comes after U.S. GDP growth in the second quarter was revised down to a 2.1% annual rate from the initial estimate of 2.4%.
- Productivity growth was revised down to a 3.5% annual rate in the second quarter, from the initial estimate of a 3.7% rate.
- Over the past 12 months, productivity rose at a 1.3% clip, the first positive reading since the fourth quarter of 2021.
- Output of goods and services rose a revised at a 1.9% rate in the second quarter, down from the prior estimate of 2.4%.
- Hours worked fell at a revised 1.5% annual rate, slightly faster than the initial estimate of a 1.4% rate.
The Rosy Inflation Narrative Is About to Take a Turn for the Worse
For months now, inflation has been steadily trending down to a 3% level after hitting 9% last summer. But that positive story is about to get a jolt this week as the consumer price index is expected to show monthly inflation rose by 0.6% in August, up from 0.2% from a month earlier. That will likely bring the annual rate to 3.6%. The culprit? Rising energy prices. Core CPI, excluding often volatile energy and food costs, will look a little better with forecasts of no change in the monthly rate and a yearly number that will be down to 4.3% from 4.7% in July.
“While the trend in inflation is easing, further progress is expected to be slower going,” said Sam Bullard, managing director and chief economist for Wells Fargo’s corporate and investment banking group. “The pickup in August CPI should serve as a reminder that lowering inflation over the coming year will likely prove more difficult than the previous year. We look for the monthly pace of core inflation to rebound to 0.2%-0.3% in Q4 and keep the annual rate closer to 4% than 3% through year end.
COVID Update – FDA Approves New Booster Shots
The US Food and Drug Administration on Monday gave the green light to updated Covid-19 vaccine booster shots from Moderna and Pfizer/BioNTech. The updated vaccines are each approved for people 12 and older and are authorized under emergency use for individuals 6 months through 11 years old. As part of the FDA’s update, the original bivalent Moderna and Pfizer-BioNTech Covid-19 vaccines are no longer authorized for use in the United States. Both vaccine manufacturers have said that testing shows that their vaccines are effective against EG.5, the currently dominant strain in the United States.
After the FDA’s go-ahead, the Advisory Committee on Immunization Practices, a group of independent experts that advises the US Centers for Disease Control and Prevention on its vaccination decisions, will weigh the safety and effectiveness of the updated vaccines and make recommendations for their use. After the CDC director signs off on those recommendations, the vaccines can be administered.
House Reconvenes With Government Funding Top of Mind
The House returns to session after the long August recess this week with government funding and a potential impeachment inquiry top of mind — two matters that are expected to dominate the lower chamber throughout September. On government funding, leaders are aiming to pass a continuing resolution to keep the government’s lights on beyond Sept. 30, but the particulars of a stopgap bill remain unknown. Congress has roughly three weeks to come to a consensus before the end-of-the-month shutdown deadline.
As lawmakers mull a continuing resolution, both chambers this week will move ahead with the formal appropriations process. The House is slated to take up a bill to fund the Department of Defense, and the Senate is scheduled to consider a “minibus” that contains three appropriations bills. But a main focus on Capitol Hill this week will be crafting a continuing resolution to avoid a shutdown and keep the government open past Sept. 30. Leaders of both parties and chambers have said Congress will have to pass a short-term stopgap bill before the end of the month, but the specifics of such a measure remain in question as conservatives in the House lay out demands on spending levels and policy provisions for the stopgap.
GM, Ford and Stellantis Want to Use Profits for EV Transition; the UAW Wants a 40% Pay Increase
The Detroit automakers are riding a multiyear run of soaring profits. How that cash pile should be deployed is at the heart of a looming showdown with the United Auto Workers union, which is threatening to strike Friday. The car companies say they need the money to fund their switch to electric vehicles; the union says its workers deserve more cash because of high inflation, their work during the pandemic and concessions made in past negotiations to help the automakers survive darker times.
The talks in Detroit are exposing an uncomfortable tension between the automakers’ recent profit streak and car executives’ warnings of a steep cost curve ahead as they race to produce more EVs. In the short run, a factory walkout would threaten to disrupt Detroit’s rollout of several new EV models and potentially drain billions of dollars in profits. It could also further narrow selection on dealership lots. UAW leaders see this round of negotiations as a prime chance to recoup significant concessions made over the past two decades, especially around the 2007-09 financial crisis.
New York Employers Are Eager to Hire Migrants. They Can’t.
Across the state, many large and small employers have expressed an overwhelming willingness to hire recent asylum seekers; migrants are even more eager to work. However, Migrants are prohibited by federal policy from securing work permits until 180 days after an asylum application is filed — a process that has resulted in monthslong backlogs and has frustrated both business and elected leaders, especially in upstate New York, where farms and small rural towns mix with a series of often hard-strapped Erie Canal cities.
The influx of roughly 110,000 asylum seekers in New York City from the southern border has caused logistical, financial and political headaches in New York, where it has divided leaders in the usually liberal state and put them in conflict with Mr. Biden. They havebegged the Biden administration for robust action. Those calls have been amplified by the private sector: Late last month, more than 120 business executives sent a letter to Mr. Biden urging him to fast-track work permits. The same sentiment is shared by business leaders in upstate communities in New York, which have seen work forces slowly drained by decades of out-migration, a trend that was often accelerated and exacerbated by the pandemic.
Labor Costs, New Calculations Could Drive Health Care Inflation Higher
The price of health insurance in CPI calculations is not simply what a consumer or employer pays but is based on insurers’ retained earnings. Insurers calculate price by subtracting what they spend on health services for customers from the premiums they charge. If they end up paying out more than expected to prove care and profits fall, it shows up in CPI data as a drop in the price of health insurance.
The Bureau of Labor Statistics said last month that it will update its methodology for calculating health insurance, starting in October. The basis method will remain in place, but the agency will smooth the retained earnings data and update prices twice a year instead of once. Goldman Sachs economists expect that this change will mean that the costs of health insurance, instead of falling 4% a month, will increase 1% a month. In addition, the price of treatment has been rising slowly, according to CPI data, with the cost of physician services up 0.4% for the 12 months ended in July. The price of hospital visits increased more, at 3.2%. Finally, labor shortages and rising wages among health care workers could filter through to higher prices as contracts are reset.
World’s First Crewed Liquid Hydrogen Plane Takes Off
German hydrogen propulsion startup H2FLY has quietly been building up to a major milestone in zero-emission aviation over the summer. And all the hard work has come to fruition, with the successful completion of the world’s first crewed liquid hydrogen-powered flights. German hydrogen propulsion startup H2FLY has quietly been building up to a major milestone in zero-emission aviation over the summer. And all the hard work has come to fruition, with the successful completion of the world’s first crewed liquid hydrogen-powered flights.
While yesterday’s demonstration flight lasted somewhere around the 10-minute mark, a few days prior, the HY4 and its two pilots stayed in the air for 3 hours and 1 minute — a feat that required 10kg of hydrogen. If using up the aircraft’s full storage capacity of 24kg, it could stay up for 8 hours.
Tesla Supercomputer Likely to Provide Company a Boost, Morgan Stanley Predicts
Tesla Inc.'s Dojo supercomputer could power a near $600 billion jump in the automaker's market value by boosting the adoption of robotaxis and its software services, Morgan Stanley analysts said. The electric-vehicle maker started production of the supercomputer used to train artificial intelligence (AI) models for self-driving cars in July and plans to spend more than $1 billion on Dojo through next year.
Dojo can open up new addressable markets that "extend well beyond selling vehicles at a fixed price," Morgan Stanley analysts, led by Adam Jonas, said in a note on Sunday. The stock on Monday was on track to add about $46 billion in market value. Morgan Stanley is one of Musk’s key advisory firms, including on the $44 billion takeover of Twitter Inc., now known as X.
Honda's EVs to Feature Tesla Charging Port in 2025
Honda is planning to implement Tesla’s plug, now known as the North American Charging Standard (or NACS) in a new electric vehicle slated for 2025. The automaker, like every other manufacturer on board with NACS, is promising the availability of a CCS Combo to NACS adapter before 2025 so existing models (and soon-to-be-released ones like the Prologue) will have access to Tesla’s vast and reliable Supercharger network.
Before its plans to adopt NACS, Honda jumped in on a joint venture with BMW, GM, Hyundai, Kia, Mercedes-Benz, and Stellantis to build out a nationwide electric vehicle charging network. DC fast-charging networks that aren’t built by Tesla are found to be largely unreliable, so with access to Tesla’s Supercharger plus building a new network, future Honda EV owners might have a better time, whenever the automaker gets around to releasing them.
Spirit Aero Seeking to Renegotiate with Boeing, Airbus
Airframe builder Spirit AeroSystems is seeking relief from its major customers over the terms by which it supplies structural elements for several major commercial jet series, including the Airbus A220 and A350, and the Boeing 737 MAX and 787 Dreamliner. At a recent investor’s conference Spirit Aero CEO Tom Gentile said his company is under pressure to deliver airframes while absorbing the high costs of wage inflation, parts shortages, and regulatory oversight.
Neither Airbus nor Boeing has offered any comment on Gentile’s remarks. However, any discussions about Spirit’s costs for supplying 737 MAX fuselage structures is likely to be complicated by an ongoing manufacturing error, which the supplier has acknowledged. At the same investment conference where Gentile spoke, Boeing chief financial officer Brian West said the current round of inspections and repairs is a very complicated undertaking – and a costly one. The broader problem for Boeing is that the protracted repair process will continue to delay deliveries of finished 737 MAX 8 jets, and that will reduce revenues and free-cash flow for Boeing.
Read more at American Machinist
IRS Plans To Ramp Up Enforcement On Millionaires, Partnerships, And Crypto—And To Harness AI
This week, IRS Commissioner Danny Werfel offered more details, announcing a series of initiatives as part of what is being called “a sweeping, historic effort to restore fairness in tax compliance.” Those initiatives include a sharper focus on high-income earners, partnerships, large corporations, and promoters abusing the nation's tax laws. The initiatives follow what Werfel describes as a “top to bottom review of enforcement work” at the IRS, thanks to increased dollars from the Inflation Reduction Act. The Act significantly boosted funding for the IRS, guaranteeing tens of millions of dollars over its operating budget for improvements and enforcement.
for fiscal year 2024, the IRS has identified 1,600 millionaires who owe at least $250,000 in recognized tax debt who will be the subject of further enforcement efforts. The IRS says that dozens of Revenue Officers will be assigned to these high-end collection cases. The IRS has also flagged ongoing discrepancies on balance sheets involving partnerships with over $10 million in assets. Those discrepancies, the agency notes, can be an indicator of potential non-compliance.