PREFACE October 2024
This report is dedicated to B2B manufacturing materials and assemblies, not services or software. For prior monthly updates you can go here:
As stated last month, for most B2B manufacturers the remainder of 2024 is already in process and there will be little if any options for upside. Since last month, we’ve had the Hurricane Helene impact and will shortly have the Hurricane Milton impact. The most immediate impact on manufacturing will be in products and markets that were already GDP insulated, like food, disposables (paper & hygiene products), etc. The hurricanes will likely cause certain inventory depletions in other key markets that may result in increased order demand into Q1 2025 such as:
· Building products
· Coated fabrics (tarps, tents)
· Combustion powered small equipment (generators, chain saws, pumps, welders, etc.)
· Non combustion small electricity support equipment (solar panels, small wind turbines, battery packs)
· Plastic containers, both flexible and rigid
· Portable telecommunications equipment
· Fuel (gasoline, diesel, propane) and water containers
· Etc.
Reconstruction demand will take longer to forecast and to become present in the market, but historically peak recovery demand from critical events can take 12-months or longer to peak. The primary reason for the delay is that the available construction resources become saturated and net turnover becomes capped at a rate below demand.
The current macroeconomic detail will be covered in the details section as every published number now pushed into the mainstream media is more and more suspect. This ironically is something that all governments and central banks do for political reasons in times of economic distress or when that distress is imminent. As an example – Those of us that have had long standing focus on the Chinese economy as a competitor, a collaterally impacted market, or as a direct participant in China have spent multiple decades identifying proxies for the actual state of the Chinese economy in lieu of the official numbers. Why? Because the official numbers weren’t real, and real output, consumption, etc. were what mattered, not the official number. When China was overstating domestic construction and industrial output, we would track critical imports to those functions like copper. When tracking copper imports became widespread, the Chinese government started importing copper they didn’t need in downturns to hide the true state of things. All of us were forced to find another proxy like natural rubber, certain financial activity, etc. The United States government and the Federal Reserve, much like the Chinese government, can be incentivized to over or understate things for similar reasons (domestic perception, politics, etc.). A key difference is that much of the data must be produced for public review from which public commentary is made. The challenging issue for most companies is to understand how often public commentary doesn’t match the assessment they might make from the same public data. Something to keep in mind:
“Key insiders” have been and continue to reduce their presence in the equity markets. Warren Buffet and Berkshire Hathaway have been the most visible, but this behavior has been ongoing broadly across many holding companies and key individuals. They have been selling on short-term volatility and allowing the retail investing market to absorb their sales before selling again on the next short-term growth. Critical to general economic forecasting is they are not buying and selling, just selling. This behavior mirrors the situation in late 2019 and 2007-2008. Retail investors pouring money into indices funds that are being carried by a handful of stocks, lift all ships but when the crash happens that all these insiders are clearly positioning to take advantage, it’s not Nvidia they will buy. They will be buying the stocks being artificially lifted in the market by Nvidia.
Macroeconomics
KEY HEADLINES SINCE SEPTEMBER
· Hurricanes Helene and Milton – Almost certainly, the immediate impacts of the hurricanes will be negative on the US economy as people will be out of work and significant asset destruction that will be hard to replace in-kind due to current state of the economy and inflationary impacts to replacement costs. While the government is already trying to link some employment impact to current numbers, insufficient time has occurred since Helen to be present in any meaningful way in the numbers
· Global Oil Demand Forecast Drops Again – Of all the global economic indicators, it’s energy demand (not price) that serves as the best direct proxy for economic actvitiy as everything made and moved requires energy. Saudi Arabia, a key OPEC leader, is heavily vested in managing oil prices within a range that is advantageous to their cost position versus sources like fracking, but covers their increasing cost to produce. As their sources become more costly, the Saudis must manage production to insure their optimizing their unit margins for production. They have already postponed planned output increases, which should continue into 2025. https://oilprice.com/Energy/Energy-General/OPEC-Slashes-Oil-Demand-Growth-Forecast-Again.html
· Central Banks and Governments Pursuing QE and Stimulus – China has been the most reported, but the recession situation in Europe and elsewhere is driving policy makers to take action. Interestingly, one of the things that is not happening is heavy buying of US treasuries which si something that has happened in the past. We continue to see more purchases of gold and silver which is why those commodities have continued to go up even with central bank rate drops and equity market strength.
· China Economic Distress Continues – Even with major government intervention, the Chinese economy continues to falter. As covered in prior monthly updates, China’s past practice of ramping up unnecessary domestic construction spending to cover global export downturns has hit a point of diminishing or negative return. The issue is that the cycles have become more volatile and shorter as the aggregate debt levels both in China and globally have increased. Also, there are no longer significant market capture opportunities for China to displace domestic suppliers with lower cost Chinese imports. This for two reasons: (1) China’s costs have increased and in many cases no longer represent as significant cost differential at equivalent quality lecvel, and (2) the supply chain impacts from COVID are driving other countries to manipulate internal spending and tariffs to insure certain materials and products currently supplied from China are on shored.
· US and EU Truck Freight Recession Continues – While some of the hurricane recovery activity in the US should boost short-term trucking demand, since the peak of trucking rates in early 2022, the rate collapses in the US persist and have resulted in over 100,000 trucking job losses with little or no impact on lane rates. In Europe, the recessionary conditions have the expected direct impact to overall commerce and trucking. Interestingly, the similar trucking conditions but the lack of a recessionary economy in the US illustrates that something in the US economy is different. If trucking is a direct indicator of economic activity and it continues to underperform even after thousands of drivers and their capacity hours have been removed from the market, why is the US also not in measurable (GDP) recession? A good source of on the ground truck freight details is the following content developer and small trucking company dispatcher on YouTube: https://youtu.be/36jtXwh1nNw?si=GdEjgdhdcum5Uh04
· Stellantis (Chrysler, Jeep Dodge, Ram) Troubles – The situation with Stellantis et al continues to degrade. News stories indicate that beyond the planned exit of the CEO, Carlos Tavares, there are strong indications that massive job eliminations will occur with these brands at all levels. https://www.cbtnews.com/stellantis-ceo-faces-challenges-amid-u-s-sales-struggles-and-investor-concerns/
· US Retail Armageddon – Retailers in the US continue to provide market feedback of worsening consumer buying power and behavior. 7-11 has announced the closure of over 400 stores, while current estimates are that over 1,600 other retail location may close nationally in the next couple of quarters and upwards of 45,000 through the next five years. (https://www.businessinsider.com/stores-closing-in-2024-list
· Aerospace Markets Now Seeing Bad Signs Beyond the Boeing Problems – Globally, indications are growing that traveler miles are dropping as economic conditions begin to impact both leisure and business travel. So far, airplane supply constraints have been more impactful to manufacturer suppliers into the market, but sustained weakening of seat mile demand could hinder any OEM manufacturer improvements on production.
· India Economic Concerns Growing – India, unlike China, Japan, and South Korea, has up to now been operating in an export space not as directly impacted by global trade economics. However, the forward outlook is weakening and impacting equity markets in the country. With mostly service (e.g. IT) and basic materials as the basis for net trade, the impacts to advanced materials and assembly manufacturing had not flowed back to India yet. https://www.bloomberg.com/news/articles/2024-10-03/indian-stocks-fall-most-since-august-on-growth-concern-outflows
· Like Prior Months, Geopolitical and Political Risk is Growing – As the US election is almost here, the reality for manufacturers is that the short-term impact will matter little on the outcome. Regardless of the winner, the fallout is likely to increase volatility both publicly and in business demand. Longer-term consequences to manufacturers could be significant depending on the size of the company and specific markets which could result in regulatory disfavor.
· Mortgage Rates Increase after Fed Rate Cut – Ironically, this situation has occurred entering recessions before. Why does this happen? Lay people tend to think that the Fed is the ultimate or most important influence on various lending rates in the economy, but that is only true when the Fed is in alignment with the bond markets. Like any product, dollars are bound by supply and demand. The Fed’s ability to influence behavior in financial markets depends on the state of the US Treasury markets, particularly the 2-year and 10-year treasuries. For the Fed overnight rate (the most quoted rate) to have any influence on markets, it must maintain a manageable spread between the 2-year US Treasury. The Fed doesn’t drive the 2-year, the 2-year drives the Fed. The 10-year Treasury is an alternative to the option of providing money for 30-year mortgages but with substantially reduced risks. The 10-year Treasury isn’t controlled by the Fed. As the US government continues to debt spend and auction off more and more debt, yields must be increased to sell the offerings the Treasury would like to issue. Reduced foreign demand for US treasuries is exacerbating the yield pressure. If a 10-year treasury yields more than a mortgage, why would an investor make their dollars available for a mortgage?
· Commercial Real Estate Situation Worsens – In the context of decades, “financial crises” seem very quick. However, in the moment these issues take multiple years to manifest and reach a “floor condition”. The article referred to here talks about the conversion of commercial real estate, which is not typically a viabl option due to the dramatic utility difference in housing versus business use. However, the condition that would result in all this commercial real estate availability is an important part of the discussion. The situation currently impacting the asset and loans for the CRE problem are tracking very similarly to the 2008 Global Financial Crisis. In August 2008, the prevailing discussions were about raising rates and too much inflation just prior to the collapse. The challenge with a CRE driven economic issue is the ease with which debt holders can default. Much of this debt is resetting at far higher rates while companies are accelerating layoffs and the retail issues discussed earlier are creating ceilings to rental rates and lower occupancy. The current US exposure to the banks in the CRE markets is $3 trillion. https://www.businessinsider.com/commercial-real-estate-office-outlook-fire-sales-apartment-conversions-housing-2024-10
· Cash and Liquidity Pooling Expands and Accelerates by Insiders – The behavior of key large scale investors and tech leaders pooling cash and cash equivalents has been covered extensively (e.g. Warren Buffet and Berkshire Hathaway). The value of cash equivalents is multiple trillions of dollars with hedge funds and large investment firms like Blackrock and Blackstone.
· Banks and Lending Make Regional Problems Global Problems – The largest investment class in the world is Chinese Real Estate. At its peak, there was over $60 trillion invested in Chinese real estate as this is the primary investment vehicle within China. Current estimates are the losses in total Chinese real estate valuation has been 30% or $18 trillion. By comparison, the total value of equities in US stock markets at all time highs is $45 trillion. The 2008-2012 GFC was initiated by US real estate collapse that affected the entire world. By comparison, the losses were not close to the issues in the Chinese economy. Whatever actions the Chinese government take, it will not be for the benefit of the global economy.
· Fast Food Companies Already Signaling Poor 2025 – McDonalds CEO has provided additional forward economic guidance that the consumers are running out of money. Income is slowing while unemployment is increasing. This is even with the “cooked numbers” https://www.msn.com/en-us/money/companies/mcdonald-s-ceo-shares-prediction-that-2025-will-be-another-challenging-year/ar-AA1s6Gil?ocid=BingNewsVerp
· Major Banks Showing Q3 Earning Drop Due to Low Loan Demand – The lower interest rates from the Fed can’t overcome to the state of the economy. While the Wells Fargo Q3 results were well received versus expectations, their data shows spending is down with higher prices means there is lower volume buying in all markets when factoring for inflation. Oddly enough, the optimism flowing from these banks and the Fed (which is owned by the same banks) sounds identical to their prognostications in 2007 and early 2008. The truth for manufacturers is that recession started two years ago for all GDP impacted markets.
DETAILS
US Employment:
Here are the links for the BLS Labor and JOLTS Reports:
At this point, if business people dependent on accurate and honest information about the state of the economy have not figured out the government commentary and reporting about employment are overstated relative to observable conditions or the detailed data in the government reports, likely some poor strategic decisions have been made. Beyond the heavy government hiring, which contributes nothing to GDP, the increased scrutiny of the reported numbers has driven bureaucrats to modify their approaches to enhancing the numbers. (See US Economy) Unfortunately, these new methods can’t address the incongruities at the detail level still present in the data. For US employment, the key incongruities remain:
· The Household Survey Employment gap to Establishment Survey Jobs is still well over 8 million, meaning that the jobs numbers reported each month do not align with the reality of employment on a people basis
· The BLS retroactively revised down a year’s worth of jobs, down over 800,000 jobs from the Establishment Survey. That adjustment occurred after each of the individual months had been revised down multiple times. For the 12-month period where the larger revision was made, from the original “reported jobs numbers” the revised numbers were less than 50% of the original numbers reported with great fanfare
· While the establishment survey has repeatedly counted workers returning from strikes as new jobs and currently there are strikes in aerospace and automotive as well as the recently brief port strike. Interestingly, while the Establishment Survey counts those returns as “new jobs”, there are no corresponding negatives to job numbers when the strike starts
· The job report details continue to show decreases in full time jobs with net increases coming from part time jobs
· More disturbing are the details showing that native or legal immigrant job growth has been negative and the net job growth has been to non-native and mostly illegal immigrants into the country
· The JOLTS report continues to reinforce weakness in the hiring and employment mobility with open positions threatening to drop below 8 million
· The more concerning issues with the JOLTS report is the trend of rapidly slowing hiring. Job losses via layoffs or voluntary separation are only half of the equation. The issue is that that hiring rates are dropping meaning that those losing employment are entering a degrading hiring condition
For manufacturers supplying into building/construction, automotive, RV, marine, large appliances, and other typically credit purchased items should understand that the real employment situation affects aggregate demand.
Inflation:
While inflation has been slowing, slowing is not a reduction in prices. The other problem with inflation is that it is measured against like purchases of like class products. The reality is that there are strong data points indicating that the broad consumer market has moved into an “inferior market condition” which has been discussed in previous updates. Summarizing, there are indications across all socioeconomic classes that consumers are converting some of their retail shopping like food to lower cost/price point options (e.g. Whole Foods to Walmart). This will have the effect of reducing aggregate spending but specific item and class spending. EXAMPLE: If a diesel pickup truck is still $100K but sales are 50% less than last year, there has only been a reduction in sales not pricing. This is not the same as people buying a $50K car in lieu of a truck. Until the truck prices drop, there is no drop in inflation as measured by item pricing.
Deflation is potentially one of the consequences of a hard landing recession. This would be actual pricing drops by items and class. The problem is that inflation is caused by the government fiscal policy and debt spending. There does not appear to be any hope in the short-term of this spending decreasing. Therefore, what is more likely is the producers will be pressured to provide less costly options for lower prices. For manufacturers, particularly those utilizing basic commodity raw materials, there are not low-cost options. The only real options for reducing costs will be related to fixed and transportation costs.
US Equity Markets (Same Details as Last Month):
NOTE: As indicated in the headlines section, the list of financial organizations pooling liquidity continues to increase beyond the list provided below from last month. All the inside money is prepping for a correction in equities, real estate, and certain commodities.
US equity markets have been discussed in multiple monthly updates. The same key points still apply:
· Equity volatility increases at the end of cycles entering recessions
· Key smart money players are still anticipating a liquidity event that will drag down markets, both equity and real estate and they’re positioning to buy up companies and property with over $11 billion in transactions in a single month:
o Warren Buffet (Berkshire Hathaway) $277 billion
o Leon Black (Apollo Global) selling stock for 1st time ever
o Marc Benioff (CEO Salesforce) Cashing out stock at $3 million per day
o Walton Family Members (Walmart) All selling significant stock holdings
o Marc Zuckerberg (Meta) Converting large amounts of stock to Cash
o Jeff Bezos (Amazon) Started selling tens of millions of dollars in stock in the last 12 months
o Jamie Dimon (CEO JP Morgan Chase) Converting large stock amounts to cash
· There have only been 5-7 stocks driving markets for over a year, but there will be some profit taking and diversification across the broader market
· The continuing strength in gold futures doesn’t align with confidence in equity markets
· The CPI data puts the Fed in a bind at a time when bond markets are pushing lower (see next section)
US Economy (GDP versus GDI)
While a recession has been historically defined as two consecutive quarters of negative GDP, much like voting (it’s not how people vote, but who is counting the votes that matters), the GDP number is highly estimated and revised in some cases for decades.
EXAMPLE
Here are the revised Annual GDP values for the year 2008:
· 2008: 1.1%, no recession reported
· 2009: 0.4%
· 2010: 0.0%
· 2011: -0.3%, actually 2008 was a recession
· 2013: -0.3%
· 2018: -0.1%, they’re still revising 2008 data 10 years later
GDP as reported by the Bureau of Economic Analysis (BEA) has a sister measure GDI (Gross Domestic Income). Like the two employment surveys from the BLS, GDP and GDI should match each other. They should balance like a ledger. GDP = total economic spending, GDI = total economic income. GDP is estimated so it’s available quicker, but GDI is more accurate as the institution of income taxes in the US means that most income data is captured directly. “Eventually”, GDP gets revised to match GDI, but “eventually” can take a decade as shown above.
Like the labor survey data, GDP and GDI began to significantly deviate in Q2/Q3 2022. The deviation has grown to a point where it could no longer be ignored as GDI aligned much more closely with the observable state of the economy than GDP (which is highly estimated). Just a week ago and suspiciously close to the election, the BEA restated recent GDI results by over $800 billion (better stated almost $1 trillion) with no specifics other than the split between pure adjustment and government spending (which is not income) or auditable details. This scale of correction to GDI is highly unusual and with the lack of specificity, highly questionable.
KEY MATERIAL AND MANUFACTURING VERTICAL MARKETS
GDP Neutral Markets
These are the markets related to most hygiene products (soap, toilet paper, etc.), food, and agriculture. The prevailing wisdom is that the non-GDP markets will only move marginally on overall macroeconomic conditions. As stated last month, depending on the state of the economy, it’s possible that even these markets could see impacts to demand.
GDP Impacted Markets
All GDP impacted markets will be impacted in a recession, but there is an additional split: Finance Dependent Demand (e.g. automobiles) and Non-Finance Related Demand (e.g. housewares) A reminder, I focus on material and manufactured parts markets. Clearly there is a lot of discretionary spending that is not materials related, like entertainment.
Finance Dependent Markets
· Automotive – At all levels except the high end luxury class, sales volumes and thereby materials and parts consumption are down. One of the better indicators of the state of the market comes from the lowest end of the used car market, which is the only part of the market that is enjoying volume growth. This YouTube content creator and his colleagues on other channels do a great job of showing the state of the auto market at the ground level. https://youtu.be/b1I5wJtqOPo?si=EkEIvwbXNEtMpETC
· RV, General Aviation, and Marine – Like automotive, some of the markets are suffering historic demand drops impacting Tier 1+ suppliers. Prices across these markets are dropping trying to generate sales, but the situation is dire resulting in more bankruptcies.
· Building & Construction – Lumber prices continue to drop as producers continue to curtail capacity and furlough employees. The impact of the reconstruction efforts due to the Hurricanes will not be immediate as the cleanup must happen first before replacement construction can begin. Concerns with delays in insurance payouts and the available contractor capacity will also drag recovery spending out over years. Arguably, the rapidly eroding situation across the rest of the nation may only be mitigated by disaster recovery spending.
· Aerospace – As indicated in the headlines section, there are some concerns now that commercial air travel demand may be weakening which will reduce any recovery from Boeing, assuming they can resolve their myriad of issues. What is certain for Tier 1+ suppliers is that no great surge in demand will happen, if at all, until probably Q2 2025.
· High Value White Goods and Electronics – Same as last month, big retailers in this space like Home Depot and Lowes are giving downward guidance.
· Intracompany CAPEX – No real changes here.
Non-Finance Dependent Markets
· General Retailing – As covered in the headlines section, new significant retailer location closures continue.
· Healthcare Products – Demand continues to hold steady.
· Smaller White Goods and Electronics – The comments for General Retailing apply here too.
· Industry Consumables – No change from last month. Aggregate demand is down, and market consolidation may impact suppliers based upon value chain partnerships.
· Packaging – GDP impacted demand is already impacting GDP impacted product packaging.
· Building & Construction – Same as last month, these expenditures will track with the larger B&C spend. This impact, like the larger B&C market, will vary significantly by region. This is the same guidance coming from Home Depot and Lowes.
Meaningful recession mitigation recommendations that could be actionable in the GDP affected markets really require the specifics of the manufacturer. Those specifics drive the appropriate market/value chain, pricing, order-to-deliver process, competitive landscape, and value proposition analyses. This is something where we can help.
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