Tick tock…

  • Recession looming?
  • A tired consumer
  • Two birds, one stone

Back in February 2016, United Technologies Corp (UTC) decided to close its Carrier Corp. furnace factory in Indianapolis. The company wanted to move production and the 1,400 jobs to Mexico over the following three years.

The announcement unleashed the fury of then US presidential candidate Donald Trump. He promised it would ‘not happen under his watch.

The chairman, Gregory Hayes, even added fuel to the fire later in November in a reproach to Trump. As reported by Bloomberg, he said ‘an isolationist approach will not — I repeat, not — create growth or jobs, nor will it make any country great.

A month later, true to his word, Trump had convinced the company to keep the factory open. The workers cheered, their jobs were saved.

That is, until last week when Carrier announced once again that it would be moving some 300 engineering and administrative positions to Mexico.

And that’s not all.

The company has been heavily investing in technology, around US$16 million in plant upgrades. 800 jobs will be lost to automation.

Trump’s success was short lived.

The chairman gave very little hope for job security to those workers still in the payroll, saying, ‘If you have a low-skilled job, they’re not safe no matter where you are. The forces of globalisation are not going to slow down.

And he has a point. Automation and globalisation are not only taking jobs, but also keeping salaries low. It is not just in the US, but here in Australia too.

The low wages are taking a toll on consumer spending and putting Australia’s 25 year long recession free track record on shaky ground.

More after the markets.

Markets

Over the weekend, the Dow Jones Industrial Average lost 2.67 points, or 0.01%.

The S&P 500 is up 0.75 points, for a 0.03% gain.

In Europe, the Euro Stoxx 50 is down 5.53 points, or 0.15%. Meanwhile, the FTSE 100 gained 0.40%, and Germany’s DAX index retreated 0.15%.

In Asian markets, Japan’s Nikkei 225 is up 36.53 points, or 0.19%. China’s CSI 300 is down 0.15%.

In Australia, the S&P/ASX 200 is down 28.77 points, or 0.50%.

On the commodities markets, West Texas Intermediate crude oil is US$49.64 per barrel. Brent crude is US$52.02 per barrel.

Gold is trading for US$1,266.26 (AU$1,702.18) per troy ounce. Silver is US$17.34 (AU$23.27) per troy ounce.

The Aussie dollar is worth .7439 US cents.

Recession Looming?

From Bloomberg:

Australia’s enviable track-record in avoiding two straight quarters of contraction since 1991 is on shaky ground. While the economy grew a solid 1.1 percent in the final three months of last year, it was rebounding from a shock 0.5 percent decline. Australia & New Zealand Banking Group Ltd. Last week said growth could be just 0.1 percent in the first quarter of this year. That would be an annual rate of 1.5%, the lowest since 2009.

Where are the areas of concern?

Home building, net exports and household consumption could be a drag on gross domestic product for the first three months of 2017, according to some estimates. A negative print would raise the specter of recession, especially as a cyclone that ripped through Queensland’s key coal mining region is tipped to subtract from growth in the three months through June.

With slowing household consumption, low wage growth, inflation and business investment, it’s highly unlikely that the high country rate growth we saw in previous years will return.

There are also concerns about the effects on North Queensland’s coal exports of Cyclone Debbie. Take a look at the following table. The black line shows the sharp drop forecast based on port data.



chart image

Source: Business Insider
Click to enlarge


Building work fell by 0.7% in the first three months, a drop much worse than the 0.5% predicted. In particular the concern is in home building. According to The Australian Financial Review (AFR), in the first three months of the year there was a 4.7% decline in residential building. It has been falling at a faster pace since December 2000.

As reported by the AFR, Macromonitor is forecasting a total decline of 23% in dwelling starts, from the peak in 2016 to 2019.  According to the forecasting company, we could very well have passed the peak of the property market, with the downturn just starting in NSW and Victoria.



chart image

Source: AFR
Click to enlarge


According to the Australian Construction Industry Forum, the slowdown in construction could cost the economy 166,000 jobs over the next three years. There are currently 1.1 million people employed in the sector. That is a 15% job loss rate.

A tired consumer

Consumers are worn out.

What do I mean by that?

They are done with spending. The truth is that with salaries not increasing, they are stretched.

That’s why we are seeing weaker consumer spending, and retailers are feeling pressure.

As you probably already heard, Topshop and Topman Australia went into administration last week. They are following in the steps of others like Herringbone, Rhodes and Beckett, Marks, David Lawrence, Pumpkin Patch and Payless Shoes.

The truth is that Australians are cutting spending as they deal with high mortgages, low salary increases and employment insecurity. The result is that the retail, car and industry sectors are suffering.

From the AFR:

The consumer is simply “fatigued”, Morgan Stanley’s strategists wrote to clients in a May 26 note, as they also warned them off the sector. 

“There has been much ado about Amazon, but the reality is that the consumer has found a resistance point,” they wrote. “Bank repricing of interest rates and an expectation from consumers for more now links up with higher essentials inflation, a bigger taxing budget and slowing conditions in the two key employment sectors of housing and retail. Wage growth remains absent, and underemployment high.

And it is not just retail. The problem is spreading to the vehicle sector. Also from the AFR:

Belt-tightening by governments that are also battling high debts has played into the problem as fleet purchases of vehicles also shrink.

Both of Australia’s big ASX-listed car dealership companies, AP Eagers and Automotive Holdings Group, have issued surprise profit downgrades in the space of 24 hours as the appetite of new car buyers waned.

Chief executive officer for AP Eagers, the oldest listed automotive retail group, said profits could be as much as 9% lower than the company’s record first half result from 2016. The company has seen back to back records for shareholders in the last two years.

With stagnated salaries and a whopping 175% household debt to GDP, it is not surprising consumers have reached a resistance point.

And it could only get worse if interest rates start rising in 2018.

Two birds, one stone

Take a drive around Melbourne’s hot property market and you may notice a trend. Properties on the markets with two billboards in front of them. One for the sale market with the ‘sold’ sticker on and a new ‘for rent’ sign just next to it.

What I mean is, the investment property market is booming. But with investors stacking up a collection of properties, how long can it go?

From the AFR:

The Australian enthusiasm for property investment was exacerbating the risks of a correction. The appetite for property investment was unparalleled around the world and an instinctive red flag.

“We have this strange thing that you don’t see anywhere else in the world with property investment. Two million people had investment properties in 2013 and I’m sure it’s much higher today, 40,000 had six or more.”

“Supposing we had some disaster and people will try to sell one of their investment properties. If it’s a real disaster they will stick the other five on the market and see which one sells. Many of the others will do the same thing and we will have our moment of correction.’

Looks like the housing cycle is slowing.

Consumers are starting to worry about their high debt levels. Levels that could even stack up higher if banks start increasing interest rates.

Wage growth is nonexistent.

And there is the added concern of job security to pay for all those high bills and high underemployment.

The pressure to save is higher, yet the savings ratio has fallen to 5%, the lowest since 2007…

Tick tock…

Cheers,
Selva Freigedo