Brake It, Don’t Break It
Plus: This Week's Featured Place: Mercer County, New Jersey, Utopia and Dystopia
Inside this Issue:
Brake It, Don’t Break It: Fed Keen to Slow the Economy but Still Grow the Economy
Sob Story? Not the Job Story: Another Strong Month for the Labor Market
Hurricane Warning: Wall Street Titan Feeling Frightened
Ford’s Lord: Auto Chief Jim Farley Gives Sweeping View of the World to Come
Greenback Whack: How a Strong Dollar Could Tank the World Economy
Attack on Jack: A Rethink of Jack Welch’s GE Legacy
Ad Queen Leaves the Scene: Silicon Valley Titan Departs
Synthetic Biology: Potential to Help, Potential to Harm
And This Week’s Featured Place: Mercer County, New Jersey, Utopia and Dystopia
Quote of the Week
“We’re carefully watching the economic data. I know all of you are doing that as well. And so far, we’re just not seeing any material impact from the broader economic world that all of you are in. Our demand environment is very strong.”
-Salesforce CEO Marc Benioff
Slow it down—just enough to kill inflation. But not too much—don’t make the medicine worse than the disease.
That, in a nutshell, is what the Federal Reserve wants for the U.S. economy. And so far, more or less, so good. The latest jobs report for May was unambiguously positive: 390,000 new jobs created. But not too positive: April job creation was 436,000. Clearly, some degree of softening is underway. Goods retailers are struggling to react as spending shifts to services. Housing sales are way down. That’s cooled pricing for key commodities like lumber. The container port of Los Angeles, America’s busiest by far, says supply chain pressures are easing. Auto sales are weak. Stock prices are down. And the narrative from corporate America is changing a bit, sounding more concerned. On Wall Street, JPMorgan Chase speaks of hurricanes on the horizon. In Silicon Valley, Microsoft is lowering its financial guidance, and Amazon admits to overexpanding. Netflix will cut jobs, joining other pandemic-era darlings like PayPal and Carvana. As the San Francisco Fed noted in the latest Beige Book report, “recent hiring freezes at a few large tech firms combined with the tightening financial conditions have led a few employers to expect the labor market to cool down in the near future.”
Cooling, of course, could quickly morph into something more sinister. Even as labor markets loosen a bit, and as supply chains get a bit more fluid, a dangerous energy shock persists. Oil prices rose again last week, with fears they might go even higher as demand from China revives post-Covid lockdowns. The Russia-Ukraine war, meanwhile, drags on. America’s large energy sector, to be sure, is benefitting handsomely—just look at how well economies are performing along the Texas and Louisiana Gulf coasts (cargo tonnage at the busy port of Corpus Christi is up by double digits this year, with exports of liquified natural gas up more than 50%!). For the overall U.S. economy, though, $119 oil is a cancer, personified by the embattled American driver. Pricey oil is lifting food prices too, complicating the Fed’s war on inflation.
Frustratingly, oil substitution effects are stunted. Many want to switch to electric vehicles, but there just aren’t enough batteries and other inputs to meet this demand. The chip shortage, moreover, has led some manufacturers to basically stop producing small, fuel-efficient cars—of the 154,000 vehicles that Ford has sold this year, 96% were either SUVs or trucks. The American economy, alas, is still very much dependent on the internal combustion engine, to speak nothing of the fertilizers, chemicals plastics and other vital products—even food—derived from hydrocarbons. As Vaclav Smil writes in his latest book “How the World Really Works: “For now and for the foreseeable future, we cannot feed the world without relying on fossil fuels.” Modern civilization, he adds, depends on them.
Oil’s nefarious assault on the U.S. economy doesn’t mean a guaranteed recession, however. Not with the job market still so healthy. Not with consumers still spending. And not with household bank balances and borrowing capacity still elevated thanks to fiscal stimulus efforts during the pandemic. Bank of America chief Brian Moynihan, speaking at a Bernstein Research event last week, gave these as reasons for his optimism, adding that spending on BOA credit and debit cards hit a record for the Memorial Day holiday. Even Jamie Dimon at JPMorgan, hurricane comments notwithstanding, sounds similarly optimistic about the American consumer—at least right now. He surely does worry about oil though, as he does the Fed’s quantitative tightening program. That began last week, adding uncertainty and potential instability to the world’s most important financial market, i.e., U.S. Treasuries. Dimon also advises against complacency about the Ukraine War, recalling how wars have a way of producing unpredictable outcomes (remember how well the 2003 U.S. invasion of Iraq initially went?).
Dimon went on to caution about credit troubles in unexpected places—in housing during the late-2000s, in telecoms and utilities in the early 2000s, etc. Perhaps it will come this time from the buildup in private credit, he suggested. But his larger point: We just don’t know.
Nor do we know how much of the latest worries—those Big Box retailer woes, for one—are merely the result of consumers shifting their preference from goods to services. Or to use Target’s representative example: from TVs to luggage. Restaurants and bars added 46,000 new jobs last month. Hotels added another 21,000. The monstrous education and health care sectors added 74,000, led by teacher hiring by state and local governments. As the former chief of Goldman Sachs tweeted: “Dial back a bit the negativity on the economic outlook. If I’m managing a big company of course I’m prepping for the worst. But the economy is starting from a strong place, with more jobs than takers, and is adjusting to higher rates. Riskier times, but may yet land softly.”
Are you similarly optimistic? Or do you side with the pessimists? Ultimately, it’s the Fed’s assessment that counts. When the FOMC meets next week, expect another half-point rate hike. No big uncertainty about that. But will it give any hints about its intentions for the following meeting in late July, or the meeting thereafter in late September? Also in late July, by the way, we’ll get the first BEA estimate on second quarter GDP, following last quarter’s negative showing. The Economist this week, by the way, has an interesting look at the role business inventories might be playing in the stability of GDP readings. In any case, there’d be something odd going on if Q2 shows another negative GDP number—two in a row is the traditional definition of a recession—even while the job market is so strong. Corporate America’s earnings, too, remain pretty strong.
Back to oil, the OPEC cartel said it would increase output, naturally concerned that high oil prices will break the world economy and lead to crashing prices (as happened in 2008). Back in Silicon Valley, Sheryl Sandberg announced her departure from Meta, having built not just Facebook into an advertising behemoth, but Google before that. Her business legacy is thus unquestioned, yet she also exits a controversial figure, linked with the many alleged ills of social media. Listen to critics like Jonathan Haidt or Shoshana Zuboff to understand the gravity of these allegations.
Nothing defies gravity quite like Elon Musk’s business endeavors, led by Tesla’s remarkable rise and the revolutionary rockets developed by SpaceX. Like Sandberg though, Musk is a controversial figure, increasingly so as he looks to buy Twitter and steps into the thorny swamps of political debate. The technology he’s introduced is beyond question. The uncertain financial resiliency of his companies, however, combined with legal troubles, could change his reputation quickly (see the Jack Welch item below).
Here's someone hoping to make Musk a bust: Ford’s CEO Jim Farley, who mentioned Tesla 15 times in a discussion at the Bernstein event last week. He acknowledged its path-breaking advances, not just in technology but in areas like marketing (no advertising), distribution (no dealership network) and talent recruitment (a willingness to spend heavily for top engineers). Ford itself is leaning in these directions, dispending with expensive ads and rethinking if not eliminating its relationship with dealers. The current generation of Ford’s electric vehicles, he said, don’t make money. But a second generation—about four years away—will have more efficient batteries, less-labor intensive production and better software that commands more revenue. Software, Farley said, is what matters most now, not motors and gearboxes. Ford, he asserts is “about to change the ride, just like Apple and all the smartphone companies changed the call.”
Ford, incidentally, said last week it will hire another 6,200 unionized workers in Michigan, Ohio and Missouri, while also converting another 3,000 temp workers to permanent full-time status—that means health care benefits. Also last week, in an interesting twist, NBC Universal announced a new film and TV production campus in Atlanta, on property that once featured a General Motors assembly plant.
Featured this week: Updated data on inflation, specifically the May figure for CPI (the consumer price index). The y/y increase for April, remember, was an uncomfortably high 8.3%. Will the May number show some easing?
· General Electric: For a long swath of the 20th century, General Electric was among America’s most admired companies. Its founding dates to Thomas Edison and the invention of the light bulb in the 1870s. During the 1940s, GE’s output, including jet aircraft engines, helped win the Second World War. It remained a key player not just