THIS WEEK'S 
REPORT:

Sluggish Job Report / America is Running Out of Everything / The Evergrande Blow Up / Restaurants Still Struggle

 

Sluggish Job Report

The Labor Department released its unemployment report for September, and September was an incredibly disappointing month for job growth.

The Labor Department said in its closely watched employment report on Friday that nonfarm payrolls increased by 194,000 jobs last month. Data for August was revised to show 366,000 jobs created instead of the previously reported 235,000 positions.

Economists polled by Reuters had forecast payrolls increasing by 500,000 jobs. Estimates ranged from as high as 700,000 jobs to as low as 250,000.

The unemployment rate fell to 4.8% from 5.2% in August.

The modest gain in jobs could temper expectations for a swift acceleration in economic growth following an apparent sharp slowdown in the third quarter. The labor market and economy remain constrained by worker and raw material shortages caused by the pandemic.

COVID-19 infections are decreasing in the United States, with 100,815 new infections reported on average each day, according to a Reuters analysis of data from state and local governments, as well as health authorities.

September's employment report is the only one available before the Federal Reserve's Nov. 2-3 policy meeting. The U.S. central bank signaled last month that it could start tapering its monthly bond buying as soon as November.

The additional unemployment benefits expired on Labor Day, so this is surprising. While economists are often wrong, the fact that the actual number was 40% of what was projected is quite the big miss. Companies are so hungry for workers that many are increasingly looking at convicted felons.

All across the country, as the economy surges and employers struggle to find enough workers, former prisoners like Urioste are finding a sliver of a silver lining in the dark cloud of the pandemic.

This summer, U.S. employers reported an unprecedented 10.9 million job openings. That was equal to more than one job for every unemployed person in the country.

In response, a growing number of companies are beginning to tap into a huge, largely ignored labor pool: the roughly 20 million Americans, mostly men and many unemployed, who have felony convictions.

A tiny fraction of businesses, including U.S. Rubber Recycling, have long made a point of hiring ex-convicts. And in recent years, California and about a dozen other states have sought to remove some of the discrimination against these job candidates by banning employers from directly asking applicants about criminal records.

While obviously risky, it does appear that tapping into an underutilized work force of 20 million Americans offers some benefits for companies that employ cheaper labor. But the sluggish job growth in the face of record job openings is a conundrum that is a threat to the economy.

America Is Running Out of Everything

A year-and-a-half into COVID, and the global supply chain is still backed up. The Atlantic pondered whether America is running out of everything.

The coronavirus pandemic has snarled global supply chains in several ways. Pandemic checks sent hundreds of billions of dollars to cabin-fevered Americans during a fallow period in the service sector. A lot of that cash has flowed to hard goods, especially home goods such as furniture and home-improvement materials. Many of these materials have to be imported from or travel through East Asia. But that region is dealing with the Delta variant, which has been considerably more deadly than previous iterations of the virus. Delta has caused several shutdowns at semiconductor factories across Asia just as demand for cars and electronics has started to pick up. As a result, these stops along the supply chain are slowing down at the very moment when Americans are demanding that they work in overdrive.

The most dramatic expression of this snarl is the purgatory of loaded cargo containers stacked on ships bobbing off the coast of Los Angeles and Long Beach. Just as a normal traffic jam consists of too many drivers trying to use too few lanes, the traffic jam at California ports has been exacerbated by extravagant consumer demand slamming into a shortage of trucks, truckers, and port workers. Because ships can’t be unloaded, not enough empty containers are in transit to carry all of the stuff that consumers are trying to buy. So the world is getting a lesson in Econ 101: High demand plus limited supply equals prices spiraling to the moon. Before the pandemic, reserving a container that holds roughly 35,000 books cost $2,500. Now it costs $25,000.

The container situation is even weirder than it looks. With demand surging in the United States, shipping a parcel from Shanghai to Los Angeles is currently six times more expensive than shipping one from L.A. to Shanghai. J.P. Morgan’s Michael Cembalest wrote that this has created strong incentives for container owners to ship containers to China—even if they are mostly empty—to expedite the packing and shipping of freights in Shanghai to travel east. But when containers leave Los Angeles and Long Beach empty, American-made goods that were supposed to be sent across the Pacific Ocean end up sitting around in railcars parked at West Coast ports. Since the packed railcars can’t unload their goods, they can’t go back and collect more stuff from filled warehouses in the American interior.

And what about the truckers who are needed to drive materials between warehouses, ports, stores, and houses? They’re dealing with a multidimensional shortage too. Supply-chain woes have backed up orders for parts, such as resin for roof caps and vinyl for seats. But there’s also a crucial lack of people to actually drive the rigs. The Minnesota Trucking Association estimates that the country has a shortage of about 60,000 drivers, due to longtime recruitment issues, early retirements, and COVID-canceled driving-school classes.

In short, supply chains depend on containers, ports, railroads, warehouses, and trucks. Every stage of this international assembly line is breaking down in its own unique way. When the global supply chain works, it’s like a beautifully invisible system of dominoes clicking forward. Today’s omnishambles is a reminder that dominoes can fall backwards too.

This was a great article on the bottlenecks in the US economy. What’s frustrating is why these bottlenecks continue to persist and how they get fixed.   Labor shortages are not just in the US – China is having similar issues. It’s concerning how acute this problem is, yet no one in government seems to be addressing it.   

The Evergrande Blow Up

 

The Wall Street Journal had an excellent story on how Evergrande ended up on the brink of collapse. The stunning lack of oversight by the Chinese banks and their regulators allowed Evergrande to somehow accumulate over $300 billion in debts they could not repay.

China Evergrande Group’s  path to the brink of default was littered with financial red flags. The property giant carried heavy debt loads, grew at breakneck pace and made it hard for outsiders to understand the company’s financial situation.

But a combination of financial regulators, local Chinese governments, yield-hungry investors and insiders kept the critics at bay. Ultimately, the only pressure that Evergrande couldn’t resist came from Beijing.

The company recently reported more than $300 billion of total liabilities, including $89 billion of debt. It obscured its financial liabilities with complex financing arrangements and did extensive share buybacks despite the debt levels, a review of financial filings shows. The buybacks helped boost the share price, making it risky to bet against the stock.

Evergrande could avoid defaulting on its debt with asset sales, capital injections or a government bailout, although the latter appears unlikely. An Evergrande property-management subsidiary said Monday that it was the target of a takeover bid, signaling a possible new deal that could bring in billions of dollars of much-needed cash for the parent company.

Evergrande was the subject of several critical financial research reports over the past decade. In 2012, Andrew Left, a prominent American short seller, claimed the company was insolvent. He said Evergrande had used “at least six accounting shenanigans” to hide its financial problems. Evergrande at the time denied and rebutted the allegations.

Hong Kong’s markets regulator, the Securities and Futures Commission, came to Evergrande’s defense. It filed its first civil proceedings against a short seller, accusing Mr. Left of spreading false and misleading information about the company.

So rather than investigate the accusations of Andrew Left, they banned him from trading in Hong Kong and fined him! Particularly remarkable was how the company classified its empty parking spaces.

The company had roughly 400,000 mostly empty parking spaces on its books, which it classified as investments. This allowed the company to value them at around $20,000 each, Mr. Stevenson said at the time.

The parking spots should have been considered inventory, he argued. He estimated that the assets could be worth less than half their book value, potentially requiring a multibillion-dollar write-down.  “Evergrande is the only major developer to adopt this treatment,” he wrote in a later piece.

Since the Chinese government ignored these red flags for years, do you really think they are going to let Evergrande collapse without a resolution strategy? The clock is ticking and the bondholders are now exploring their options.    

Restaurants Still Struggle

The US restaurants, after some boom times this summer, are struggling again and many may not be able to survive this upcoming winter.

Data and interviews with restaurateurs point to a deterioration in finances due to surging costs for everything from salmon to uniforms and labor shortages. A survey found that 51% of small restaurants in the country couldn’t pay their rent in September, up from 40% in July.

Unlike during most of 2020, today’s struggles aren’t visible with the naked eye: Customers are still flocking to eateries, for the most part, in spite of rising prices and lingering fears of the delta coronavirus variant. But the anxiety over mounting expenses is palpable among restaurant owners from New York City to Nashville, Tennessee.

“You might see a restaurant that’s doing well on a Friday night, but that doesn’t at all tell the story of how they’re doing. Probably not good,” said Daisuke Utagawa, a Washington, D.C., chef whose restaurants include Haikan and Daikaya. “For us, personally, we haven’t seen any sort of recovery. We are still underwater.”

The industry is raising the alarm. Its main lobbying group this week called on Congress for more aid to help meet payroll and pay down debt, citing a survey showing that a majority of restaurant operators have seen business conditions deteriorate in the past three months. Like many companies around the world, food-service firms are also hit by supply-chain bottlenecks. 

Underscoring the surge in expenses, a closely watched price gauge hit its highest since 1991 in August, driven by energy and food, the Commerce Department said Friday.

“Our kitchen labor costs are up 20%, maybe more,” said Jeff Katz, partner at Crown Shy and Saga in New York City. “The question is, how much more can the customer handle. We haven’t raised our prices yet, but these costs are real.”

We believe this is also the direct consequence of not allowing restaurants to fail. By attempting to save every restaurant, we have made it more difficult for anyone to make any money. Restaurants are preparing to be better equipped for winter outdoor dining.

Restaurant owners say they are better prepared this winter for the mass of pandemic-weary diners who still want an outdoor option.

A year ago, restaurants threw together improvised tents, finicky propane heaters and utilitarian patio furniture. Diners showed up, but even some who were eager for a safe way to dine felt like they were overpaying for a subpar experience.

With more time to make arrangements, owners are making expensive bets on what diners want when temps go down. Some of them are using the money to speed up service, add decor and invest in higher-quality permanent setups. Others are tweaking menus to offer warm, well-executed dishes and hot-themed drinks.

Few would have predicted year-round outdoor dining in cold weather climates, but this is a COVID habit that seems permanent.