Global business

America Inc and the shortage economy

Three things to look for from the upcoming earnings season

IF YOU LOOK only at the scale of the profits cranked out by American businesses, they seem to be indestructible (see chart). 

Despite a pandemic and a savage slump in 2020, large listed American firms’ net income for the third quarter of this year is expected to reach over $400bn, at least a third higher than in the same quarter in 2019. 

Yet as earnings season gets into full swing this week, bosses and investors are watching for signs that three related worries are biting: supply-chain tangles, inflation, and hints that a long era of profitable oligopolies is giving way to something more dynamic and risky. 

Already big firms such as Snap, Honeywell and Intel have given the jitters to investors. 

Could there be more to come?

Only a quarter or so of firms in the S&P index have reported results so far. 

Those that have done so have pleased investors with better than expected figures. 

Superficially the picture is of “back to business as usual”. 

Bad-debt provisions taken by banks in the depths of the panic over the economy, which proved unnecessary, have been unwound. 

JPMorgan Chase got a $2bn benefit to its bottom line from this reversal in the third quarter. 

Goldman Sachs has shelled out $14bn in pay and bonuses so far this year, up by 34% year on year. 

American Express reported a leap in revenues as small firms and consumers spent on their cards more freely. 

United Airlines confirmed it was on track to hit its performance targets for 2022.

Yet look again and the three worries loom. 

Start with supply chains. 

The number of ships waiting off California’s big ports remains unusually high at about 80, according to Bloomberg. 

On 22nd October, Jerome Powell, the chair of the Federal Reserve, said that supply-chain problems may last “well into next year”. 

The knock-on effects are feeding through industry. 

Union Pacific, a railway firm, lowered its forecast for traffic volumes because semiconductor shortages (often in Asia) have hit car production, in turn reducing the number of vehicles and components transported by rail. 

Honeywell, an industrial firm, cut its full year sales target by 1-2% complaining of a shortage of parts. 

VF Corp, which makes shoes (including white ones that fans of “Squid Game”, a hit TV show, hanker after) complained of supply-chain problems in Asia. 

So far the problem is not disastrous but it is inflating costs and forcing firms to adapt.

This supply-chain headache is one element of a second, broader worry, about inflation and its impact on profits. 

Commodity prices are a source of pressure, with crude oil reaching $86 a barrel this week. 

Wages are too: although there are still 5m fewer people employed across the economy than before the pandemic hit, average hourly pay rose by 4.6% year on year in September. 

The immediate effect tends to be felt by low-margin firms that employ a lot of people: Domino’s Pizza has complained of a “very challenging staffing environment” and falling sales.

Elsewhere a mild inflationary mindset is slowly infiltrating boardrooms. 

Procter & Gamble predicted that commodity and freight inflation would raise its operating costs this financial year by about 4% and that sales would rise by up to 4%, owing to a mixture of price rises, and volume and mix effects. 

Honeywell warned there would be a “continued inflationary environment” in 2022. 

All firms are weighing how much they can raise prices to compensate for higher costs. 

So are fund managers who are busy running screens for companies that they judge to exhibit the all-important quality of “pricing power”. 

The shifting psychology of bosses and investors towards expecting more inflation should concern Mr Powell at the Fed.

The final big issue is whether an economy with shortages that is running hot ultimately forces an end to the managerial consensus of the past decade, which has favoured keeping margins high and being stingy with investment in order to maximise short-run cashflow. 

Already there are signs that attitudes are shifting in response to shortages and pent-up demand: economy-wide investment, excluding residential investment, rose by 13% in the second quarter of 2021 compared with the preceding year. 

United Airlines has said it will increase its capacity on international routes by 10%. 

FreePort McMoRan, a huge miner of copper (used in electric vehicles among a wide array of industrial applications), has said that it is “prepared to make value enhancing investments in our business” in response to red-hot prices. 

Hertz has announced an order of 100,000 cars from Tesla. 

And on Wall Street a fund-raising bonanza for speculative start-ups continues, including last week the merger of a special-purpose acquisition company with the social-media ambitions of a certain Donald Trump.

Rising investment is exactly what economists want because it increases capacity today and boosts the economy’s long-run potential. 

Yet whether investors are prepared to take the plunge remains to be seen. 

Habituated by years of high margins, they tend to run shy of rising investment and competition. 

Snap’s share price dropped by over 20% on October 21st as signs that the war over privacy settings on the iPhone between Apple and social-media firms, and the intensifying competition in advertising between a wide array of tech firms, is hurting its results. 

And Intel, which earlier this year boldly announced plans for a huge rise in investment in order to return to the frontier of the semiconductor industry, alongside TSMC and Samsung, presented Wall Street with the bill in the form of much lower than expected short-term earnings: its shares dropped by 12%. 

If you run a company or invest in one this is the new calculation: demand is recovering and costs are rising. 

Can you raise prices? 

And should you expand capacity? 

By the end of this earnings season the answer may be clearer.

The left’s low-rate fantasy makes inequality worse

Easy money is not creating better jobs, it’s feeding market bubbles that make the asset-rich richer

Rana Foroohar 

© Matt Kenyon

Unlike many on America’s left, I’ve always been sceptical that ultra-low interest rates make things easier for the poor. 

Keeping rates too low for too long encourages speculation and debt bubbles. 

When they burst, they always hurt those on low incomes the most, as we witnessed during the 2008 financial crisis.

And yet for years, progressives have argued that loose monetary policy and low interest rates are necessary to promote employment, particularly at the lower end of the socio-economic ladder.

This is not the case. 

While easy money may have helped create a bit of wage pressure in low-end service jobs, unemployment kept falling in recent years even as the Federal Reserve began to raise rates from ultra-low to still-low levels.

Meanwhile, academic research has shown that the tendency of low rates to fuel market bubbles is a key reason behind inequality, since they make the asset-rich richer, while not actually fuelling consumption and demand. 

In the US, the top 10 per cent of the population owns 84 per cent of equities. 

There are only so many homes, cars and pairs of jeans that these people can buy.

Most people live on their paycheques. 

And despite a bit of wage growth over the past six months, incomes on an inflation-adjusted basis are still below where they were in 2019, says Karen Petrou, managing partner of Federal Financial Analytics.

“This is the Kool-Aid: that ultra-low rates promote employment,” she says. 

“But they don’t.” 

Most people work to make money, and while central bankers can brew up asset inflation, they can’t create good middle-class jobs. 

Only business, helped along by the right policy incentives, can do that. Wall Street isn’t Main Street.

Still, the fantasy of low rates somehow creating real growth dies hard. 

Witness the new progressive push to get rid of the Fed chair, Jay Powell, who last week voiced concerns about inflation being more persistent than previously thought. 

That could, of course, indicate the need for a quicker tapering of central bank bond buying and/or faster interest rate hikes.

Financial markets never want to hear that, of course. 

But neither does the political left. 

Elizabeth Warren, the senator from Massachusetts, called Powell a “dangerous man” for his efforts to roll back some financial regulation following the 2008 crisis. 

Another Democrat, the head of the Senate banking committee Sherrod Brown, rightly pointed out the very unequal nature of the recovery, but also criticised Powell for saying the test for full employment had been “all but met”, and said that the “Fed cannot pull back every time workers gain a tiny bit of power to demand higher wages”.

On the one hand, I’m sympathetic to this sentiment. 

I remember once interviewing a labour activist and Fed adviser who complained that central bankers always pull the punchbowl away just when average people have arrived at the party. 

Fair enough. 

With stock prices still near record highs, and US home prices up nearly 20 per cent annually, it’s no wonder that small-time investors are desperate for their slice of the pie. 

Income growth won’t buy you a house.

And yet, risk is greatest just when the punchbowl is about to be pulled. 

I worry about the rise of retail speculation on apps such as Robinhood. 

I also worry that investors with fewer liquid assets are those taking on some of the biggest risks. 

Consider a recent Harris poll showing that 15 per cent of Latino Americans and 25 per cent of African Americans say they’ve purchased non-fungible tokens, compared with just 8 per cent of white Americans.

This feels way too much like the phenomenon of low-income homeowners being sold dicey mortgages in the run-up to 2008. 

Yet who can blame people for wanting a sip of the punch when savings rates are zero and inflation is 5 per cent?

The real problem here is that we have left it too late to normalise monetary policy and create a more balanced economy that isn’t just about riding asset bubbles. 

The perversions in our system were underscored last week by the trading scandals that forced two Fed governors to step down.

But merely cleaning up ethics policy at the Fed or making sure that we don’t loosen banking regulation (both laudable goals) isn’t going to get the US economy where it needs to be. 

We must all give up on the notion that low rates alone are going to create good jobs and income growth. 

We should taper faster, and move forward slowly but surely with normalising monetary policy.

Many will argue against doing this, particularly as we move into what may be a long cold winter in which rising fuel prices will hit low-income individuals hard. 

Yet, as Petrou points out, many of them are already paying double-digit credit card rates. 

A small tick-up in the Fed funds rate will not be a critical factor, she says, especially given that in the US, those rates mainly trickle through to consumers via home refinancing, which is done mostly by those with high credit scores.

Meanwhile, a small but positive real interest rate would allow small-time savers to start building a nest egg. 

That’s a worthy goal no matter what your politics.

The Devastating Ways Depression and Anxiety Impact the Body

Mind and body form a two-way street.

By Jane E. Brody

Credit...Gracia Lam

It’s no surprise that when a person gets a diagnosis of heart disease, cancer or some other life-limiting or life-threatening physical ailment, they become anxious or depressed. 

But the reverse can also be true: Undue anxiety or depression can foster the development of a serious physical disease, and even impede the ability to withstand or recover from one. 

The potential consequences are particularly timely, as the ongoing stress and disruptions of the pandemic continue to take a toll on mental health.

The human organism does not recognize the medical profession’s artificial separation of mental and physical ills. Rather, mind and body form a two-way street. 

What happens inside a person’s head can have damaging effects throughout the body, as well as the other way around. 

An untreated mental illness can significantly increase the risk of becoming physically ill, and physical disorders may result in behaviors that make mental conditions worse.

In studies that tracked how patients with breast cancer fared, for example, Dr. David Spiegel and his colleagues at Stanford University School of Medicine showed decades ago that women whose depression was easing lived longer than those whose depression was getting worse. 

His research and other studies have clearly shown that “the brain is intimately connected to the body and the body to the brain,” Dr. Spiegel said in an interview. 

“The body tends to react to mental stress as if it was a physical stress.”

Despite such evidence, he and other experts say, chronic emotional distress is too often overlooked by doctors. 

Commonly, a physician will prescribe a therapy for physical ailments like heart disease or diabetes, only to wonder why some patients get worse instead of better.

Many people are reluctant to seek treatment for emotional ills. 

Some people with anxiety or depression may fear being stigmatized, even if they recognize they have a serious psychological problem. 

Many attempt to self-treat their emotional distress by adopting behaviors like drinking too much or abusing drugs, which only adds insult to their pre-existing injury.

And sometimes, family and friends inadvertently reinforce a person’s denial of mental distress by labeling it as “that’s just the way he is” and do nothing to encourage them to seek professional help.

How common are anxiety and depression?

Anxiety disorders affect nearly 20 percent of American adults. 

That means millions are beset by an overabundance of the fight-or-flight response that primes the body for action. 

When you’re stressed, the brain responds by prompting the release of cortisol, nature’s built-in alarm system. 

It evolved to help animals facing physical threats by increasing respiration, raising the heart rate and redirecting blood flow from abdominal organs to muscles that assist in confronting or escaping danger.

These protective actions stem from the neurotransmitters epinephrine and norepinephrine, which stimulate the sympathetic nervous system and put the body on high alert. 

But when they are invoked too often and indiscriminately, the chronic overstimulation can result in all manner of physical ills, including digestive symptoms like indigestion, cramps, diarrhea or constipation, and an increased risk of heart attack or stroke.

Depression, while less common than chronic anxiety, can have even more devastating effects on physical health. 

While it’s normal to feel depressed from time to time, more than 6 percent of adults have such persistent feelings of depression that it disrupts personal relationships, interferes with work and play, and impairs their ability to cope with the challenges of daily life. 

Persistent depression can also exacerbate a person’s perception of pain and increase their chances of developing chronic pain.

“Depression diminishes a person’s capacity to analyze and respond rationally to stress,” Dr. Spiegel said. 

“They end up on a vicious cycle with limited capacity to get out of a negative mental state.”

Potentially making matters worse, undue anxiety and depression often coexist, leaving people vulnerable to a panoply of physical ailments and an inability to adopt and stick with needed therapy.

A study of 1,204 elderly Korean men and women initially evaluated for depression and anxiety found that two years later, these emotional disorders increased their risk of physical disorders and disability. 

Anxiety alone was linked with heart disease, depression alone was linked with asthma, and the two together were linked with eyesight problems, persistent cough, asthma, hypertension, heart disease and gastrointestinal problems.

Treatment can counter emotional tolls

Although persistent anxiety and depression are highly treatable with medications, cognitive behavioral therapy and talk therapy, without treatment these conditions tend to get worse. 

According to Dr. John Frownfelter, treatment for any condition works better when doctors understand “the pressures patients face that affect their behavior and result in clinical harm.”

Dr. Frownfelter is an internist and chief medical officer of a start-up called Jvion. 

The organization uses artificial intelligence to identify not just medical factors but psychological, social and behavioral ones as well that can impact the effectiveness of treatment on patients’ health. 

Its aim is to foster more holistic approaches to treatment that address the whole patient, body and mind combined.

The analyses used by Jvion, a Hindi word meaning life-giving, could alert a doctor when underlying depression might be hindering the effectiveness of prescribed treatments for another condition. 

For example, patients being treated for diabetes who are feeling hopeless may fail to improve because they take their prescribed medication only sporadically and don’t follow a proper diet, Dr. Frownfelter said.

“We often talk about depression as a complication of chronic illness,” Dr. Frownfelter wrote in Medpage Today in July. 

“But what we don’t talk about enough is how depression can lead to chronic disease. 

Patients with depression may not have the motivation to exercise regularly or cook healthy meals. 

Many also have trouble getting adequate sleep.”

Some changes to medical care during the pandemic have greatly increased patient access to depression and anxiety treatment. 

The expansion of telehealth has enabled patients to access treatment by psychotherapists who may be as far as a continent away.

Patients may also be able to treat themselves without the direct help of a therapist. 

For example, Dr. Spiegel and his co-workers created an app called Reveri that teaches people self-hypnosis techniques designed to help reduce stress and anxiety, improve sleep, reduce pain and suppress or quit smoking.

Improving sleep is especially helpful, Dr. Spiegel said, because “it enhances a person’s ability to regulate the stress response system and not get stuck in a mental rut.” 

Data demonstrating the effectiveness of the Reveri app has been collected but not yet published, he said.

Jane Brody is the Personal Health columnist, a position she has held since 1976. She has written more than a dozen books including the best sellers “Jane Brody’s Nutrition Book” and “Jane Brody’s Good Food Book.”  

The Neglected Sources of China's Economic Resilience

Many China-watchers are pessimistic about its prospects, arguing that it remains overly reliant on Western technology. But thanks to a huge, interconnected market, and an exceptional capacity for learning, the entrepreneurial impulse driving China’s development remains strong.

Zhang Jun

SHANGHAI – Over the last 20 years, a number of thriving technology companies have emerged in China. 

This has invited much speculation about the country’s scientific and technological prowess, and about its ability to innovate. 

Some argue that China is already nipping at America’s heels in these domains, and has become a world leader in some sectors. 

Others believe that China is not quite as far along as it may appear, and the government’s regulatory clampdown on tech companies will impede its continued progress. 

Which is it?

Those who doubt China’s progress emphasize the country’s reliance on Western technology, pointing out that its homegrown tech companies still do not compete with their American counterparts globally. 

But China optimists note that those companies continue their rapid international expansion, a reflection of China’s exceptional capacity for learning.

The latter camp has a point. 

In fact, China’s capacity for learning is the secret to the country’s economic success, and it says much more about China’s prospects than where the country stands technologically. 

After all, technological innovation is less an input than an output of entrepreneur-led economic development. 

It is by building thriving businesses that entrepreneurs gain opportunities to develop new technologies and applications.

True, China has faced growing external challenges in recent years, including clampdowns on technology sharing by developed economies. 

Furthermore, the government’s efforts to maintain internal economic order and mitigate financial risks, such as through increased regulation of tech companies, has been controversial in the market. 

And some foreign manufacturing firms have reportedly withdrawn from China.

But the economy has not ground to a halt. 

On the contrary, the entrepreneurial impulse driving China’s development remains strong. 

It helps that China has a huge internal market of 1.4 billion people connected by well-developed transportation systems, advanced communication networks, and flexible and efficient supply chains.

While many foreign firms have come and gone, this has always happened, and it is not because outsiders are treated unfairly in the Chinese market. 

Foreign companies simply struggle to compete with local companies, which enjoy a significant advantage, including less bureaucratic red tape and deeper market knowledge. 

Moreover, while foreign firms might arrive in China with a slight technological advantage, it is usually short-lived, given how fast Chinese companies learn.

Today, there is a staggering number of successful small and medium-size Chinese companies. 

They might not be household names – in fact, they’re referred to as “invisible champions” – but they are constantly innovating in applying advanced technologies. 

And their ranks continue to grow.

There is also a large number of Chinese companies serving overseas customers, with many maintaining a far larger presence in Europe and the United States than in China. 

These firms leverage China’s efficient warehousing, distribution, and logistics systems, as well as its superior capabilities in product design and manufacturing, to bolster their competitiveness in overseas markets.

Shein, an online fast-fashion retailer that was founded in 2008 in Nanjing, is a typical example of such a firm. 

It began as a cross-border e-commerce company, selling clothing via platforms like Amazon and eBay. 

But, in 2014, the company created its own brand and launched a bespoke website and app in markets around the world, from the US and Europe to the Middle East and India.

By selling inexpensive clothing directly to consumers, Shein thrived. 

Before long, it had become the second-most-popular e-commerce site for young Americans, behind only Amazon. 

According to Google trends, users in the US – Shein’s leading market – search for Shein more than three times as often as they search for Zara.

Despite being worth an estimated $15 billion, Shein was not particularly well-known in China until last year, when it was listed as one of China’s top-ten “unicorns” (private companies with a valuation over $1 billion). 

That is because it does not serve the Chinese market. 

Instead, it has leveraged China’s advantages – the result of huge amounts of government investment over the last 20 years – to build its own flexible supply chain, concentrated in Guangdong, the country’s most developed manufacturing center.

Thanks to this supply chain, Shein is reportedly able to take a product from design to production in ten days. 

Its fast-fashion competitors – whose products are typically designed in Europe, manufactured in Southeast Asia and China, sent to European headquarters for warehousing, and then shipped to global markets – simply cannot keep up. 

Shein has also started to build warehouses in some key markets.

Shein is no anomaly. 

China boasts a number of other fast-fashion cross-border e-commerce platforms, and a total of 251 unicorns, as of last year. 

The list includes social-media apps such as TikTok, which has taken the world by storm. 

The influence of Chinese internet companies is large and still growing in the European, American, and South Asian markets.

China’s government is partly to thank. 

After the SARS outbreak of 2003, it worked to support the expansion of e-commerce. 

Then, to offset the shock of the 2008 global financial crisis, it made continuous investments in internet, communication, and transportation networks, mobile-payment systems, logistics and warehousing capabilities, and supply chains, while promoting linkages among sectors. 

These efforts have helped strengthen and sustain the economy’s base-level sources of innovative dynamism.

To be sure, China’s super-size, fast-growing economy suffers from its structural problems, which seem not to correspond with its underlying dynamism. 

This apparent discrepancy is a reminder of the economy’s complexity. 

For example, because the state-owned sector captures a disproportionate share of financial resources, it is often regarded as a source of misallocation. 

But recent studies find that state-owned enterprises might have served as an informal channel for alleviating the financing constraints of small and medium-size enterprises.

Those who focus excessively on surface-level phenomena will continue to underestimate China’s economic resilience. 

One cannot truly understand the Chinese economy and its prospects without paying attention to the irrepressible dynamism that forms its base.

Zhang Jun, Dean of the School of Economics at Fudan University, is Director of the China Center for Economic Studies, a Shanghai-based think tank.