Month: October 2021

One of the major challenges facing the bull case, in addition to numerous previously discussed factors such as the Fed’s imminent tightening (save us the semantics, and just read Morgan Stanley on “Tapering is Tightening“), rapidly shrinking margins, rising interest rates and stagflation fears, China’s real estate slowdown, the global energy crisis, snarled supply chains, a potential US debt default, and the first failure of dip buying to push the S&P back to its rising trendline, is that after several quarters of record corporate earnings, equity valuations are increasingly coming under scrutiny and, as Goldman’s David Kostin writes in his latest Weekly Kickstart note, “investor focus will increasingly assess whether earnings growth can continue to lead the market higher.”

3Q earnings season kicks off when the largest Banks report during the week of Oct. 11th, 47% of S&P 500 market capitalization will report during the week of October 25th and 86% will report by November 6th.

Consensus expects S&P 500 EPS growth of +27% year/year in 3Q, a sharp deceleration from the 2Q growth rate of +88%, even if EPS growth for the median stock is forecast to slow more modestly, from +38% to +12%. Bottom-up estimates imply a roughly equal contribution to EPS growth from sales and margin expansion. Excluding Financials and Utilities, S&P 500 sales are expected to rise 15% yr/yr and net profit margins are forecast to equal 11.6% (+146 bp yr/yr). However, this would bring 3Q margins below the realized level of net profit margins from 1H 2021 (12.2%). All 11 sectors are expected to report positive EPS growth in 3Q, led by Energy (from negative to positive EPS), Materials (+90%) and Industrials (+71%).

And while a generally optimistic Goldman, which recently upped its S&P price target to 4,700 believes there is upside to consensus estimates (as a reminder, the share of companies beating EPS by more than a standard deviation averaged 71%, a record high, and the average EPS beat equaled 21%, well above the long-term average of 6%), the bank does warn that the frequency and magnitude of EPS  beats will moderate from 1H 2021 – as economic and earnings growth are decelerating and base comparables have become more challenging – and warns that there are four key risks to watch: (1) Supply chains, (2) oil, (3) labor costs, and (4) China growth.

We delve deeper into these four earnings season themes below, but first we note that arguably the biggest challenge for stocks – especially high growth, ultra-high duration tech names, namely the rapid recent rise in rates which have led to a contraction in tech name valuations (the FAAMG sector is about 7% below its all time high). As Goldman recently warned (again) S&P 500 returns “have typically been below-average when rates rise by 1 standard deviation in a month and negative when rates rise by 2 standard deviations. The recent move in nominal rates was a 1.5 standard deviation event on a monthly basis, but reached the 2 standard deviation threshold on a 10-day basis.“

So going back to Goldman’s key risk factors we start with…

1. Supply chains.The ISM Suppliers Deliveries Index averaged 74 during the past six months (>50 indicates slower deliveries), the highest level since 1974. Of the 26 S&P 500 firms that reported results since the start of September, 18 mentioned supply chains on their earnings calls, primarily within Consumer and Industrial sectors. The average consensus revision to 4Q 2021 EPS for these firms has equaled -4%.

Goldman economists estimate that strong goods demand accounts for two-thirds of global manufacturing delays. Ironically, Goldman then writes that the strong demand backdrop and expectations that disruptions will ease is likely one reason that 2022 EPS estimates for these firms have been roughly unchanged. This is completely wrong as even the CEO of Mersk said that global demand has to ease so that supply can catch up and supply-chains can normalize; absent this we will remain in an indefinite state of stagflation. Where Goldman does get it right is that the largest firms have highlighted mechanisms including price hikes, cost controls, leveraging scale,and switching suppliers to mitigate the impact of supply chain disruptions, which however means sharply higher prices for a much longer length of time than the “transitory” argument suggests. As such, Goldman warns that “a key risk is that supply chain normalization takes longer than expected and that unmet demand today is not fully recouped in later quarters. Services industries such as Financials and Software have less EPS risk than goods-producing industries such as Industrials.”

2.Oil. Brent oil prices have risen by 51% YTD and Goldman’s commodities team recently hiked its year-end forecast to $90/bbl, above their previous forecast of $80. However, contrary to expectations that these will be rapidly passed on to consumers leading to sharp gains for energy companies, Kostin says that “based on our top-down earnings model, oil prices have a roughly neutral impact on aggregate S&P 500 EPS” and calculates that every 10% increase in Brent prices boosts S&P500 EPS by just 0.3%. Furthermore, while higher oil prices are a tailwind to Energy EPS they are also a headwind to most non-Energy sectors that rely on oil as an input or are sensitive to consumer spending (higher gas prices act as yet another tax on the US consumer). Also, it is worth noting that the boost from Energy to index EPS is likely smaller today, as it represents just 4% of S&P 500 2021E EPS.

3. Labor costs. Ongoing commentary from corporations shows an acute focus on rising wages and the lack of labor supply. Goldman’s adjusted Wage Tracker sits at the highest level since 2007.

Here, however, Kostin is again quick to defuse fears that labor costs will hit margins, calculating the these represent only 13% of the median S&P 500 stock’s revenues, and historical correlations show that the large-cap index is relatively insulated from wage pressures.

Furthermore, as noted last month, Goldman’s analysis suggests a 100 bp acceleration in wage growth would reduce S&P 500 EPSby just 0.7%, all else equal.

Small-caps and the Industrials and Consumer sectors are most vulnerable to rising wages due to their high labor costs and low profit margins.

4. China growth. Goldman’s China Economics team recently lowered their Q3 growth forecasts to 0% (QoQ) amid sharp cuts to production in a range of high energy intensity industries and the property market slowdown.

And while the indirect impact on supply chains is likely a greater EPS risk than the direct effect from reduced end demand in China, Kostin says that in aggregate, the S&P 500 generates just 2% of its sales explicitly from Greater China. Indeed, the S&P 500 derives 72% of its sales in the US and US GDP growth is the most important driver of EPS, however some very high growth sectors such as semis (43% of sales in China), tech Hardware(11%), and stocks with the highest sales to China are more exposed.

The good news – according to the traditionally cheerful Goldman – is that downside risk from these four factors appears relatively contained in aggregate today, but certain stocks face more risks than others. Indeed, several early reporters beat on 3Q EPS but offered weak guidance (MKC, MU, NKE). Consistent with recent quarters, and as we predicted recently, guidance will be a clearer differentiator of stock price reactions than 3Q results during the season. As Kostin – correctly – cautions, earnings revisions typically carry a particularly strong signal for stock returns in the current backdrop of decelerating economic growth, underscoring the importance of identifying the “winners” and “losers” around these key macro risks. Readers should monitor management commentary to assess the implications of these macro factors on the S&P 500 earnings outlook.

Finally, in addition to these four themes, Biden’s corporate tax hikes remain a broad-based, imminent risk to the 2022 EPS outlook. As Goldman warned previously, a change in the corporate tax code would have a direct impact on nearly all S&P 500 companies. The bank’s baseline assumption for a 25% statutory corporate tax rate and an increase in the foreign income tax rate would represent a 5% hit to 2022 S&P 500 EPS. However, thanks to growing bickering between progressive and centrist Democrats, uncertainty about whether tax reform will actually become law is high, as the House delayed a vote on the bipartisan infrastructure bill. Prediction market odds of an increase in the corporate tax currently stand at 66%.

In case you were wondering whether or not Elon Musk’s ex, Grimes, was holding up well after their split (we know you weren’t wondering, but humor us), she appears to be doing just fine.

That is, if walking around Los Angeles dressed like some type of Star Wars extra while flipping through the pages of Karl Marx’s “Communist Manifesto” is “doing just fine”.

Grimes was spotted gallivanting in downtown LA, flipping through the book, in what the NY Post calls her “first public appearance since the split”.

She appeared to be “enthralled” by the book, or at least giving off the appearance that she was. We can’t imagine Grimes would leave the house dressed as she was an expect not to be noticed or photographed.

The Post reported she was “blithely flipping” through the book. Perhaps she was wondering where the pictures were.

Grimes has previously said that artificial intelligence was the “fastest way to communism” and Elon Musk has described himself in the past as a “socialist”.

We are still waiting for either of the two to give away their fortunes for the better of the cause. It hasn’t happened just yet, and we won’t hold our breath.

We noted about a week ago that the couple had split. The two are reportedly “semi-separated” and “still love each other” while remaining “on great terms”.

Musk confirmed that the two would continue to co-parent their one year old son, X Æ A-Xii Musk.

Musk told the NY Post: “We are semi-separated but still love each other, see each other frequently and are on great terms.”

He continued: “It’s mostly that my work at SpaceX and Tesla requires me to be primarily in Texas or traveling overseas and her work is primarily in LA. She’s staying with me now and Baby X is in the adjacent room.”

While people in LA may think the book is a status symbol, those with real world experience in Marxism didn’t seem too amused.

I have lived under communist rule in Hungary in the 1980’s. We were told what to believe, what to think, and where we can go. Government propaganda was everywhere. Freedom was crushed and I had to escape. Does she know what she is doing? I hope this is just a joke.

— Attila (@enviroartist) October 3, 2021

Authored by Jack Phillips via The Epoch Times,

Some $2 million has been raised for a Marine who was put in the brig for speaking out against the U.S. military’s leadership amid the chaotic Afghanistan evacuation.

More than $2.2 million was raised for Lt. Col. Stuart Scheller after more than 29,000 donors contributed. Scheller is awaiting a hearing over viral videos in which he called for accountability from top leaders in the military and the Department of Defense.

He was placed in confinement at the Regional Brig for Marine Corps Installations East at Marine Corps Base Camp Lejeune, officials said. About a week ago, the Marine Corps confirmed his detainment, although it’s not clear when his Article 32 hearing will take place.

“The time, date, and location of the proceedings have not been determined,” Marine Corps Training and Education Command spokesman Capt. Sam Stephenson told Task & Purpose.

“Lt. Col. Scheller will be afforded all due process.”

In August, Scheller gained viral fame after posting a video on social media alleging that top military brass were not taking responsibility for how the military withdrawal from Afghanistan was handled, including the ISIS terrorist attack that left 13 service members dead in Kabul.

“The reason people are so upset on social media right now is not because the Marine on the battlefield let someone down,” Scheller said in a video posted several weeks ago.

“People are upset because their senior leaders let them down. And none of them are raising their hands and accepting accountability or saying, ‘We messed up.’”

After releasing several videos, Scheller was reportedly told by his superiors to stop posting on social media entirely. He appeared to ignore that alleged directive by writing about the gag order in his most recent social media post.

In one post, he announced that he was relieved from his position as the battalion commander for the Advanced Infantry Training Battalion at School of Infantry East at Camp Lejeune, North Carolina. In another post, Scheller suggested in a post that he could be be taken to the brig.

“What happens when all you do is speak truth and no one wants to hear it. But they can probably stop listening because… I’m crazy… right?” Scheller wrote in another post.

“Col Emmel please have the [military police] waiting for me at 0800 on Monday. I’m ready for jail.”

Scheller’s father, Stu Scheller, told the same publication that he believes the military is treating his son unfairly, also confirming that he was taken to lockup pending a hearing.

“All our son did is ask the questions that everybody was asking themselves, but they were too scared to speak out loud,” he told Task & Purpose.

“He was asking for accountability. In fact, I think he even asked for an apology that we made mistakes, but they couldn’t do that, which is mind-blowing.”

The elder Scheller said that his son was merely asking for accountability from top military leaders over the withdrawal.

The Epoch Times has contacted the Department of Defense for comment.

With 40% of new cars predicted to be electric by 2030, Baltimore County’s volunteer firefighter’s association hopes Tesla can figure out how to stop making portable fireballs.

Investment bank UBS predicts by 2025, 20% of all new cars sold globally will be electric. Then by 2030, new sales will jump to 40%, and by 2040, every new car sold globally will be electric. The electric car adoption curve appears parabolic, and emergency responders need improved methods to safely and quickly extinguish electric vehicle fires as they’re likely to become more frequent. 

Take, for example, a Tesla crash in Towson, Maryland, on Thursday evening. The vehicle immediately caught fire after it smashed into a median. The driver was unharmed, but the fire raged out of control after multiple fire stations didn’t have the proper resources to extinguish the flames. 

“The fire escalated to fully involved within about five minutes, officials said. Firefighters initially used portable extinguishers, but a foam unit from the fire department’s hazmat unit was deployed, along with copious amounts of water, to cool the fire as it intensified due to damaged battery-powered cells that contain lithium, which ignites when exposed to oxygen,” local news WBAL said. 

Traditional fire extinguishers, such as foam and water, are ineffective at immediately extinguishing lithium-metal fires. A class-D dry powder extinguisher is certified for use in lithium fires, though there was no mention if firefighters that night had that or a lithium fire blanket to isolate the fire. Instead, a large-capacity water tanker, hazmat unit, and a foam unit were called in and eventually extinguished the blaze two hours later. 

Commenting on the fire, one Twitter user said: “What is going to happen if the majority of cars are electric. Every accident/car fire can’t require this level of Emergency Service assets.” 

Sounding frustrated, the Baltimore County Volunteer Firefighters Association responded to the user and said: “Let’s hope @elonmusk can work with the fire service and together we can develop a better response.” 

Let’s hope @elonmusk can work with the fire service and together we can develop a better response.

— Baltimore Co. Volunteer Firefighter’s Association (@BaltCoVolFire) October 1, 2021

Earlier this summer, 20 tons of water were used to extinguish a Tesla fire in Taiwan. For some context, it only takes 3 tons of water to put out a gasoline car fire. A Texas fire chief told The Independent that a Tesla fire needed 40 times more water to control the blaze in a separate incident.

The National Transportation Safety Board (NTSB) has encouraged electric car companies to educate and help emergency responders on techniques and new tools to put out lithium-ion battery fires. But in the Baltimore fire, the three firehouses appeared not to be well versed in controlling a lithium fire. 

Meanwhile, where’s all that lithium going to come from, and how will environmentally conscious world leaders dispose of it?

By Michael Wilson, Morgan Stanley’s chief US equity strategist

Our US equity strategy process has several key components. Most importantly, we focus on the fundamentals of growth and valuation to determine whether the overall market is attractive and which sectors and styles look the best. The rate of change in growth is more important than the absolute level, and we use a market-based equity risk premium framework that works well as long as you apply the right regime when using it. In that regard, we’re avid students of market cycles and believe that historical analogies can be helpful. For example, the mid-cycle transition narrative that has worked so well since March came directly from our study of historical economic and market cycles.

The final component we spend a lot of time studying is price, i.e., technical analysis. Markets aren’t always efficient, but we believe that they are often very good leading indicators for fundamentals – the ultimate driver of value. This is especially true if one focuses on sector and style leadership and relative strength of individual securities. In short, we find these internals to be much more useful than simply looking at the major averages.

This year, we think that the process has lived up to its promise as the price action has lined up nicely with the fundamental backdrop. More specifically, cyclicals dominated growth stocks in the first quarter during the most accelerative phase of the early-cycle recovery. Large-cap quality leadership since March is signalling what we believe is about to happen – decelerating growth and tightening financial conditions. The question for many investors now is whether the price action has already discounted these fundamental outcomes. The short answer, in our view, is no.

Equity markets sold off sharply two Mondays ago on concerns about an Evergrande bankruptcy. While our house view is that it won’t lead to major financial spillover, it will weigh on China’s growth. This means that the growth deceleration we (and the markets) were already expecting will likely be worse and is probably not fully priced in. The other reason why equity markets were soft a few weeks ago had to do with concerns about the Fed articulating its plans to taper asset purchases. The Fed did not disappoint, as it essentially told us to expect the taper to begin this year. The surprise was the speed with which it expects to be done tapering – by mid-2022. This is about a quarter sooner than the market had been anticipating and increases the probability of a rate hike in 2H22, a clearly hawkish shift.

After the Fed meeting on Wednesday, real 10-year yields were up 12bp in two days and are now up 31bp in just eight weeks. In addition, the US dollar was stronger. Both weighed heavily on equity markets. In other words, tapering is tightening for stocks even if it isn’t for the economy – the more important consideration for the Fed. In short, higher real rates should mean lower equity prices. Secondarily, they may also mean value over growth even as the overall equity market goes lower. This makes for a doubly difficult investment environment given how most investors are positioned. Finally, the most powerful offset to a material correction in the S&P 500 this year has been the extremely resilient buy-the-dip mentality among retail investors, a strategy that is now being challenged. After the Evergrande dip and rally, stocks have probed lower and taken out the prior lows, making this the first time that buying the dip hasn’t worked, simultaneously violating important technical support.

For the past month, our strategy has been to favor a barbell of defensive quality sectors like healthcare and staples, together with financials. The defensive stocks should hold up better as earnings revisions start to come under pressure from decelerating growth and higher costs, while financials can benefit from the higher interest rate environment. On the other side of the ledger are consumer discretionary stocks, which remain especially vulnerable to a payback in demand from last year’s over-consumption. Within that bucket we favor services over goods, where we think there remains some pent-up demand. The risk to earnings may also be higher than average for some tech stocks levered to the work-from-home dynamic that is now fading. Within the sector, we are most concerned about semiconductors and neutral overall.

The International Alliance of Theatrical Stage Employees, one of Hollywood’s most prominent unions, is eyeing a strike.

In what could be a massive blow to movie and TV studios, many of whom are still trying to deal with fallout from the pandemic, the union’s leaders have hit an impasse while seeking shorter working hours as part of a new contract, Bloomberg reported Thursday.

The request has been in response to longer hours that have become the norm since Covid shut down a large portion of the industry.

The union has a membership of about 60,000, most of whom are based in Los Angeles. They are threatening to walk off the job, should the union’s leadership – which is countrywide – decide. This means that a strike would affect studios across the U.S., not just in Los Angeles. 

In total, 1 million jobs “directly tied to film and TV production” could be affected.

Alongside of a historic labor shortage coming back from the pandemic, production has been on the rise as the studio arms of companies like Netflix and Amazon look to build out their content. Both Netflix and Walt Disney have told shareholders that the lack of new content has been a headwind for streaming sign-ups. 

The Alliance of Motion Picture and Television Producers says it “put forth a deal-closing, comprehensive proposal that meaningfully addresses the IATSE’s key bargaining issues.” 

But the union isn’t amused. It wrote to its members: “As you may be aware, negotiations with the major producers have reached a standstill. They refused to reply to our last proposal.”

The union is pushing for rest and meal breaks, as well as higher pay for its lowest earners, some of whom only make $15 per hour. 

The IATSE has never gone on strike in its history, though both parties likely remember a writers strike from 13 years ago that lasted 100 days. 

An IATSE strike could “cripple” the production industry, Bloomberg wrote. 

Authored by James Rickards via DailyReckoning.com,

The happy talk out of Wall Street would have you believe that the Evergrande financial collapse in China is under control and that responsible parties have taken steps to avoid a “Lehman moment” in Chinese capital markets.

Almost everything about that narrative is factually wrong. It’s Wall Street happy talk at its finest, assuring investors that things are under control while the smart money runs for the hills. Something closer to the truth was reported the same day in The Wall Street Journal. Here’s their summary:

Chinese authorities are asking local governments to prepare for the potential downfall of China Evergrande Group, according to officials familiar with the discussions, signaling a reluctance to bail out the debt-saddled property developer while bracing for any economic and social fallout from the company’s travails…

Local governments have been ordered to assemble groups of accountants and legal experts to examine the finances around Evergrande’s operations in their respective regions, talk to local state-owned and private property developers to prepare to take over local real estate projects and set up law enforcement teams to monitor public anger… a euphemism for protests, according to the people.

China’s Bogus Plan

This actual crisis management plan is the worst possible playbook. Why?

Any response to a financial crisis has to be centralized so that decisions about how to deploy limited resources can be made rapidly. Some lenders must be saved, some should be allowed to fail. Equity holders should be wiped out. Foreign investors in dollar-denominated debt of Evergrande will be left to fend for themselves and possibly seek relief in their home countries.

The point is these types of decisions cannot be made by “local governments” as proposed by the Chinese. The government plan is not a serious effort to truncate a financial crisis. It seems designed more to suppress social unrest and perhaps arrest “troublemakers.”

Western analysts don’t understand this dynamic because they view events through the lens of Wall Street and Washington norms.

But the Communist Party of China does not care if Chinese oligarchs or investors in BlackRock ETFs lose money. That suits them fine. They’re communists.

The Good News and the Bad News

The good news is that the China myth has now been revealed to be a fraud. The globalist dream for China has crashed and burned. Good riddance.

Chinese regulators believe they have the resources to bail out or restructure Evergrande with some haircuts for creditors.

They probably do, but that misses the point.

Evergrande investors are now staging protests at banks after learning that their loans to Evergrande will not pay out for two years. Of course, Evergrande will be bankrupt long before that, and the investors will get nothing in the end.

This is another fiasco in the making because those investors will dump that unwanted real estate, which will collapse the property market in turn. Essentially, Chinese regulators are so desperate that they are trying to pay off creditors in kind with deeds to real estate that no one wants.

The Chinese are only looking at what’s inside the four walls of Evergrande and ignoring the fact that their entire property and financial system is on the verge of a world-historic crack-up.

But here’s the real problem: The damage will not be confined to Evergrande. It will spread quickly to counterparties of Evergrande, including other developers and banks.

This unprecedented combination of a financial crisis and Communist indifference could result in full-blown contagion that could emerge as a crisis in the U.S. and Europe within a few months.

I’ve predicted this all along, but in reality, it wasn’t that hard to predict. The Chinese economy is basically a debt-driven Ponzi scheme.

Up to half of China’s investment is a complete waste. It does produce jobs and utilize inputs like cement, steel, copper and glass. But the finished product, whether a city, train station or sports arena, is often a white elephant that will remain unused. The Chinese landscape is littered with “ghost cities” that have resulted from China’s wasted investment and flawed development model.

And as I’ve explained before, that has serious implications for China’s leadership…

The “Mandate of Heaven” in Jeopardy

China’s economy is not just about providing jobs, goods and services. It is about regime survival for a Chinese Communist Party that faces an existential crisis if it fails to deliver.

It is an illegitimate regime that will remain in power only so long as it provides jobs and a rising living standard for the Chinese people. The overriding imperative of the Chinese leadership is to avoid societal unrest.

If China’s job machine seizes, as parts of it did during the coronavirus outbreak, Beijing fears that popular unrest could emerge on a scale potentially much greater than the 1989 Tiananmen Square protests. This is an existential threat to Communist power.

President Xi Jinping could quickly lose what the Chinese call “the Mandate of Heaven.”

That’s a term that describes the intangible goodwill and popular support needed by emperors to rule China for the past 3,000 years. If the Mandate of Heaven is lost, a ruler can fall quickly.

Even before the present crisis, China has had serious structural economic problems that are finally catching up with it.

China is so heavily indebted that it is now at the point where more debt does not produce growth. Adding additional debt today slows the economy and calls into question China’s ability to service its existing debt.

Essentially, China is on the horns of a dilemma with no good way out. China has driven growth for the past eight years with excessive credit, wasted infrastructure investment and Ponzi schemes.

The Chinese leadership knows this, but they had to keep the growth machine in high gear to create jobs for millions of migrants coming from the countryside to the city and to maintain jobs for the millions more already in the cities.

Will China Try to Create a Dangerous Diversion?

The two ways to get rid of debt are deflation (which results in write-offs, bankruptcies and unemployment) and inflation (which results in theft of purchasing power, similar to a tax increase).

Both alternatives are unacceptable to the Communists because they lack the political legitimacy to endure either unemployment or inflation. Either policy would cause social unrest and unleash revolutionary potential.

The question is will China move aggressively against Taiwan, for example, to distract the people and attempt to unite them?

China does not want war at this time. But diverting the people’s attention away from domestic problems toward a foreign foe is an old trick leaders use to unite the people in times of uncertainty.

If China’s leadership decides that the risk of losing legitimacy at home outweighs the risk of conflict that would likely involve the United States, the likelihood of war rises dramatically.

I’m not making a specific prediction, but wars have started over less. This is a very dangerous time.

The National Restaurant Association (NRA) penned a letter to Speaker Pelosi, Leaders Chuck Schumer, Kevin McCarthy, and Mitch McConnell about the restaurant industry’s dire situation heading into the fall season. 

NRA said the “struggling restaurant industry is of grave concern to us.” The association included a new survey of the industry’s economic conditions and concluded the “state a recovery from the pandemic will be prolonged well into 2022.” They warned: “the majority of full-service and limited-service operators say business conditions are worse now than three months ago.” 

The findings below are on the heels of soaring food inflation, labor shortages, and logistical nightmares that have made some restaurant items nearly impossible to obtain. 

• 78% of operators say their restaurant experienced a decline in customer demand for indoor, on-premises dining in recent weeks because of the delta variant spike. 

• 63% of operators said their sales volume in August, historically one of the busiest months for restaurants, was lower than it was in August 2019. 

• Costs are up – 91% of operators are paying more for food; 84% have higher labor costs; 63% are paying higher occupancy costs, but profitability is down – 85% of operators reported smaller margins than before the pandemic.

• Although the industry has added back many of the jobs lost during the pandemic, 78% of operators say their restaurant doesn’t have enough employees to support current customer demand.

• 95% of restaurant operators say their restaurant experienced supply delays or shortages of key food or beverage items during the past three months.

The new findings paint a grim economic backdrop for President Biden’s “Build Back Better” plan and suggest the stagflation is begging to bite. After all, more and more economists are warning about the increasing risk of 1970s-style stagflation, the latest to warn was Stephen Roach. 

A separate study by small business networking site Alignable, conducted between Aug. 28 and Sept. 27, found that most restaurants (51%) were unable to cover their September rent. 

Both studies suggest the return to normalcy for restaurants is puttering out as deterioration in finances due to surging costs, labor shortages, and a decline in traffic may indicate another round of restaurant busts are ahead.