Trends We're Tracking: M&A Improvement, Arms Race 2.0, Car Prices, and Labor Shortages
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Antitrust environment improves for M&A market
Merger and acquisition (M&A) deal volume plunged more than 35% in 2022 from 2021. While the sharp drop can be mostly attributed to the volatile financial markets as both stock and bond markets fell sharply in 2022, the overly aggressive stance of Federal Trade Commission (FTC) against M&A is also to blame. Entering 2023, however, the FTC seems to have softened its stance against M&A. For example, the FTC recently withdrew its antitrust complaint challenging Meta’s acquisition of Within Unlimited and allowed Amazon’s purchase of One Medical Health Clinics to close without even challenging it.
FTC has faced a lot of pushbacks and criticism in recent years, not only from business communities, but also legal communities for its overly aggressive stance against M&A. Judges were ruling against FTC in quite a few cases, including the above-mentioned Meta/Within Unlimited deal. Additionally, there is increasing internal discord within the FTC. For example, Christine Wilson, the only Republican commissioner, abruptly resigned recently and accused Chair Lina Khan of “abuses of regulatory power.”
Arms race 2.0
February 24th marked the first anniversary of Russia’s invasion of Ukraine. While this one year has seen a lot of devastation, volatile energy prices, heightened global food insecurity, and inflation, it has also had a profound impact on military spending by countries across the globe, thus pushing the world into a new arms race. Countries like Poland and Hungary that neighbor the conflict area are bulking up, fearing a more volatile security environment. Countries that are far away from the conflict zone like China, India, Taiwan, South Korea, and Japan are considering it a playbook for high intensity, high fire power future warfare. Even Rogue States like North Korea have upped their ICBM test numbers to record levels, and Iran is emerging as a major drone supplier for countries like Russia and fringe elements in the Middle East.
New alliances are being forged and production nodes are popping up in the Indo-pacific region, as sharing advanced defense technologies and joint production is becoming a norm. U.S. and global defense contractors and advanced weapons manufacturers are seeing record order flows. Their stocks, which have been rallying, look poised to continue to benefit from a prolonged arms race. From a macroeconomic perspective, countries in Europe, who had cut down on their defense spending in their budgets after World War II, are upping it. In countries where joint ventures and home productions are encouraged, the defense sector is expected to emerge as a major employment and growth contributor. However, on the geopolitical risk side, this arms race 2.0, combining with the existence of authoritarian regimes and ever-increasing global insecurity, can be a deadly cocktail for upping the geopolitical risk premium.
Soaring car prices
Traditionally automakers in the U.S. carried between 60 to 100 days of inventory, but once the pandemic hit and supply chains were disrupted, inventory levels were nearly halved to 30 to 45 days. The cut to inventory levels has served to lower overheads and keep prices elevated, delighting automakers while frustrating consumers. Average monthly payments for a new car have risen to a record $777, while monthly payments for used cars is now at $544. This is quite a shock to consumers dealing with high inflation as the average monthly payment for new cars has been around $400 for nearly a decade. Even as supply chain issues have abated, this new business model for automakers will likely persist as they have seen their profits increase.
Construction labor shortages
When considering the factors of production within the current economic environment, there is an evident power shift from capital to labor, as labor markets across the U.S. remain tight with the official rate of unemployment dropping to 3.4% for the month of January. Furthermore, many retail companies are paying higher wages in an effort to attract more workers. This trend is particularly strong within the construction sector, where it is estimated that the sector will experience a shortage of half a million workers this year. Currently the rate of unemployment within the construction sector is at 4.6% in 2022, the second lowest on record. According to one survey, 80% of construction companies are struggling to hire workers. All this is adding up to higher wages for construction workers, whose average hourly wage is $36 an hour, exceeding the average of $33 an hour for a new college graduate. Additionally, the upcoming infrastructure spending by the federal government, in excess of $1.5 trillion, is likely to increase the labor demand resulting in even more pronounced shortages in the labor market.
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