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Barron’s Weekend Summary: Automobile electrification is advancing rapidly. Tesla may have led the way, but the legacy automakers are catching up quickly

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Benefits for gig workers expired, but riders still pay more—and drivers still earn more—in a tight labor market

Americans hailing an Uber or a Lyft ride still face elevated prices due to a shortage of drivers—the latest example of how a tight labor market is costing consumers more while also raising pay for workers.

Uber Technologies Inc. and Lyft Inc. had expected most drivers to return to work after federal unemployment benefits expired nationwide in September. But that is happening only slowly. Fares have only marginally inched down from their summer highs.

That means drivers are earning more and riders are paying more than they were at the beginning of this year, before the widespread availability of vaccines accelerated the economic reopening from pandemic shutdowns. Uber and Lyft prices are directly tied to driver supply, according to the companies.

Data show that fares dipped during the late spring and summer in states that opted out early from some or all enhanced and extended federal unemployment benefits, compared with states that didn’t, according to YipitData, which tracks emailed receipts.

But the nationwide average ride-share fare declined just 3% during the first three weeks of October compared with a record high for the month of July. U.S. riders on average have still paid 22% more for a ride so far in October compared with January, and 30% more than they did in October 2019.

Drivers are returning—just more slowly than demand for rides. An Uber spokesman said that “there are now more drivers on Uber in the U.S. than at any point during the pandemic,” but acknowledged that in many cities there are still labor constraints that have kept the nationwide average price high.

“Now there’s so many people that want to go out and do things” that drivers haven’t kept pace with how quickly riders have returned, Lyft President John Zimmer said in September in a talk on Clubhouse, the audio-based social network. A Lyft spokeswoman said Saturday the company expects things will fully resolve, but couldn’t predict when.

Both companies report third-quarter results next week and are expected to address the labor shortage and prices.

The sting to consumer wallets raises questions about where the drivers have gone, and mirrors the trend rippling across the wider economy, in which a smaller labor force is contributing to wage and price inflation and causing Americans to wait longer for goods and services.

The fact that prices remain close to where they were in the summer indicates that “there is still a supply shortage, even if the severity of the shortage is better than it was,” said Peter Martin, a YipitData research analyst with expertise in the ride-share industry. Longer trips and fewer rider discounts also contribute to higher average prices, he said.

Harry Thomas, an Uber driver at night for 3½ years, switched to grocery delivery when Covid-19 lockdowns began in the spring of 2020. He returned briefly to ride-share driving this past summer, but now is back to delivery work, along with some freelance web and design projects. He also is applying for full-time jobs.

“Uber has tried to entice me to come back and drive for them, but I rather like daytime hours,” said Mr. Thomas, who lives in San Antonio. He said he is concerned about safety and the possibility he could be sued under Texas law for helping someone access an abortion, even though Uber and Lyft have said they would cover legal costs for any driver in that situation.

Unemployment benefits were extended to gig and self-employed workers for the first time during the pandemic, resulting in about 15 million claimants at the height of the federal program last year. Claimants likely included ride-share drivers, as well as people who had sole proprietorships or were paid as contractors. The number of people collecting those benefits declined gradually as the economy reopened and states began ending the programs this summer.

Benefits for gig workers and the self-employed expired in remaining states in early September, though some states have taken weeks to work through backlogs of claims.

Despite the end of those benefits, and the expiration of a weekly $300 federal unemployment benefit added to regular state payments, many U.S. employers across the economy are struggling to fill positions. U.S. job openings have trended at record highs in recent months, exceeding the number of unemployed Americans seeking work, according to the Labor Department. That shows the labor market is perhaps tighter than the 4.8% unemployment rate indicates and that workers have more options.

A Goldman Sachs analysis found that driver earnings fell during the late spring and summer in states that ended enhanced unemployment benefits early compared with states that didn’t, similar to the trend YipitData found with prices. Taken together, the data suggests the effects of the September expiration of benefits might eventually trickle down to the rest of the country—albeit slowly.

Economists say there are multiple reasons the labor force is constrained. Worries about becoming ill with Covid-19 and pandemic-related disruptions in school and child care are likely keeping some people on the sidelines. Others retired early or stepped away from the workforce temporarily, perhaps to wait for a better work opportunity or to become a full-time parent.

Meantime, openings in traditional jobs might have attracted some ride-share drivers.

“If you ever wanted a job in corporate America, it’s probably the easiest that it’s ever been,” said Brad Erickson, an analyst at RBC Capital Markets who covers Uber and Lyft.

Workers might also be migrating to other low-skill industries that have a lot of job openings. Many ride-share drivers turned to food and grocery delivery as demand for rides disappeared during the pandemic—and some are staying there. Nearly three-quarters of 4,000 DoorDash Inc. drivers surveyed in July said they didn’t want to share their vehicle, a staple of ride-hailing that won’t ever go away. Some drivers haven’t switched back to ride-share over concerns that demand might taper off again if the health crisis persists.

Jim McIntire, a 56-year-old Lyft driver in Chicago, said he chooses to drive because he likes the work and the money is good. He has been working three days a week and making more money than he did when he was working five or six days a week last year. “I have never, never made this much money” as a ride-share driver, he said, though he said he worries it might not last.

Uber and Lyft have poured millions of dollars into attracting drivers with bonuses. The companies are gradually pulling those incentives, particularly in areas where more drivers have returned.

Still, ending the labor shortage won’t bring prices back down to their pre-pandemic levels. Uber and Lyft are phasing out rider discounts to rein in costs and to show investors that they can grow without the dirt-cheap prices that were the hallmark of the past decade.

Manufacturing sector weighed down by raw material costs, a power crisis and a slowdown in the property sector

BEIJING—A contraction in China’s factory activity worsened for a second straight month in October, adding evidence that growth momentum has weakened as the country’s vast manufacturing sector is weighed down by soaring raw material costs, a widespread power crisis and a sharp slowdown in the property sector.

China’s official manufacturing purchasing managers index dropped to 49.2 in October, according to data released Sunday by the National Bureau of Statistics, lower than September’s 49.6 reading and the lowest since the outbreak of the pandemic in February 2020.

The reading fell far short of the 49.9 median forecasts expected by economists polled by The Wall Street Journal and marked the second straight month that the gauge came in below 50 which separates contraction from expansion.

Last month’s PMI contraction had already ended an 18-month-long factory-sector boom that helped power the world’s second-largest economy as it bounced back from the pandemic.

Although some economists expected China’s factory activity would improve slightly from the previous month as the power curbs eased, Sunday’s reading instead suggested that the broader picture for China’s economy is quickly deteriorating.

Domestic demand, in particular, remains weak, held back by an ailing property market under pressure from Beijing’s tightening rules, as well as widespread power shortages and sporadic virus outbreaks that have halted consumption and production activity.

In a statement Sunday, Zhao Qinghe, an economist with China’s statistics bureau, blamed the drop in factory activity primarily on the power shortage and soaring raw material prices. The recent jump in commodities prices pushed the subindex for output to 61.1 in October from 56.4 in September, hitting the highest level since 2016, when the data was first published, Mr. Zhao said.

Since September, China has been dealing with power rationing and blackouts, partly the result of aggressive energy-efficiency targets set by Beijing and aimed at reaching peak carbon emissions before 2030.

China’s main economic-planning agency, the National Development and Reform Commission, said in a statement last week that it met with coal producers to discuss measures to tamp down soaring coal prices.

Although authorities have been pulling out the stops in recent weeks to ease the country’s worst power crunch in decades, some economists say the energy crisis could persist for months, slowing factory output and pushing up industrial inflation.

Beyond the power crisis, a downturn in the real-estate market has also added to the list of growth headwinds. China’s property sector, which by some estimates contributes to as much as one-third of growth in the world’s second-largest economy, has seen home sales and average home prices fall in recent weeks as regulators enforce strict rules on developers’ leverage. A property-tax pilot announced by the country’s top legislative body aimed at distributing wealth more evenly has only added to the uncertainties.

China’s crackdown on its property sector has brought the specter of broader economic pain as weakened demand spills over into investment and construction, with potential negative implications for employment and local government finances.

Exports, a key engine of the country’s economic rebound following the coronavirus outbreak, also showed softness in October, according to Sunday’s data release. A subindex measuring new export orders rose to 46.6 in October, improving slightly from September’s 46.2 but still remaining deep in contraction territory. The new orders subindex, however, dropped further from the previous month to 48.8 in October.

Meanwhile, China’s official nonmanufacturing PMI, which includes the services and construction sectors, expanded in October, albeit at a slower rate than in September, according to separate data also released Sunday by China’s statistics bureau. The nonmanufacturing PMI came in at 52.4 in October, versus 53.2 in September, while the subindex tracking the services sector declined to 51.6 in October from 52.4 in the previous month.

The continued expansion in the services sector, though precarious, came as Chinese citizens enjoyed a weeklong National Day holiday and social-distancing measures were relaxed, supporting a bounceback in services that rely on human contact.

A virus flare-up in a dozen regions in late October, however, has led many to question how long the situation can last, particularly as authorities reimpose strict measures to crush new infections ahead of the Beijing-hosted Winter Olympics in February.

A subindex measuring construction activity, meantime, weakened to 56.9 from 57.5 in September, the statistics bureau said.

Preponderance of Chinese stocks deprives investors of broader exposure

For the past couple of weeks, portfolio managers at a number of the world’s biggest funds have been pondering a report by Goldman Sachs. Some of them, opting to read between the lines, suspect its 23 pages portend a great deal more than they say out loud about geopolitics, China and the contingency plans forming in some heads.

The question posed in the paper is whether China’s enhanced and now bulging weight in the benchmark MSCI Emerging Market index justifies breaking the world’s second-biggest economy out of that category and creating a separate “EM ex-China” asset class for the asset management industry to work with. A global squad of seven Goldman strategists have attacked this technical and intriguing question, and present a compelling case for the change.

Fund managers who have read it say the paper encapsulates a debate that was just beginning to happen on the margins, but was likely to accelerate sharply in coming months and years. The ramifications of such a change, which would directly or indirectly affect more than $10tn worth of assets benchmarked to various MSCI indices, are big enough to mean that the shift would not be a simple one. So if you think it is the probable point of arrival in three to five years’ time, said one Hong Kong-based fund manager, the discussion needs to point in that direction now and the index-makers need to know that the momentum is real.

The Goldman argument comes in three stages. The first hinges on China’s outsized weight in the MSCI EM index, which has doubled over the past five years to about a third and could soon top 40 per cent. Sheer size, rather than the traditional question of whether particular markets have graduated to “developed” status, is the key here. When Shanghai, Shenzhen and Hong Kong are taken in combination, they represent the world’s second largest global equity market. No single country has ever had this heft in the EM index and that dominance has a range of significant consequences for portfolio managers. An investor seeking a broad sweep of emerging market narratives, cycles and exposure, either globally or concentrated in Asia, is no longer really getting that. They are getting the China story — with all its idiosyncrasies and peril — and a decreasingly relevant investment hinterland.

The second argument, which fund managers say may demand a greater leap of faith than they and others are ready for, is that the stub of an EM index shorn of China exposure would still be highly investable. Particularly so because the weighting of global mutual funds towards non-China EM is currently, according to Goldman, at a decade low. The Goldman contention here is that while only about half the stocks in the MSCI EM index are non-China, they are deep and liquid enough to remain attractive on their own merits. They are also decreasingly geared towards Chinese growth. Indeed, EM ex-China, say the report’s authors, would offer an even spread of about 20 per cent weightings each between the three largest markets (Taiwan, India and South Korea). That trio, with its bias towards tech hardware and semiconductors, would also offer a rather different industrial profile from the current one, dominated by the enormous internet and consumer retail technology stocks that lead the Chinese market capitalisation rankings.

For its final strand, the report cites the experience that occurred when Japan was stripped out of MSCI’s pan-Asian index in 2001 after it had come to represent 73 per cent of the total capitalisation. There was, the report says, no cannibalisation effect after the change: both Japan and the region continued to receive cumulative net inflows at consistent paces.

Goldman is at great pains to present all this as a series of win-win hypotheticals. The problem, say fund managers, is that it has arrived at an awkward moment in which the question of China as an investment opportunity for the outside world can now invite some highly negative views. Some of those are based on the past few months of sudden, market-slamming regulatory change. Others take a dark long-term view of what Xi Jinping’s “common prosperity” rhetoric may mean for business and investing. At the most pessimistic end, some now frame the question around scenarios of military escalation around Taiwan. It is not impossible, says one fund manager, to envisage some situation in which clients in the US feel obliged for various reasons to remove China from their global exposure altogether.

As matters stand, the idea of EM ex-China may be pitched as a tribute to the extraordinary growth and attractiveness of its market. Some may decide that such an index needs to exist as a form of future contingency.

New commitments boost state-controlled utility but path ahead remains uncertain

As the French government signals a future where nuclear power will play an integral role in achieving carbon neutrality for the country by 2050, its state-controlled energy giant EDF remains encumbered by its past.

Positioned at the heart of the nuclear debate in France and Europe, EDF struggles under a debt-laden balance sheet and a reputation for being unable to make novel nuclear technologies on time and on budget.

But now President Emmanuel Macron has extended an olive branch and seemingly cleared a path for it to expand internationally and attract much-needed investment.

Macron — whose government has dressed down EDF for cost overruns and delays on one of its French reactor projects, and paused a much-hyped restructuring of the utility — recently announced a €1bn investment in research into small modular reactors (SMRs), a new technology garnering interest around the world.

Meanwhile, government officials have also signalled Macron could announce the go-ahead for at least six large reactors before the end of the year — previously the decision wasn’t expected until well after a presidential election next April.

“This is certainly a very positive moment for nuclear,” said Xavier Ursat, executive director and head of new nuclear projects at EDF.

“This year, everything has become concrete.”

Created in 1946 by General Charles de Gaulle, EDF holds emotional power in France, Europe’s last bastion of nuclear power, and is linked with the nation’s industrial past and future.

For years it was unclear if Macron, under pressure to move away from nuclear power towards renewables, would give the green light to new reactors long called for by EDF. Shortly after coming to power, Macron committed to reducing nuclear’s share of France’s electricity production from 75 to 50 per cent by 2035.

However, ambitious European climate goals, which hinge on pivoting to forms of energy that emit less carbon than fossil fuels, have put the spotlight on nuclear again and handed France an opportunity to assert its dominance in the field.

For EDF, thawing state tensions and confirmation of France’s desire for a nuclear future bring increased visibility to ensure it can keep training and hiring the people it will need and attract investment.

That will be no small task for a company saddled with €41bn of debt and a colossal maintenance and investment programme to fund. UBS estimates a total investment requirement of more than €100bn for it to secure a 20-year life extension for 80 per cent of its nuclear fleet.

If approved, any government subsidies to fund six new reactors — estimated in leaked documents in 2019 to cost around €47bn — and the final price of the nuclear power produced by them, will ultimately be given the green light by Brussels.

The cost of this funding could also be influenced by whether or not the EU includes nuclear energy in its taxonomy on “green finance”, making it a more attractive investment prospect. That decision has been delayed indefinitely because of infighting in the EU.

“Whether we can get financing at a low rate or super high rates completely changes the final cost. That’s the real subject, behind the gross number,” said Ursat.

EDF faces other hurdles too, including the failure to reach a compromise with Brussels over the restructuring of the utility that would have allowed it to raise the regulated price at which it sells nuclear energy and ringfence some of its activities.

It also needs to show it can deliver on its next-generation European Pressurised Reactor (EPR) technology, which it is planning to sell to India, Poland and the Czech Republic.

EPR reactors under construction in Europe — including Flamanville in France and Hinkley Point in the UK — are billions over budget and years behind schedule. The company’s previous chief financial officer quit over concerns about strains Hinkley Point was putting on EDF’s balance sheet.

These setbacks have led some investors and analysts to question EDF’s strategy and growth in the risky and costly field of nuclear power, were it not more than 80 per cent owned by the French government.

“The new reactor at Flamanville is not up and running yet, and some will want to see that project completed before France commits to more reactors with the same design,” said Sam Arie, an analyst at UBS. “From an investor point of view, is there interest in new nuclear projects? Not really.”

However, recent soaring energy prices coupled with stringent climate goals seemed to have turned the tide in EDF’s favour.

France’s cheapest pathway to reaching carbon neutrality by 2050 would involve building 14 new reactors, according to a report last Monday from French grid operator RTE, with other options that rely more heavily on expanding solar and wind energy production implying greater costs.

Under the scenarios RTE presented, even if France were to reduce its current share of nuclear power in the electricity mix from 70 to 26 per cent by 2050, it would still have to build eight new reactors. If it built no new nuclear reactors and relied exclusively on building renewables and extending the lifespan of existing nuclear, this would cost €10bn more per year than options including new reactors.

Recent rising energy prices have also brought a windfall for EDF. The cost of producing nuclear and renewable energy has remained constant but about 30 per cent of the company’s electricity is exposed to market prices.

The rest of EDF’s electricity is sold at a fixed rate — much below current global market prices — meaning that French households and businesses have been shielded from the sharpest edge of soaring energy prices.

Analysts at UBS have forecast EDF could make an extra €4 or €5 per megawatt hour (MWh) in 2022, which could create an extra €3bn in revenue.

“EDF is a big winner in this energy crisis,” said Denis Florin, partner at Lavoisier Conseil, an energy-focused management consultancy. “They dramatically wanted these EPRs, and they really want money for research into SMRs. This is Macron’s reconciliation with EDF.”

Meanwhile, France will act as the shop window for exports of the new SMR technology — billed to be less powerful but easier to produce and run than conventional reactors — with EDF expected to begin building its first “Nuward” reactor in nine years.

The idea is for these mini-plants to be built in pairs, between them able to produce 340MWh — the equivalent of old high carbon-emitting coal, oil and gas plants around the world that will reach the end of their lifespan in the next 20 years.

“That is the market we are targeting, and for this market you have to be ready in 2030,” Ursat said.