USA: Manufacturing upturn slows amid cooling demand,surging costs and material shortages

The US manufacturing sector signalled a further improvement in operating conditions during May, according to PMI^TM data from S&P Global, but the rate of growth eased to the softest since January as expansions in output, new orders and stocks of purchases waned. That said, overall demand conditions remained robust, with firms stepping up their hiring activity amid a sharp uptick in backlogs of work. Business confidence, however, slipped to the lowest since October 2020.

Meanwhile, supply constraints and inflationary pressures remained key themes, hampering output growth and stockpiling efforts. The rate of cost inflation accelerated to the fastest in six months, with firms passing on higher expenses to customers through a near-record rise in output charges.

The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI™) posted 57.0 in May, down from 59.2 in April and below the earlier released ‘flash’ estimate of 57.5. The latest reading was the lowest for four months.

Output growth at manufacturers was strong overall, as greater client demand and a further uptick in new orders supported the upturn in production. The rate of expansion was the slowest for three months, however, as material shortages, delivery delays and a softer rise in order book inflows began to stymie growth momentum.

New orders rose sharply in May,with higher new sales inflows often attributed to a sustained rise in customer demand and the acquisition of new clients. That said, the pace of growth softened further from March’s recent peak and was the slowest seen since January. Foreign client demand also softened, with export orders rising at the slowest rate for four months. Global uncertainty due to the war in Ukraine and challenging logistics reportedly weighed on the upturn.

On the price front, cost burdens rose at a near-record pace amid soaring input prices. Higher operating expenses were commonly linked to hikes in metals, energy, fuel and transportation costs, with some firms mentioning that the war in Ukraine and COVID-19 lockdowns in mainland China had exacerbated surging prices. The pace of cost inflation accelerated to the fastest since November 2021’s record rate.

In response, manufacturers raised their selling prices again in May. In contrast to a faster increase in cost burdens, however, output charges increased at a softer pace than in April. Nonetheless, it was the third-sharpest in 15 years of data collection.

A cooling in new orders growth was in part linked to customers pushing back on high prices, though also reflected shortages and growing concern about the outlook.

Concerns regarding the impact of inflation on customer spending dampened output expectations in May. Goods producers remained upbeat towards the year-ahead outlook, but the degree of optimism slipped to its lowest since October 2020.

Greater new order inflows spurred another round of hiring, as manufacturing firms expanded workforce numbers at a faster pace in May. The solid increase was also attributed to the filling of long-held vacancies. Higher employment helped relieve pressure on capacity, as backlogs of work rose at the slowest pace in 15 months. Where an increase was noted, firms generally linked this to material shortages.

Finally, suppliers’ delivery times continued to hamper production efforts. Although lead times lengthened to a greater extent than seen anytime prior to the pandemic, the latest incidence of delays was the least severe for 16 months. Alongside soaring input prices, this resulted in softer purchasing growth as efforts to stockpile were stymied and many opted to work through inventories instead.

The ISM:

The May Manufacturing PMI^® registered 56.1 percent, an increase of 0.7 percentage point from the reading of 55.4 percent in April. (…) The New Orders Index reading of 55.1 percent is 1.6 percentage points higher than the 53.5 percent recorded in April. (…) The New Export Orders Index reading of 52.9 percent is up 0.2 percentage point compared to April’s figure of 52.7 percent. The Imports Index fell into contraction territory, decreasing 2.7 percentage points to 48.7 percent from 51.4 percent in April.

The Prices Index registered 82.2 percent, down 2.4 percentage points compared to the April figure of 84.6 percent. The Backlog of Orders Index registered 58.7 percent, 2.7 percentage points higher than the April reading of 56 percent.

The Employment Index went into contraction territory at 49.6 percent, 1.3 percentage points lower than the 50.9 percent recorded in April. The Supplier Deliveries Index reading of 65.7 percent is 1.5 percentage points lower than the April figure of 67.2 percent.

The Inventories Index registered 55.9 percent, 4.3 percentage points higher than the April reading of 51.6 percent.

WHAT RESPONDENTS ARE SAYING

• “Suppliers are seeing a light at the end of the tunnel for restoration of (semiconductor) component supply. Second-quarter and Q3 supply appears to be loosening.” [Computer & Electronic Products]
• “While orders remain strong and backlogs exist, there’s a softening in forecasted orders for leading indicator-type customers and business units.” [Chemical Products]
• “The challenge with semiconductors hasn’t softened; the situation is worsening due to Chinese COVID-19 lockdowns.” [Transportation Equipment]
• “Input costs, particularly grain, oil, dairy and protein, are rising faster than can be passed along at retail and food service, with no relief in sight.” [Food, Beverage & Tobacco Products]
• “Our order books are still strong. Material prices continue to rise, with energy and freight noted as the underlying influences on increased costs.” [Machinery]
• “Steel remains in allocation. Electronics lead times are more than 12 months.” [Fabricated Metal Products]
• “Supply chain issues are causing us to dramatically extend our lead times. Our production lines have (run) low on or out of parts needed to complete rates every week this month.” [Miscellaneous Manufacturing]
• “We’ve continued to transition to North American sales to avoid ocean vessels, and we are apprehensive about the West Coast ports’ labor contract negotiations. A challenge of doing more business by rail is the backlog of rail cars and embargos.” [Paper Products]
• “Price increases haven’t let up. I thought 2022 was going to be better, but it hasn’t been. Shortages (among other issues) are still disrupting the supply chain.” [Plastics & Rubber Products]
• “Business is steady. We consolidated shifts and do maintenance on off hours, which is working well.” [Primary Metals]

Fifteen of 17 manufacturing industries reported growth in new orders in May, compared with 17 in April, 15 in March, 16 in February, 11 in January and 13 in December.

• Commodities Up in Price: 40 vs 36 in April vs 45 in March and 33 in February.
• Commodities Down in Price: 5 vs 1 in April, 6 in March and 7 in February.
• Commodities in Short Supply: 21 vs 18 April, 24 in March and 13 in February.

To sum up: manufacturing remains quite strong, stockpiling continues, bottlenecks persist, costs keep soaring and strong pricing power enables pass throughs though with some noting more resistance. Same in Canada.

Canada: Quicker expansions in output, new orders and jobs inMay

Operating conditions in Canada’s manufacturing sector improved in May amid stronger expansions in output, new orders and employment. Sustained demand growth prompted firms to boost their buying activity, and at a record rate, while capacity pressures continued to build. Despite stronger uplifts in sales, business confidence dipped to a joint ten-month low, largely reflecting concerns surrounding intense cost pressures. That said, the rates of both output charge and input price inflation eased to the softest since February.

The seasonally adjusted S&P Global Canada Manufacturing Purchasing Managers’ Index^® (PMI^®) registered 56.8 in May, up from 56.2 in April. The latest reading signalled 23 continuous months of growth, with the latest expansion much quicker than the long-run series average.

Central to the uptick was a quicker increase in new orders. Stronger demand, particularly for consumer goods, were recorded during the month. Respondents continued to link growth to the retreat of pandemic restrictions and favourable demand for Canadian manufactured goods. International sales also increased, albeit at a softer pace than in April. Firms mentioned higher demand from the US market.

Companies responded to rising demand by lifting their output levels for the twenty-third month in succession. Larger workforces helped firms to boost their output, while panel comments also suggested some inputs were more readily available in May.

Despite efforts to boost production, and the strongest uplift in headcounts for 17 months, capacity pressures continued to emerge. The overall rate of backlog accumulation was marked, the quickest for six months and among the strongest in the near 12-year survey history. Firms had insufficient capacity to deal with the surge in new orders, but there were also reports of absenteeism due to illnesses. As a result, companies chose to prioritise incoming orders and refrained from adding to post-production inventories, which fell solidly.

Supplier performance deteriorated once again, with port congestions, material scarcity and lockdowns in China leading to delivery delays. Although marked, the incidence of delays was the second-lowest for 15 months.

Firms continued to add to their pre-production inventories as they sought to mitigate against any future supply-chain issues. In fact, quantity of purchases rose at the quickest rate in the series history, beating the previous record set in July 2018. Meanwhile, pre-production stocks rose at the fourth-strongest rate in the series.

Raw material scarcity, ongoing supply-chain disruption and lockdowns in China continued to exacerbate cost pressures in May. Higher prices were reported for metals, resin, fuel, transportation, machinery and other inputs. The rate of inflation moderated to a three-month low, but was still marked compared to the long-run series average. Higher expenses were passed on to clients with the overall rate of selling price inflation the third-strongest in the series history.

Inflationary concerns weighed slightly on optimism, which moderated to a joint ten-month low in May. That said, firms were still optimistic for output growth over the year ahead amid plans to expand their online presence, greater consumer demand and new client wins.

The boom in North American manufacturing is happening without much contribution from vehicle manufacturing:

U.S. Light Vehicle Sales Fall Sharply in May

The Autodata Corporation reported that light vehicle sales during May declined 12.2% to 12.81 million units (SAAR). Sales were off by roughly one-quarter y/y and were one-third below the April 2021 peak. Vehicle sales comprise roughly four percent of real consumer expenditures.

Sales of light trucks led last month’s decline by falling 12.4% (-23.0% y/y) to the lowest level this year. Purchases of domestically-produced light trucks weakened 11.0% last month (-19.7% y/y) to 7.95 million units. Sales of imported light trucks declined 17.4% to 2.09 million units and were off by one-third y/y.

Trucks’ share of the light vehicle market was little-changed at 78.4% in May but down from the 80.4% share six months earlier.

Auto sales weakened 11.5%, off by one third y/y, to 2.77 million units. Purchases of domestically-made autos fell 13.2% in May to 1.90 million units, off by one-quarter y/y. Sales of imported autos fell 6.5% (-41.6% y/y) to 0.87 million units.

Imports’ total share of the U.S. vehicle market eased m/m to 23.1% and remained below February’s 25.4% share. Imports’ share of the passenger car market rose to nearly one-third, but remained down from the September 2021 high of 38.1%. Imports’ share of the light truck market eased to 20.8%.

Companies Struggle With Rising Prices, Fed’s Beige Book Says Tightness in the labor market has started to ease with some hiring freezes, according to some firms

The U.S. economy grew at a slight to modest pace this spring as companies struggled with higher prices and labor shortages, the Federal Reserve said in a report.

“Retail contacts noted some softening as consumers faced higher prices, and residential real estate contacts observed weakness as buyers faced high prices and rising interest rates,” the Fed said on Wednesday in its periodic compilation of business anecdotes from around the country, known as the Beige Book. The report contained details about the latest effects of high inflation and the tight labor market.

The beige book, which included information gathered through May 23, said many companies reported strong price increases and passed along higher prices to consumers. However, some cited customer pushback. (…)

Across Fed districts, though, worker shortages continued to slow production. That spurred employers to automate, offer greater job flexibility and raise wages, the beige book said.

In the Chicago Fed district, firms noted that some workers were asking for raises due to higher inflation.

• Shippers Boxed Out

Efforts to relieve a shortfall in shipping containers are stuck at sea and on the docks. Ship operators have been adding millions of boxes to international operations over the past two years, but the WSJ’s Costas Paris reports the added capacity is effectively trapped in congested distribution networks as shipping moves into its busiest period. An early start to the peak season is adding to the problem as importers order and ship goods early to get ahead of feared bottlenecks later this year. The result is that some 12% of the world’s container ships are backed up outside ports for weeks longer than normal while backups in inland distribution networks are growing. The average time boxes wait at the ports of Los Angeles and Long Beach has surged recently, and reached 9.6 days in April, the highest level since July 2021, according to the Pacific Merchant Shipping Association.

U.S. JOLTS: April Job Openings Ease Slightly from All-Time High

Job openings fell 455,000 in April to 11.400 million (-3.8% m/m, +23.0% y/y), but that followed an increase of 511,000 in March which produced an all-time high of 11.855 million. These data, collected and published by the Bureau of Labor Statistics, begin in December 2000. The job openings rate, 7.0% in April, is calculated as job openings as a percentage of the sum of establishment employment plus openings. Its highest value ever was 7.3% in March; the rate first reached 7.0% in October 2021, so this shows that the labor market has been quite strong in recent months.

New hires decreased 59,000 in April (-0.9% m/m, +7.6% y/y) after declining 187,000 (-2.7% m/m in March). The March and April declines follow a surge of 406,000 in February, +6.3% m/m. The hiring rate was 4.4% in April, the same as in March and down from 4.5% in February.

The total number of job separations was 6.033 million in April (-3.4% m/m, +4.9% y/y). There were 4.424 million quits (-0.6% m/m and +10.2% y/y), following 4.449 million in March. The quits rate was 2.9% in April, the same as in March and February. Layoffs and discharges were 1.246 million in April (-12.0% m/m and -10.0% y/y), down from 1.416 in March and the smallest amount ever in these data, which began in December 2000. (…)

Private-sector job openings fell 3.9% m/m (+25.1% y/y) in April, to 10.392 million, with the private-sector job openings rate at 7.0%, down from 7.3% in March.

Among select industries, openings in manufacturing had the biggest increase in April, 119,000 (+13.6% m/m and 15.1% y/y). Construction job openings also increased, reaching 449,000 (+5.4% m/m and +36.5% y/y) in April after 426,000 in March. The April amount was a record number of openings for the construction sector. Professional and business services had 2.181 million job openings at the end of April, down 6.4% m/m but up 31.4% y/y. Government sector job openings were 1.008 million at the end of April, down 3.4% m/m and up 5.4% y/y.

Rather strange to see openings 68% above their pre-pandemic levels while hires are up 10% and actual employment is still 0.8% below. Real GDP is 2.8% higher than in Q4’19.

Dimon Says Consumers Have Six to Nine Months of Spending Power JPMorgan Chase & Co. Chief Executive Jamie Dimon said U.S. consumers still have some six to nine months of spending power left in their bank accounts but warned of an economic “hurricane” brewing.

He estimated that some $2 trillion in extra funds are still waiting to be spent. “That fiscal stimulation is still in the pocketbooks of consumers. They are spending it,” he said at an investor conference Wednesday. (…)

Mr. Dimon said the data is heavily distorted by inflation impacts and shifting consumer-spending patterns in goods and services. Lower-income households aren’t quite as healthy, he added. (…)

“That hurricane is right out there down the road coming our way,” Mr. Dimon said. “We just don’t know if it’s a minor one or Superstorm Sandy. You have to brace yourself.”

• Second-Quarter GDP Growth Estimate Falls On June 1, the GDPNow model estimate for real GDP growth in the second quarter of 2022 is 1.3 percent, down from 1.9 percent on May 27.

• More evidence for a 2Q US growth rebound After the surprise contraction in the first quarter, there is growing evidence to suggest the economy will rebound strongly in the second with 4%+ GDP growth on the cards. The labour market is strong, consumers are spending and there is now evidence that manufacturing isn’t struggling as much as feared while construction output continues grinding higher

Saudi Arabia ready to pump more oil if Russian output sinks under ban Riyadh aware it must not ‘lose control’ of oil prices as energy sanctions hit Moscow

US For-Sale Homes Rise For First Time Since 2019 on Realtor

The number of active listings rose 8% year-over-year in May, probably driven by new sellers and a slowdown in would-be buyers deterred by high prices, Realtor.com said in a report Thursday. The largest increases in new listings were in the West and the South, in cities including Austin, Texas, and Phoenix, Arizona. (…)

Listings remain 48.5% below their May 2020 level, and price increases have accelerated in recent months. (…)

In an early sign, the rate of sellers making price cuts accelerated in May, Hale said.

• BoE’s Cunliffe seeing evidence of slowdown in housing market

World’s Biggest Truck Manufacturer Says Chip Crunch Easing

(…) [Daimler’s] Radstrom’s comments echo an assessment from Mercedes-Benz AG production chief Joerg Burzer this week who said the chip crunch was no longer causing serious production stoppages. (…)

Radstrom said there was no signs yet of a slowdown in truck manufacturing, typically a sector that’s sensitive to downturns. (…)

Bank of Canada Raises Rates Again and Vows to Be Forceful on Inflation Central bank lifts policy rate to 1.5% from 1.0%, warns inflation heading higher and economy is overheating

(…) The central bank said annual inflation was well above its target of 2%, and expected the consumer-price index to move higher in the near term before easing. In a forecast in April, the Bank of Canada anticipated inflation to average almost 6% in the first half of 2022. It said the economy is strong “and is clearly operating in excess demand,” or an environment in which there aren’t enough goods and services to meet consumer needs. (…)

“The governing council is prepared to act more forcefully if needed to meet its commitment to achieve the 2% inflation target.” The central bank warned of a rising risk that elevated inflation expectations become entrenched. (…)

“With consumer spending in Canada remaining robust, and exports anticipated to strengthen, growth in the second quarter is expected to be solid,” the central bank said in its statement. In April, it forecast 6% growth in the second quarter. As for the labor market, the Bank of Canada said job vacancies remain elevated, companies are reporting widespread labor shortages, and wage growth is accelerating and broadening across sectors of the economy.

KPMG found that 71% of Canadian business owners believe the rate hikes will exert “material pressure” on profit margins and over half are expecting the valuations of their companies to drop.

The Middle Kingdom is in the doldrums

There has been a steady drumbeat of dire economic news out of China in May, pointing to a contraction in the economy in the second quarter. This comes at a tricky time for President Xi who is trying to secure a third term as Chinese President later this year. On the positive side, reported COVID-19 cases have fallen very sharply and Shanghai is gradually beginning to reopen. But any further large spikes in virus cases present major downside risks for the economy this year. (…)

The surveyed rate of urban unemployment has risen markedly over recent quarters and is now well above the early 2020 peak in 31 large cities. It is particularly elevated among 16-24-year-olds, rising from 14.3% in December to over 18% in April. This comes in a year when a record 11 million students are due to graduate from Chinese universities.[1] The authorities will increasingly worry about the risks to social stability if unemployment continues to spike.

Perhaps unsurprisingly, housing activity remains firmly in the doldrums. In the first four months of the year, the areas of floor space started and sold were down 28% and 25% respectively compared with the same period in 2021, while the area of land purchased by real estate developers was almost 50% lower. This will add to pressures on local government finances, already hit by a weakening economy, and by the costs of stimulus measures and of administering the ‘zero-Covid’ policy. (…)

Policymakers are in a tricky position. Their policies have created a massive bubble in the housing market over the past decade, which appears to be bursting. It may be difficult to prevent this without an aggressive easing in policy that changes the narrative on the outlook for the sector, but also risks inflating the bubble more. (…)

• Fitch withdraws ratings on debt-laden China Evergrande, subsidiaries In its statement on Thursday, Fitch said that it would no longer have sufficient information to maintain the ratings on Evergrande, the world’s most indebted developer with more than $300 billion in debt, and two of its subsidiaries.

China Warns US Ban on Xinjiang Goods to ‘Severely Disrupt’ Ties “If the act is implemented, it will severely disrupt normal cooperation between China and the US, and global industrial and production chains,” Foreign Ministry spokesman Zhao Lijian said Thursday at a regular press briefing in Beijing.