U.S. Manufacturing PMI: July PMI ticks up to record high, but supply delays and price pressures also hit new peaks
July PMI data from IHS Markit signalled the most substantial improvement in operating conditions across the U.S. manufacturing sector on record. Overall growth was supported by stronger expansions in output and new orders, with the latter increasing at the second-fastest pace since data collection began in May 2007. Unprecedented supplier shortages and delays continued to exert upward pressure on input costs and stymie firms’ ability to process incoming new work. As a result, cost burdens rose at a record breaking rate and the accumulation of backlogs accelerated.
Nonetheless, output expectations remained upbeat amid hopes of further boosts to client demand over the coming year.
The seasonally adjusted IHS Markit U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posted 63.4 in July, up from 62.1 in June and slightly higher than the earlier released ‘flash’ estimate of 63.1. The improvement in the health of the manufacturing sector was the strongest in the 14-year series history.
Contributing to the uptick in the headline figure was a sharper expansion in production at the start of the third quarter. The upturn was reportedly linked to stronger client demand and efforts to clear backlogs of work. The rate of growth was the steepest for six months and marked overall.
New business at manufacturing firms rose at a robust rate, that was close to the record pace set in May. Firms stated that greater new order inflows stemmed from stronger client demand from new and existing customers, as some sought to stockpile. At the same time, foreign client demand rose at one of the fastest rates since data collection began in 2007 amid the reopening of key export markets.
July data signalled an unprecedented deterioration in vendor performance, as supplier delays were driven by transportation issues and severe raw material shortages.
Such constraints on component deliveries and greater global demand for inputs reportedly pushed input costs up. The rate of cost inflation was the sharpest on record. Firms were, however, able to continue to raise their selling prices in July as charges also increased at a record-breaking pace. The uptick in output charges was overwhelmingly attributed to efforts to pass-through higher costs where possible.
Supplier price hikes led to greater stockpiling activity at manufacturers, as growth in input buying accelerated to a fresh series high. Efforts to mitigate against future price rises or material shortages resulted in an unprecedented rise in pre-production inventories. In contrast, stocks of finished goods fell at a strong pace as firms sought to sell from their current holdings.
At the same time, stronger new order growth led to the second-fastest accumulation in work-in-hand since 2007. To reduce pressure on capacity, firms expanded their workforce numbers at the steepest pace for three months, but some continued to note difficulties filling vacancies.
Finally, goods producers were markedly upbeat overall regarding the outlook for output over the coming year in July. Optimism was often linked to hopes of stability in future supply chains and further boosts to client demand. Although easing from that seen in June, the degree of confidence was above the long-run series average.
Chris Williamson, Chief Business Economist at IHS Markit:
Despite reporting another surge in production, supported by rising payroll numbers, output continued to lag well behind order book growth to one of the greatest extents in the survey’s 14-year history, leading to a near-record build-up of uncompleted orders.
Capacity is being constrained by yet another unprecedented lengthening of supply chains, with delivery delays reported far more widely in the past two months than at any time prior in the survey’s history. Manufacturers and their customers are consequently striving to maintain adequate inventory levels, often reporting the building of safety stocks where supply permits, to help keep production lines running and satisfy surging sales.
The result is perhaps the strongest sellers’ market that we’ve seen since the survey began in 2007, with suppliers hiking prices for inputs into factories at the steepest rate yet recorded and manufacturers able to raise their selling prices to an unprecedented extent, as both suppliers and producers often encounter little price resistance from customers.
From the ISM Manufacturing PMI (my emphasis):
- “Business levels continue to exhibit strong demand, with no signs of backing down. Purchases continue to have long lead times due to shortages of raw materials and labor force, as well as logistics challenges. Increased costs are being passed to customers.” [Computer & Electronic Products]
- “Supply chains are slowly, very slowly filling up. Like a water hose, starting upstream and slowly flowing downstream. Rumor is a full return to ‘normal’ may be nearer to year’s end, but the situation is progressing. Transportation (equipment and drivers) is the current pinch point, more so than material shortages.” [Chemical Products]
- “Strong sales continue, and inventories are low as the chip shortage is keeping production numbers down — we have idled several of our assembly plants to reduce the strain on the chip supply base.” [Transportation Equipment]
- “Still dealing with price increases from force majeure issues as well as overseas shipping premiums and higher costs of items like fuel. Customer demand still high; pushing plant to max production rates.” [Food, Beverage & Tobacco Products]
- “Strong operations, (with) new programs, orders and launches. Continue to have hiring difficulties and are unable to fill production and salaried jobs (due to) a lack of candidates. Raw materials are still in short supply, with longer lead times.” [Fabricated Metal Products]
- “Incoming bookings continue to be strong, and economy continues to return. Still struggling with inflation and availability (of materials, labor and freight).” [Furniture & Related Products]
- “Sales are above last year by a good percentage, but meeting demand is just not possible due to force majeure situations, logistics, and labor shortages. We don’t anticipate this ending until well into 2022.” [Nonmetallic Mineral Products]
- “Supply chain continues to be extremely challenging in a variety of categories. Having to place orders months ahead of time just to get a place in line.” [Machinery]
- “Very busy with new orders. Material costs continue to rise, and supplies are sometimes delayed. Labor issues are still affecting us the most with finding proper labor. Labor— costs are increasing as we are competing locally for top talent.” [Miscellaneous Manufacturing]
- “Business levels continue to be very strong, but we also continue to struggle finding employees. We can only fill 75 percent of our order requirements due to the labor shortage.” [Primary Metals]
The ISM data reveal that manufacturers’ inventories remain tight and unstable. Manufacturers’ reading of their customers’ inventories (chart) declined 5.8% to 25% in July, “the lowest since the index was established in January 1997.”
“Average lead time for production materials in July was 86 days, down two days from the June figure of 88 days, the highest since ISM® began collecting this data in 1987.”
(…) Out of the 29 nations for which July data were available, 22 saw growth during the latest survey month. The eurozone remained a bright spot, with the three highest-ranked countries based on PMI readings (the Netherlands, Germany and Austria) all located in the currency bloc. The US was in fourth place overall. PMI readings for China (50.3) and Japan (53.0) were well below the global average.
Emerging markets tended to underperform compared with developed nations in July, continuing a trend observed over the past eight months. The emerging Asia region was especially weak, containing five out of the seven nations seeing contractions (Thailand, Malaysia, Vietnam, Indonesia and Myanmar). (…)
EARNINGS WATCH
Two variables drive equity markets, earnings growth and changes in earnings multiples. This is about earnings:
According to Refinitiv data, S&P 500 earnings will grow 8.5% in 2022 to reach $221.86 per share on a 10.4% gain in revenues. Non-Financials will grow their earnings 12.0% on a 10.7% rise in revenues.
S&P 500 revenues growth correlates closely with that of total U.S. business sales as Ed Yardeni illustrates:
Real business sales growth rarely exceeds 5.0% which would imply inflation exceeding 5% in 2022 for S&P 500 revenues to rise more than 10%. Revenue estimates thus appear stretched, otherwise J. Powell & Co. will get a nasty surprise.
Meanwhile, unlike the post-2009 period, corporate input costs are rising much faster than consumer prices. So far, this squeeze is offset by the unusual demand created by the huge rescue moneys sent directly to Americans but many corporate officers are already warning about the challenges ahead when demand and revenues normalize.
Last week, the U.S. Bureau of Labor Statistics released the Employment Cost Index for Q2. Noflationists are quick to note that the ECI came in light, rising 0.7% from Q1, below the consensus view of +0.9% and only 2.8% annualized. Some also point out the “sharp slowing in employment costs in the exact part of the economy that the gurus are saying is in the shortest labor supply situation —services!” where the ECI came in +0.7% QoQ, down from 0.9% in Q1.
But a deeper, broader analysis is more concerning:
- Private industry compensation rose 0.8% QoQ in Q2 after +1.0% in Q1. But the total was helped by an awkwardly low +0.3% rise in benefits which masked the +1.0% rise in Wages and Salaries that followed Q1’s +1.1%. Private wages are up 4.2% annualized in the first half.
- Goods-producing industries saw their total comp jump 1.1% in Q2 after +0.7% in Q1. Service-providers’ total comp slowed from +0.9% to +0.7% partly due to a 2.2% decline in Finance and insurance, “correcting” the 4.3% jump in Q1 likely caused by bonuses. That group’s comp is still up 4.2% annualized in the first half.
- During the first half, wages for goods producers rose 3.8% a.r., a sharp acceleration from +2.8% in all of 2020. But they jumped 1.3% QoQ (+5.3% a.r.) in Q2 (1.4% in Construction).
- Private service provider employees saw their wages rise 0.9% in Q2 after 1.3% in Q1, +4.5% annualized in the first half.
- And as to the “exact part of the economy that the gurus are saying is in the shortest labor supply situation”, leisure and hospitality, private wages exploded +2.8% in Q2 after +1.6% in Q1 for a 9.0% annualized rate in the first half after +3.6% in 2020.
This next chart plots the growth in business sales minus wages and salaries against nonfinancial profit margins which tend to fluctuate with businesses’ ability to grow revenues faster than wage costs. The chart ends in Q1 because we don’t have Biz sales for June yet. But if we assume 2022 inflation at 2.5% and real revenues up 3.0%, many corporations might be hard pressed to grow their margins in 2022, let alone maintain them.
All this to say that expectations of 12% growth in S&P 500 non-financial earnings in 2022 look set for disappointments, unless inflation is much higher than 2.5%, in which case many other people will be disappointed.
Pricing power has become a crucial attribute as price makers will grow earnings faster than price takers in coming years. That differentiation will become more obvious when stimulus and reopening demand cools off and revenue growth returns to more normal levels.
Refinitiv will shortly give us its first tally of corporate guidance for Q3 and the rest of 2021. Rosenberg Research makes its own tally of what comes out of conf. calls. Half way in the reporting season, 34% have guided down for Q3 earnings and 24% have guided down for the upcoming fiscal year. This compares with 39% negative guidance for all of Q2 and 43% for Q1.
So far, so good, but as costs keep rising while revenues slow down from their current strong pace, guidance could get much less enthusiastic.
- For Fast Food, Supersized Sales Outrun Heavier Costs Second-quarter earnings show fast-food companies can still attract customers despite higher labor and food costs
(…) McDonald’s MCD -1.08% reported that comparable sales in the U.S. rose nearly 15% from the 2019 quarter. KFC parent Yum Brands YUM 0.76% said the chain grew comparable sales by 19% over that same period.
Even restaurants that supposedly benefit from lockdown conditions are thriving in the reopening. Domino’s Pizza said second-quarter sales grew 3.5% from a year earlier in the U.S., when most restaurants were shut due to public-health orders. (…)
McDonald’s said last week that its U.S. menu prices rose 6% from a year earlier in the second quarter, which did little to dent customer demand. The average second-quarter check size grew due to larger order sizes as well as higher prices, the company said.
And operators have options as labor costs increase. Digital ordering kiosks can reduce a store’s labor needs while also making it easier to offer extra promotions to a customer. (…)
TECHNICALS WATCH
The strongest equity market has some of the weakest breadth on record MS Mike Wilson: “The mid-cycle transition de-rating is advanced but unfinished. Falling earnings revision breadth this fall will likely complete that process.”
Apartment Rents Increase as Workers Return to Cities
(…) Median rent has risen more than 10% over the past year, according to homesearch website Apartment List, reflecting how soaring housing prices are forcing many would-be home buyers out of the for-sale market. (…)
But in nearly every major metro area, rents are now much higher than they were a year ago. New York and San Francisco rents have begun to recover without having to lure tenants with free rent or other incentives so often anymore. (…)
Camden Property Trust, a Houston-based landlord, reported new lease rents at its properties jumped 19% this July. (…)
Goldman Sachs Is Giving Entry-Level Bankers a Nearly 30% Raise The Wall Street firm is increasing base pay for its entry-level employees—first-year analysts—to $110,000, a nearly 30% increase from the previous starting salary.
Fed’s Waller Says September Taper Call May Be Warranted
Federal Reserve Governor Christopher Waller said that if the next two monthly U.S. employment reports show continued gains, he could back an announcement soon on scaling back the central bank’s bond purchases. (…)
“If the jobs reports come in as I think they’re going to in the next two reports, then in my view with tapering we should go early and go fast, in order to make sure we’re in position to raise rates in 2022 if we have to. I’m not saying we would.” (…)
Tapering could begin as soon as October and be completed in around five or six months if the labor market was sufficiently strong, Waller said. That timeline was similar to Bullard’s view, outlined Friday, to begin the taper in the fall and complete it by the end of the first quarter of 2022. (…)
“My concern is this anecdotal evidence I am hearing from business contacts who are saying they are able to pass prices through, they fully intend to,” he said. “They have got pricing power for the first time in a decade. Those are the sorts of issues that make you concerned that this may not be transitory.” (…)
“The delta variant is not going to sidetrack the U.S. economy in any way,” Waller said.
The coronavirus pandemic may have pushed the United States into a volatile era of stronger growth and better productivity, but higher interest rates and faster inflation as well, St. Louis Federal Reserve president James Bullard said, elaborating on why he thinks the U.S. central bank should end its crisis-era policies.
Bullard, who five years ago said he viewed the United States as mired in an epoch of low growth, low productivity and low inflation, said he is beginning to think a new “regime” may have arrived where the Fed will have to cope with faster change and more frequent shocks.
(…) the risk is higher inflation that could upend the Fed’s current expectation that price pressures will ease on their own and allow for continued loose monetary policy. (…)
China Takes Aim at Auto Chip Dealers Top market regulator probes those it suspects are driving up prices
(…) Chinese authorities have vowed to establish semiconductor supply chains that rely less on imports and have said they are engaging with auto manufacturers and chip makers to match supply and demand. (…)
Taiwan Semiconductor Manufacturing Co. , the world’s largest contract chip maker, said it expects the auto-chip shortage will begin easing this quarter, as it allocated more capacity to producing parts needed for new cars. The company has also noted that it is seeing more clients stock up on inventory to cushion their supplies. (…)
However, analysts and company executives expect the broader supply crunch to extend into next year. Intel Corp. Chief Executive Pat Gelsinger said last month that the shortage could stretch into 2023. (…)
- Stellantis chief financial officer Richard Palmer said on Tuesday the world’s fourth largest carmaker did not expect chip supply to improve before the fourth quarter, with a total projected production loss of around 1.4 million vehicles in 2021. “The rebound of global car markets continues to be hampered by acute supply limitations across the entire value chain,” Infineon CEO Reinhard Ploss told analysts. “All in all, it will take time to get back to a supply-demand equilibrium.” “In our view, this will take until well into 2022, Ploss added. (Reuters)
Tencent Sinks After China Denounces Online Gaming Shares in Tencent and rivals plummeted after a state-owned newspaper criticized online gaming as “opium for the mind,” fueling concerns that the companies’ games could be swept up into a broader regulatory crackdown.
China Shuns Ericsson, Nokia as the West Curbs Huawei The U.S. and many of its allies have restricted the use of 5G cellular equipment made by China’s Huawei. Now Beijing is doing the same to Huawei’s Western rivals.
China quietly sets new ‘buy Chinese’ targets for state companies, U.S. sources say]
China’s government quietly issued new procurement guidelines in May that require up to 100 per cent local content on hundreds of items including X-ray machines and magnetic resonance imaging equipment, erecting fresh barriers for foreign suppliers, three U.S.-based sources told Reuters. (…)
The former official said that when China joined the World Trade Organization, it agreed not to issue such internal documents. The document also violated the spirit of the January, 2020, Phase 1 trade deal with the United States, the former official said. “They need to reduce barriers, not create new ones.”
Sent to Chinese hospitals, companies and other state-owned buyers, the document sets local content requirements of 25 per cent to 100 per cent for 315 items. They include medical equipment, ground-based radar equipment, testing machinery, optical instruments; items used for animal husbandry; seismic instruments, and marine, geological and geophysical equipment, the former official said. (…)
U.S. trade experts said China’s local content rules differed from planned increases in U.S. “Buy American” thresholds because they were not publicly released, and affect far greater volumes of medical equipment and other goods since China’s state-owned enterprises include hospitals and other entities. (…)
Also transitory? Florida breaks record for new coronavirus cases as surge of infections rips through state
Florida reported 21,683 new coronavirus cases on Friday, the state’s highest one-day total since the start of the pandemic, according to data released Saturday by the Centers for Disease Control and Prevention.
The data shows the severity of the surge in Florida, the epicenter of the U.S. outbreak and now responsible for 1 in 5 new infections nationally. The previous peak in Florida had been on Jan. 7, when the state reported 19,334 cases, according to the CDC — before the widespread availability of coronavirus vaccinations. Florida has reported an average of 15,818 new cases a day over the past seven days, according to data compiled by The Washington Post.
The Florida Department of Health reported that coronavirus cases in the state had jumped 50 percent in the past week. In that time, the state has reported 409 deaths. (…)
About 49 percent of Florida’s population has been fully vaccinated as of Sunday.
State health officials have indicated that hospitals are struggling to keep up with the number of covid-19 patients. The Florida Hospital Association said Friday that covid hospitalizations are approaching last year’s peak. (…)
“There is no higher risk area in the United States than we’re seeing here,” Aileen Marty, an infectious-disease expert at Florida International University, told CBS Miami. “The numbers that we’re seeing are unbelievable, just unbelievably frightening.” (…)
More than 2,000 intensive care unit beds in Florida are occupied by covid patients.
At Jackson Memorial Hospital in Miami, all of the beds at its covid-only intensive care unit are filled with unvaccinated patients. “It just went boom,” Akinkunmi said. (…)
Lakshmi noted that 83 percent of the [Tampa General] hospital’s covid patients are unvaccinated.
“It feels like we are getting hit by a train, the pace is so fast and uncontrolled,” she said. “I just don’t have any words anymore. This is awful, just awful, and it is going to be awful.” (…)
But DeSantis has maintained that the increase is a “seasonal wave” caused by more people being indoors and air-conditioning systems circulating the virus. (…)
A coronavirus variant discovered in Colombia is also showing up in South Florida. Carlos Migoya, CEO of Jackson Health System, recently told WPLG that the B.1.621 variant has accounted for infections in some coronavirus patients, trailing behind the delta and gamma variants. B.1.621 has yet to receive a Greek-letter designation, as more prominent variants have. (…)
