U.S. Manufacturing PMI: Production growth near six-year peak but price gauge highest since 2011
February PMITM data from IHS Markit indicated a marked upturn in the health of the U.S. manufacturing sector. Although the rate of overall growth eased, it was the second-fastest since April 2010 and was supported by sharp increases in output and new orders. Unprecedented supply chain disruption remained apparent, however, with supplier shortages and transportation delays leading to a substantial rise in input costs. Firms were, however, able to partially pass on input prices to clients through the fastest increase in charges since July 2008.
At the same time, employment grew at the steepest rate since September 2014, as business confidence also improved.
The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posted 58.6 in February, down from 59.2 in January but broadly in line with the earlier released ‘flash’ estimate of 58.5. The marked improvement in the health of the manufacturing sector was the second-strongest in almost 11 years.
Despite easing, rates of expansion in output and new orders remained sharp overall in February. The rate of production growth was among the fastest in six years while new order growth was among the fastest seen over the past three years. New export orders also rose solidly, registering the second-steepest gain since September 2014.
Particularly encouraging is a marked improvement in demand for machinery and equipment, hinting strongly at strengthening business investment spending. However, new orders for consumer goods showed the strongest back-to back monthly gains since the pandemic began, suggesting higher household spending is also feeding through to higher production.
Also helping to buoy the headline PMI figure was a substantial lengthening of supplier delivery times amid significant supply chain disruption. Ordinarily a signal of improving operating conditions, longer lead times for inputs reportedly stemmed from supplier shortages and transportation delays due to coronavirus disease 2019 (COVID-19) restrictions. The extent to which wait times lengthened was the greatest since data collection began in May 2007.
As a result, goods producers registered a severe uptick in cost burdens. The rate of input price inflation accelerated to the sharpest since April 2011. Higher raw material prices, notably for steel, and increased transportation costs were widely linked to the rise.
The recent strengthening of demand allowed firms to partially pass on higher costs to clients through the fastest rise in charges since July 2008.
Input buying among manufacturers continued to rise at a solid rate, but supplier delays meant that many needed to utilise their current holdings of raw materials and finished goods to fulfil production requirements in the interim. Therefore, both pre- and post-production inventories fell in February, with the former declining at the steepest pace since June 2020.
In line with strong new order inflows and supplier delays, pressure on capacity at manufacturers increased. The accumulation of backlogs of work was the quickest for three months. In an effort to ease strain, firms expanded their workforce numbers at the sharpest pace since September 2014.
Finally, output expectations regarding the year ahead among manufacturers strengthened in February. The degree of optimism was the highest for three months amid hopes of an end to the pandemic and a reduction in restrictions as 2021 progresses.
From the ISM via Haver Analytics:
- China Manufacturing Stumbles as U.S. Takes Off Manufacturing readings out of China are slowing while those out of the U.S. are soaring
Data: Caixin, IHS Markit; Chart: Axios Visuals
(…) Part of the explanation may be seasonality; the shifting dates of the Lunar New Year holiday make adjusting indexes for seasonal distortions tricky. But the strong rebound in global trade in late 2020 likely also weakened marginally in early 2021. (…)
Markit has a better explanation than the WSJ:
So far this year, US manufacturers have reported the strongest goods export growth for six-and-a-half years, while Eurozone and Japanese producers reported the strongest export sales for three years in February.
In contrast, the IHS Markit-compiled Caixin PMI for mainland China showed a second successive monthly decline in exports, which are now in the steepest period of decline since June.
This loss of export trade out of China may in part be due to an unusually strong seasonal impact from the Lunar New Year spring festival holidays, but also reflects logistical issues.
So far this year supply chains problems have again reappeared, reaching near-record highs again. This in part reflects an imbalance of supply and demand: demand has revived quickly as economies recover from lockdowns but supply and logistics capacity has been slower to follow suit. A lack of shipping containers in particular has curbed the amount of goods that have been shipped out of China.
Encouragingly, both of these effects should prove temporary, meaning China should start to contribute further to the economic recovery in coming months rather than acting as a drag, as has been seen in the opening months of 2021.
U.S. Construction Spending Strengthens Again in January
Building activity continues to strengthen. The value of construction put-in-place increased 1.7% during January (5.8% y/y) following December’s 1.1% gain, revised from 1.0%. A 0.7% January increase had been expected in the Action Economics Forecast Survey.
Private construction increased 1.7% (6.8% y/y) in January following a 1.5% December rise. Residential construction jumped 2.5% (21.0% y/y) as single-family building surged 3.0% (24.2% y/y), the seventh consecutive month of notably strong increase. Home improvement expenditures strengthened 2.3% (17.9% y/y) after rising 1.8%. The value of multi-family construction edged 0.7% higher (16.9% y/y) following a 0.2% rise.
Nonresidential private construction improved 0.4% in January (-10.1% y/y) following six consecutive monthly declines. Transportation building rose 1.0% (-2.7% y/), strong for the fifth straight month. Lodging construction rose 0.7% (-22.7% y/y) while commercial building weakened 1.8% (-8.3% y/y). Manufacturing construction rose 4.9% (-14.7% y/y) as education construction edged 0.4% higher (-15.7% y/y). Office building eased 0.2% (-4.4% y/y) about as it did in December.
Public construction rose 1.7% during January (2.9% y/y) following a 0.1% December uptick. Spending on highways & streets, which makes up nearly one-third of public spending, surged 5.8% (6.5% y/y) and outlays on health care units improved 0.9% (9.1% y/y). Power construction improved 0.2% (-4.0% y/y) while spending on educational buildings was little changed (0.9% y/y).
U.S. Farmers are Planting More Row Crops Than Ever Planters wager that rallies in crop prices are just getting started
The U.S. Department of Agriculture projects that farmers will plant 182 million acres of corn and soybeans in 2021. That is an all-time high and up roughly eight million acres from last year—driven by a jump in soybean acreage, which is expected to rise nearly seven million acres from last year.
“If realized, this would approach the highest planted soybean area figure on record,” said Mac Marshall, vice president of market intelligence for the United Soybean Board. That record dates back to 2017, when farmers planted 90.2 million acres of soybeans, according to USDA data.
Behind the increase lies a sharp rise in soybean prices over the past eight months—67% since June 1, with the most-active contract on the Chicago Board of Trade trading at $14.07 per bushel on Thursday, a level unseen since July 2014. (…)
As of last week, Chinese buyers had purchased 35.9 million tons of U.S. soybeans since the start of September—up nearly 24 million tons from the same period a year earlier. (…)
Net farm cash receipts, the money made by selling crops, are expected to rise 5.5% or $20.4 billion in 2021, according to the Federal Reserve Bank of Kansas City.
“The ag economy has entered this year with one of the strongest financial outlooks in years,” said Nathan Kauffman, vice president of the bank, at last week’s USDA forum.
A 45% drop in the amount of money sent to farmers in the form of government aid, however, will lower net farm income by 5.8% in 2021, according to the bank. And the USDA cautions that its outlook for stronger crop acreage in 2021 is predicated largely on favorable weather conditions in the Corn Belt—which some forecasters don’t expect.
That is because of a weather phenomenon known as La Niña, characterized by cooler-than-normal waters in the Pacific Ocean, which causes dry weather in some parts of the globe and heavy rainfall in others.
Central bankers continue to battle over bond yields
This is from Axios’ Dion Rabouin:
European Central Bank governing council member and Bank of France governor Francois Villeroy de Galhau said the ECB should start by using its pandemic emergency bond-buying program to drive down yields.
- He noted that the ECB continues to “stand ready to adjust all of our instruments, as appropriate, including possibly a lowering of the deposit rate if needed.”
Why it matters: Those were the strongest comments yet from an ECB official and they put the Federal Reserve on an island among major central banks in their response to rising yields.
- As I wrote yesterday, an increasing number of central bankers, including Bank of Japan governor Haruhiko Kuroda, have recently either taken action to increase their bond-buying programs or announced their intention to do so if yields continue to rise.
- The Fed has said it plans to maintain its current program and downplayed the threat of inflation.
“Upward pressure on real yields in these countries may persist unless the Fed, which has been more reluctant to act so far, makes clear that it is not happy with the recent rise in US real yields,” Franziska Palmas, a markets economist at Capital Economics, said in a note.
- “Given that safe government bonds are effectively substitutes for investors, change in US yields tends to pull others in the same direction. In other words, if the Fed continues with its current approach, it will make life more difficult for other DM central banks.”
Remember the good old days when central bankers were talking to each other and coordinating policies and actions…
Wall Street Bullishness Is Becoming a Contrarian Sell Signal
- Investors Put Record $86 Billion Into Stock ETFs in February
- Cathie Wood’s Flagship ETF Roars Back With Near-Record Inflow
- John Authers: The Money Gusher Says There’s No Stocks Bubble Yet Relative to a gauge of global liquidity, markets don’t look as extended as they were in 2000 or before the global financial crisis.
Authers’ article includes a price to sales chart for the S&P 500 Tech sector. I always warn about P/S charts that omit to include margins trends since it may be ok to buy at a high P/S ratio if margins are also high and trending up.
This Morningstar/CPMS chart includes both lines updated after yesterday’s close:
Investors are paying up for sales but they also get record net profits for each dollar of sales. The chart does not help looking forward but it does say that valuation (P/S) has caught up with profitability in the last 5 years. But how sustainable are 30% net margins?
The above chart is market weighted. Here’s the same chart using the IT sector median data:
Median valuation is near the 2000 record high but median margins, at 13% (much lower than the 30% weighted margins), are almost twice their 2000 level and rising…
Curious about the whole market? This next chart gives the median measures for the CPMS universe of 2061 stocks: record high median P/S against declining margins.
Slicing the CPMS universe in two tiers, here’s Tier 1’s median , in fact the 25th percentile of the CPMS universe:
Ans here’s the 75th percentile, highlighting the recent performance of smaller cap stocks. Better pray for those margins to quickly catch up…
Coincidentally, speaking of margins sustainability:
[Yesterday] morning, delivery giant DoorDash, Inc. (DASH on the NYSE) announced an amendment to its lockup agreement: Insiders are now permitted to sell up to 40% of their positions as soon as next Tuesday, replacing a six-month moratorium on insider sales from the company’s Dec. 8 initial public offering. The urge to take some profits is understandable, as DASH shares have jumped 66% over that relatively short period. (…)
The company reported that 73 separate jurisdictions around the country now limit the commission that DoorDash can charge restaurants (which had typically ranged as high as 30%), up from 32 on a sequential basis. Those restrictions erased some $36 million of Ebitda in the quarter, and the company projects that the gross impact of those curbs will “almost double” in the current period. (…)
An uncomfortable question for the DASH bulls: Might the third-party delivery model be fundamentally flawed? One legacy player’s experience could prove instructive. Domino’s Pizza CFO Stuart Levy declared on last week’s earnings call that: “In 60 years, we’ve never made a dollar delivering a pizza. We make money on the product, but we don’t make money on the delivery. So, we’re just not sure how others do it.” (…) (Almost Daily Grant)
While we are discussing charts, this one is making the rounds of financial media:
The same chart with my trend lines. Notice how the lows since 2015 led to ever lower lows. These are not friendly trends in my humble opinion.
For your related interest from The Market Ear:
Two charts from Goldman Sachs, perhaps illustrating what “transitory” means:
From Israel with hope: Best data yet suggests vaccines will empty COVID wards Of first 1.82 million immunized, only 0.07% became virus positive, 122 were hospitalized, 23 died. If everyone had shots, we’d only need a ‘few dozen’ virus beds, says top MD
Of 1.82 million people who were inoculated by early February, only 1,248 — 0.07 percent — had tested positive by February 25, according to data from an internal Health Ministry forum that was released to The Times of Israel on Monday. (…) Only 122 fully vaccinated people — meaning at least one week after their second shot — have ended up in hospitals, of whom 73 deteriorated to serious condition. (…)
The Health Ministry suggested that while it reported that 1,248 vaccine-protected people tested positive, it believes the actual number is lower. This is because 648 of them were diagnosed within the first two weeks when the state considers them immune. Epidemiologists believe that some of them caught the virus before they achieved immunity.
Companies Zoom In on Small Shareholders Amid Retail Trading Frenzy ‘We want to let them ask us anything,’ a CFO of an online car-parts seller said of its individual investors
(…) The retail mania is prompting companies to get a better understanding of their shareholders and how they can connect with them. They are reaching out to individual investors through special events, podcasts, social-media channels and charts, while also keeping the lines of communication open for institutional investors. (…)
“We are building influencer strategies, working selectively with some of these influencers to inform and educate the growing pool of capital represented by retail investors,” said Rachel Carroll, president and managing partner at Edison Group, an investor relations company. (…)
“Social media is another way to get to retail investors,” in addition to conventional means of investor communications like earnings events and press coverage, Mr. Palkhiwala said. Qualcomm, for example, is using Twitter to share its results with followers. “Hopefully that gives us some more exposure to them,” he added.
China on track to surpass US as ‘AI superpower’, Congress warned Security commission calls for greater reshoring of semiconductor production
Jack Ma’s Ant defies pressure from Beijing to share more customer data Central bank frustrated with drip feed of user information in crackdown following pulled $37bn IPO
The FT says that only a fraction of Ant’s users have approved sharing their information with the PBoC. “But the PBoC is pushing companies to find ways to share data, such as requiring consumers to agree to data-sharing as a condition of using their services — a measure Ant is loath to implement for fear of scaring off customers, according to former and current employees.”
I don’t feel like waging for this David against this Goliath.