U.S. MANUFACTURING PMI
Output growth picks up amid stronger demand and easing supply disruption
The US manufacturing sector registered a stronger improvement in operating conditions midway through the opening quarter of 2022, according to February PMITM data from IHS Markit. Although only modest overall, output rose at a faster pace amid signs of easing supply chain disruption and the sharpest expansion in new orders since last October. Stronger new sales growth spurred manufacturers to increase staffing numbers and boost stocks of purchases. Pressure on capacity softened as backlogs rose at the slowest pace in a year as material shortages eased.
Although input costs increased at the slowest pace for nine months, selling prices ticked higher at the sharpest rate since last November.
The seasonally adjusted IHS Markit US Manufacturing Purchasing Managers’ Index™ (PMI™) posted 57.3 in February, up from 55.5 in January and only slightly lower than the earlier released ‘flash’ estimate of 57.5. The headline figure was below the peaks seen in 2021, but signalled a stronger upturn in the health of the manufacturing sector, with sharper output and new order expansions contributing to overall growth.
February data indicated a modest upturn in production across the manufacturing sector. The expansion was much softer in comparison with the marked rates of growth seen throughout 2021 due to ongoing material and labor shortages, but where a rise was noted this was reportedly driven by a steeper increase in new sales and efforts to clear backlogs.
Manufacturers recorded a sharper uptick in new orders midway through the first quarter, supported by stronger demand from new and existing customers. The rate of growth quickened from January’s 16-month low and was the quickest since last October. At the same time, foreign client demand also strengthened, as new export orders rose at the fastest pace for five months.
There was some reprieve for goods producers amid reports of softer deteriorations in supplier performance in February. Delivery delays were the least severe since last May. Firms often noted that although material shortages eased, transportation and logistics delays extended lead times.
Less severe supply disruption was reflected in a slower increase in input prices. The rate of cost inflation eased to the softest for nine months, but remained historically elevated amid higher material and transportation fees.
Despite a softer rise in input costs, firms were able to increase their selling prices at a sharper pace in February amid more accommodative demand conditions. Companies widely attributed the rise in output charges to the pass-through of greater costs to clients. The rate of charge inflation accelerated to a three-month high and was marked.
In line with stronger demand conditions, firms stepped up their purchasing activity. Input buying expanded at a steeper pace as firms sought to build safety stocks. Efforts to protect against future shortages and price hikes led to the fastest rise in pre-production inventories since last July. That said, stocks of finished goods were depleted at a quicker rate as manufacturers struggled to replenish inventories.
Increased new order inflows spurred greater optimism among manufacturing firms in February. Output expectations for the coming year were the strongest since November 2020, as firms were buoyed by hopes of a reduction in supply-chain disruption and a greater ability to retain employees.
The ISM report for February came in with the headline index rising to 58.6 from 57.6 (consensus 58.0) and new orders at 61.7 versus 57.9. The employment component slipped to 52.9 from 54.5, but it is still at least in expansion territory. Prices paid remain elevated at 75.6.
Indeed, inflation pressures are likely to remain elevated with customer inventories falling rapidly again (anything below 50 is a contraction), while order backlogs are rising again. This suggests that US manufacturers continue to hold significant pricing power – they have months and months worth of orders on their books and they know customers are desperate so they can easily pass on higher costs to customers.
ISM order backlogs and customer inventories suggest manufacturers have pricing power
Source: Macrobond, ING
Source: Macrobond, INGFrom the ISM: WHAT RESPONDENTS ARE SAYING
- “Electronic supply chain is still a mess.” [Computer & Electronic Products]
- “Strong sales growth as retail continues to return.” [Chemical Products]
- “Demand for transportation equipment remains strong. Supply of transportation services continues to be a major issue for the supply chain.” [Transportation Equipment]
- “Strong demand has continued beyond our traditional seasonality curves. Coupled with the continuing difficulties in procurement of ocean freight, operational planning and managing costs are our biggest challenges.” [Food, Beverage & Tobacco Products]
- “We have seen year-over-year revenue growth of about 10 percent due to markets coming back. However, in the automotive area, the microchip shortage is causing slowness in growth.” [Machinery]
- “Demand for steel products has increased to historic levels, driven by the automotive and energy industries.” [Fabricated Metal Products]
- “We are expecting a year of strong demand, higher prices and continued supply chain challenges.” [Textile Mills]
- “Demand continues to be strong, increasing our backlog. Production has been more consistent due to availability of parts, but we are not able to increase builds to cut into the backlog.” [Electrical Equipment, Appliances & Components]
- “Business conditions are good, demand remains strong, and we continue to be challenged to keep up with demand.” [Miscellaneous Manufacturing]
- “Business is still strong. Facing logistics and raw material supply chain issues with some products.” [Plastics & Rubber Products]
Sixteen of 18 manufacturing industries reported growth in new orders in January, up from 11 in January and 13 in December.
- Commodities Up in Price: 33 vs 35 in January, 28 in December and 36 in November.
- Commodities Down in Price: 6 vs 7 in January, 8 in December and 5 in November.
- Commodities in Short Supply: 13 vs 16 in January, 10 in December and 21 in November.
U.S. Light Vehicle Sales Decline in February
The Autodata Corporation reported that light vehicle sales during February fell 6.9% (-12.3% y/y) to 14.15 million units (SAAR). Sales were 23.5% below the April ’21 peak of 18.50 million units.
Sales of light trucks declined 7.4% (-10.7% y/y) last month to 11.18 million units. Purchases of domestically-made light trucks weakened 8.3% in February (-12.2% y/y) to 8.62 million units. Adding to this decline was a 4.5% easing (-5.2% y/y) in sales of imported light trucks to 2.56 million units.
Trucks’ share of the light vehicle market slipped to 79.0% and remained below an 80.4% share in October.
Passenger car sales fell 4.5% (-17.5% y/y) in February to 2.98 million units. Purchases of domestically-produced cars declined 3.8% last month (-16.7% y/y) to 2.00 million units. Sales of imported autos eased 5.8% last month (-19.0% y/y) to 0.98 million units.
Imports’ share of the U.S. vehicle market rose in February to 25.0% but it was still below last September’s high of 27.9%. Imports’ share of the passenger car market fell to 32.9% last month. Imports’ share of the light truck market increased to 22.9%, the highest level since September.
U.S. Construction Spending Posted Solid Increase in January
The value of construction put-in-place jumped up 1.3% m/m (8.2% y/y) in January after an upwardly revised 0.8% m/m increase in December (initially 0.2%) and an upwardly revised 1.0% m/m gain in November (previously 0.6% m/m). The Action Economics Forecast Survey has looked for a modest 0.3% m/m rise in January.
Private construction increased a solid 1.5% m/m (11.0% y/y) in January following upwardly revised increases in both December and November. The originally reported 0.7% m/m increase in December was revised up to 1.3% while the 0.8% rise previously reported for November was bumped up to a 1.3% m/m gain. Private residential construction increased 1.3% m/m (13.4% y/y) with increases in both single family construction (1.2% m/m) and home improvements (1.8% m/m) while multi-family construction edged down 0.1% m/m, their second monthly decline in the past three months.
Private nonresidential construction rose 1.8% (7.3% y/y) in January after having slipped 0.2% m/m in December. The January gain was concentrated in manufacturing construction, which rebounded 8.5% m/m following a 3.9% slump in December, power (2.7% m/m) and transportation (1.5% m/m). (…)
The value of public construction rose 0.6% m/m (-1.3% y/y) in January following a 1.0% m/m decline in December (revised up from a 1.6% m/m drop) and a 0.1% decrease in November. (…)
Q1 GDP contraction?
In spite of the above, the Atlanta Fed’s latest GDPNow model estimate is 0.0%, down from 0.6% on February 25.
And that came before the release of January’s trade deficit widening to a record $107.6B in January from $100.5B in December. January’s number is 15% above the Q4 average “which may just be enough to tip real GDP into contraction” per David Rosenberg.
Meanwhile, the Chase consumer spending tracker, with data through Feb. 25, suggests that control sales could decline 1.4% in February.
Recent comment from retailers suggest a cautious, if not squeezed, consumer.
Target reported Q4 same store sales up 8.9% but really only thanks to big market share gains as traffic grew 8.1%. TGT’s average ticket was up only 0.7% in Q4, well below inflation.
WMT’s Q4 SSS grew 5.6%.
Kohl’s, which also reported quarterly financial results Tuesday, forecast net sales in fiscal 2022 to increase 2% to 3%, compared with the nearly 22% increase the previous year.
Macy’s last week forecast 2022 sales flat to up 1%.
VW, BMW to Idle Plants on Parts Shortages From Ukraine
VW will idle some production lines in Wolfsburg, Germany — the world’s largest car plant — next week before a broader shutdown the following week, the company said Tuesday. BMW said in a separate statement it expects temporary shutdowns because of parts shortages, and announced it’ll suspend vehicle exports as well as local assembly in Russia because of the invasion. (…)
German automotive companies and suppliers maintain some 49 production sites in Russia and Ukraine, according to the German car lobby group VDA. (…)
White House Quietly Calls On U.S. Oil Companies To Increase Production “Prices are quite high, the price signal is strong. If folks want to produce more, they can and they should,” White House National Economic Council Deputy Director Bharat Ramamurti said in an interview today.
Eurozone Inflation Hits Fresh High as Ukraine Invasion Confronts ECB With Dilemma The eurozone’s inflation rate jumped to a new high in February, presenting the European Central Bank with a difficult choice between supporting flagging growth and clamping down on accelerating prices driven by the threat to energy supplies following Russia’s invasion of Ukraine.
(…) The European Union’s statistics agency Wednesday said consumer prices were 5.8% higher in February than a year earlier, an acceleration from the 5.1% rate of inflation recorded in January. (…)
Much of the pickup in inflation has been driven by energy prices, which were 31.7% higher than a year earlier, having been 28% higher in January. That was also the fastest annual increase in a series that goes back to 1997. (…)
Economists at Capital Economics now expect the annual rate of inflation to peak at more than 6% this month, and remain above 5% until the final three months of the year. (…)
JPMorgan said it now expects the eurozone economy to stagnate in the three months through March, having previously forecast an annualized increase in gross domestic product of 1%. It also lowered its growth forecasts for subsequent quarters. (…)
Germany’s statistics agency Tuesday said that annual pay rises negotiated by labor unions or similar groups amounted to just 1.1% in the three months through December. (…)
Good news? Not for consumers.
The Eurozone core CPI also accelerated, reaching 2.7%. Inflation on services is 2.5%.
Nordea’s scenarios:
A significant damage to the Russian economy is unavoidable. This is due to the direct hit via the financial system due to the sanctions and the high level of uncertainty that we expect to continue and which will significantly harm both domestic and foreign fixed asset investments even in an optimistic scenario, where Ukraine and Russia come to a rapid agreement. Even a total collapse of the Russian economy cannot be excluded.
We expect the negative impact on the Euro area as a whole to remain limited as long as energy imports from Russia are allowed and the worries of an escalation beyond Ukraine remains limited. Ending those would likely cause a high amount of uncertainty and lead to a recession in the Euro area.
The ECB is probably ready to look through the near-term rise in energy price inflation but the worries towards upside inflation risks were real before the Russian attack and the central bankers are more likely to delay their policy tightening plans, if needed, rather than to abandon them altogether.
Unfortunately, we cannot exclude a possibility of even a worse outcome than presented in these scenarios.
Soaring Fertilizer Prices Are About to Increase the Cost of Food Russia is a major supplier of every crop nutrient, and higher supermarket bills will be a ripple effect of its invasion of Ukraine.
- The White House eyes company profits in inflation battle The White House is targeting corporate profits as it grapples with inflation. Bharat Ramamurti, deputy director of the White House’s National Economic Council, said there are examples of companies outside of the meatpacking industry — which has particularly been in the White House’s crosshairs — increasing prices beyond their own climbing costs.
Russia ‘extremely likely’ to default on debts if Ukraine crisis worsens, IIF says
The IIF estimates that half of the foreign reserves of the central bank, which on Monday hiked interest rates and introduced some capital controls, are held in countries which have imposed asset freezes, severely shrinking the firepower policy-makers have to support the Russian economy.
The central bank would prioritize the protection of domestic savers with foreign investors “one of the last on the list.”
“If we stay here and this (the crisis) escalates, then default and restructuring is likely,” Elina Ribakova, the IIF’s deputy chief economist told reporters during a media call. She said default would be “extremely likely,” although the relatively small size of foreign holdings – at around $60-billion – of Russian debt would limit the fallout.
Default on domestically held bonds was far less likely, she added. (…)
The IIF’s Ribakova said the sanctions, which could yet be toughened even further, were “the most severe economic sanctions imposed on a country” ever and would send the Russian economy into a tailspin, with a low double-digit contraction this year likely and inflation soaring by a double digit amount too. (…)
China ready to ‘play a role’ in Ukraine ceasefire
China Holds Talks With Ukraine, Further Edging Away From Russia
China is “extremely concerned” about the harm to civilians in Ukraine, Foreign Minister Wang Yi told his Ukrainian counterpart in a call, in the latest indication of Beijing’s desire to prevent the war’s further escalation.
Wang said the world’s second largest economy also “deplores the outbreak of conflict between Ukraine and Russia,” according to a statement posted on the Ministry of Foreign Affairs website. The remarks were published after a call between Wang and Ukrainian Foreign Minister Dmytro Kuleba, the most senior exchange since Russia’s Vladimir Putin launched the invasion Thursday.
Wang also acknowledged the conflict was a “war,” rather than a “special military operation” as described by Russia. Kuleba said Ukraine was willing to strengthen communication with China and that it looked forward to China’s “mediation for the realization of the ceasefire,” according to the statement. (…)
The war is testing Chinese President Xi Jinping’s commitment last month to a “no limits” relationship with Putin, as the U.S. and its allies pile on sanctions and press Beijing to take as stand against military aggression. In recent days, Xi has urged Putin to pursue negotiations and China’s United Nations ambassador abstained from, rather than opposing, a Security Council resolution condemning the attack. (…)
Still, China has refrained from publicly calling for a ceasefire or describing the war as an “invasion,” and thus a violation of the UN-guaranteed sovereignty Beijing frequently vows to uphold. China hasn’t criticized Russia, and continues to voice support its security concerns and blame the U.S. for precipitating the crisis. (…)