U.S. Manufacturing PMI: Marked improvement in operating conditions amid strong demand conditions
The seasonally adjusted IHS Markit U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posted 61.1 in August, down from 63.4 in July, and broadly in line with the earlier released ‘flash’ estimate of 61.2. The latest improvement in operating conditions was the softest for four months, but nonetheless among the strongest seen in the over 14-year series history.
Contributing to overall growth was a sharp expansion in production during August, albeit the slowest for five months. Where an increase was reported, it was generally linked to a further upturn in new orders and firm demand conditions. The softer expansion of output was due to capacity constraints including material shortages, according to panellists.
New orders continued to increase midway through the third quarter, as client demand rose markedly. Alongside greater customer spending, some companies noted that stockpiling efforts at clients drove new sales. The rate of growth was the slowest since March, however. At the same time, growth in new export orders also softened and was the slowest for eight months.
Manufacturers commonly reported that material shortages hampered output growth, as supplier delivery times increased markedly and to one of the greatest extents on record. Longer lead times were attributed to greater global demand for inputs and capacity issues at suppliers.
Subsequently, cost burdens rose substantially in August. The rate of input price inflation was the fastest seen in more than 14 years of data collection amid supplier price hikes. In an effort to partially pass on greater costs to their clients, goods producers raised their selling prices at the steepest pace on record.
In line with greater new order inflows, manufacturers expanded their input buying during August. Firms also noted that efforts to build safety stocks drove the upturn in purchasing. Although stocks of purchases rose for the sixth month running, the pace of accumulation slowed as firms utilised current holdings of inputs in production. Meanwhile, stocks of finished goods were depleted at the fastest pace since May 2020 as firms struggled to rebuild inventories amid material shortages and pressure on capacity.
Backlogs of work rose markedly midway through the third quarter, and at one of the sharpest rates on record. Despite a further increase in employment, firms expressed challenges retaining staff which reportedly exacerbated constraints on capacity.
Finally, business confidence regarding the outlook for output over the coming year strengthened in August. Greater optimism was linked to hopes of further growth in client demand.
- American Factories Will Keep Humming The ISM Survey shows a manufacturing sector that would be booming even if demand slowed
The Institute for Supply Management on Wednesday said that its index of manufacturing activity came in at 59.9 in August, up a bit from July’s 59.5, keeping at what is historically a high level. Anything over 50 indicates expansion. (…)
The combination of the rapid rebound in demand since Covid-19 first struck last year and the global shortages of raw materials and parts brought on by the pandemic has led to a massive decline in inventory levels across the economy. As of the second quarter the ratio of nonfarm inventories to final sales of goods and structures, adjusted for inflation, was 3.75, according to the Commerce Department. Before the pandemic, that figure averaged about 4.25.
Because of the desperate need for restocking, manufacturing output could continue to expand even if demand didn’t grow at all. (…)
From the ISM report:
Commodities Up in Price
Adhesives (2); Aluminum (15); Aluminum Extrusions; Aluminum Products (5); Capacitors (2); Caustic Soda (3); Cement; Copper-Based Products; Corrugate (11); Corrugated Packaging (10); Crude Oil (3); Diesel Fuel (8); Electrical Components (9); Electrical Motors (2); Electronic Components (9); Freight (10); High-Density Polyethylene (HDPE) (8); Hydraulic Components (2); Labor — Temporary (4); Linear Low-Density Polyethylene (LLDPE); Lumber* (14); Natural Gas (2); Ocean Freight (9); Packaging Supplies (9); Pallets (2); Plastic Resins (12); Polyethylene (7); Polypropylene (14); Resin-Based Products (7); Resistors (2); Rubber-Based Products; Semiconductors (7); Soybean Oil; Steel (13); Steel — Carbon (9); Steel — Cold Rolled; Steel — Hot Rolled (12); Steel Products (12); Steel — Scrap (4); and Steel — Stainless (10).
Commodities Down in Price
Lumber* (2); and Wood.
Commodities in Short Supply
Adhesives & Paint (2); Aluminum (5); Aluminum Products (4); Cable Assemblies; Capacitors (2); Corrugated Packaging (2); Electrical Components (11); Electronic Components (9); Foam; Hydraulic Components (2); Labor — Temporary (4); Lumber (2); Metal Components; Ocean Freight (5); Plastic Products (7); Plastic Resins — Other (6); Polypropylene; Printed Circuit Board Assemblies; Resin-Based Products; Resistors (2); Rubber-Based Products; Semiconductors (9); Steel (9); Steel — Hot Rolled (10); Steel — Stainless (6); Steel Castings; and Steel Products (7).
Note: The number of consecutive months the commodity is listed is indicated after each item. *Indicates those commodities reported both up and down in price.
Canada: Operating conditions improve sharply amid stronger demand conditions
Canadian manufacturers recorded another robust expansion in manufacturing conditions with the PMI at a four-month high in August. Quicker upticks in output, new orders, exports and purchases underpinned growth and in turn supported optimism. Delivery delays were again, however, a common theme in the latest survey period, with lead times lengthening markedly. As a result, firms sought to protect against future shortages by building pre-production inventories but consequently faced steep cost pressures. Input price inflation strengthened to a fresh new series high, but selling prices rose at a fractionally softer pace.
The headline seasonally adjusted IHS Markit Canada Manufacturing Purchasing Managers’ Index® (PMI®) registered 57.2 in August, up from 56.2 in July. The latest reading extended the period of growth to 14 successive months, with the latest expansion the fourth quickest in the near 11-year history of the survey.
Production volumes at Canadian manufacturers rose at a sharp and accelerated pace. Firms often reported that greater demand combined with larger workforces allowed firms to raise output volumes. Around 23% of firms increased production in August compared to July, compared with 11% who reported declines.
Similarly, higher sales to both international and domestic markets resulted in a marked uptick in new orders. Firms mentioned a general improvement in customer demand. Higher sales to US and European markets also drove the increase, according to panellists.
Higher output requirements and rising backlogs resulted in additions to headcounts in August, bringing the current period of job creation to 14 months. The rate of increase moderated slightly from July but remained higher than the long-run series average. Some firms found it difficult to source skilled replacements for
voluntary leavers, however.
Robust expansions in new orders, along with some reports of insufficient staffing levels led to another increase in outstanding business. In fact, backlogs rose at the third-quickest rate in the series history. Material shortages and transportation bottlenecks were also blamed for the rise in incomplete work. As a result, firms fulfilled sales through existing stocks of finished goods which were depleted at a quicker pace. Supply chains were once again under intense pressure in August. Global material shortages and port congestions added to lead times which lengthened to the second-greatest extent in the series history. In a bid to protect against future supply shocks, firms added to their pre-production inventories, and at the second-quickest rate on record. Rising demand led to input price inflation strengthening to a new series high. Material shortages and higher prices for steel, resin and transportation were also mentioned. The relatively strong demand environment allowed firms to partially pass-through higher expenses, with output price inflation the third-fastest on record.
Finally, outlook reflected the strong demand environment, which improved notably in the latest survey period.
U.S. Light Vehicle Sales Decline Sharply in August
The Autodata Corporation reported that light vehicle sales during August declined 11.1% (-14.8% y/y) to 13.09 million units (SAAR). They have fallen 29.2% since the April peak of 18.50 million units.
Sales of light trucks declined 11.0% (-15.0% y/y) in August to 9.98 million units after falling 4.5% in July. Purchases of domestically-made light trucks fell 11.2% in August (-18.9% y/y) to 7.55 million units after declining 4.8% July. Sales of imported light trucks were off 10.0% last month (+0.4% y/y) to 2.44 million, down from April’s record 3.30 million units.
U.S. consumers continue to prefer larger vehicles. Trucks’ share of the light vehicle market rose minimally to 76.2% last month. That was increased from the latest low of 48.1% during all of 2009
Auto sales declined as well as light trucks sales. Passenger car sales were off 11.7% (-14.1% y/y) in August to 3.10 million after a 4.9% July decline. Purchases of domestically-produced cars weakened 12.7% last month (-24.0% y/y) to 1.99 million units after falling 4.6% in July. Down for a third straight month, sales of imported autos weakened 10.5% (+11.0% y/y) to 1.11 million following a 4.6% July decline.
Imports’ share of the U.S. vehicle market was little changed last month at 27.0% and remained up from 23.5% in December. It has been rising steadily from 19.9% in 2015. Imports’ share of the passenger car market rose to 35.8% in August. Imports’ share of the light truck market rose to 24.4% last month, up from 20.7% in August 2020.
It’s pretty amazing that North American manufacturing would remain so strong amid such poor vehicle sales and declining domestic market shares.
Manufacturing production is just back to its pre-pandemic levels while manufacturers’ sales are 6.5% higher (inflation?). Yet, manufacturing employment is 3.4% lower on same hours.
DROWNING IN STATS
It’s been an amazing year, equity markets wise:
Data: S&P Dow Jones Indices; Note: 2021 data is year-to-date; Chart: Sara Wise/Axios
Jason Goepfert at SentimenTrader:
This year will go down in the history books as one of the best for investors. It already has in many respects, as we outlined two months ago. And it just keeps going.
September and October are well-known as being the most challenging for traders, as stocks have tended to see their worst returns and highest volatility. In a premium post yesterday, Jay showed that over the past 120 years, if an investor held the Dow Industrials only during September and October, their return would have been -74% (though it hasn’t been nearly as bad since 2008).
It’s relatively unusual for the S&P 500 to close at a record high in August. It would be even more unusual if it did it in September. Since 1928, there have been 1,124 months, of which 212 closed at a record high. Out of those, only 12 occurred in September.
Jason then shows historical returns in the S&P 500 after it closes the month of August at an all-time high, and it’s a sea of red.
Even though by definition, momentum was strong, the S&P had an incredibly hard time holding onto its gains over the next month. Most remarkably, the Risk/Reward Table shows that only two signals saw more reward than risk during the next month. (…)
This has been a historic year for momentum in stocks, and when it is high-quality, momentum usually rolls over every other factor until it stops for whatever random reason. There is zero evidence that’s going to be the case any time soon. Breadth has been questionable, which puts a dent in the “high-quality momentum” argument, but then there was an incredibly impressive thrust last week, so maybe that’s moot. Buyers have been able to make doubters look like fools in 2021, and based on September’s tendency, they have their work cut out for them again.
Constant new all time highs – time to worry?
August proved to be a great month for new all time highs. Last time we had similar all time high counts was in 1929 and 1987. On both occasions market decided crashing in October.
Current melt up is playing out well and vols are in implosion mode again.
Ideally protection becomes dirt cheap and we can start tilting the book into some serious long premium plays/hedges/downside speculation. After all October tends to be volatile…
Tier1alpha
Who needs staples anymore?
@StrategasRP
The whole world is getting upgraded
Chart shows the latest 1-month revision to I/B/E/S 2021E and 2022E consensus earnings. Bull market in everything. Earnings momentum in everything…
IBES
A Sector Buy Signal with a 90% Win Rate
The estimable Liz Ann Sonders noted that the percentage of Financial stocks trading above their 50-day moving averages has gone from a low level to a very high one.
Within 30 days, the sector cycled from having fewer than 20% of its members above their medium-term averages to having more than 95% of them above.
In the past five years, the only times this has triggered were February 2019 and May 2020, both leading to double-digit gains.
Whenever medium-term participation in Financials cycles from a low to a very high level in a relatively short number of days, the sector has tended to keep going. There have been 42 such signals over the past 70 years, with only 3 of them leading to any meaningful losses over the next year.
Within a market out of breadth, Financials have good breadth:
That must be helping:
Lastly, the Financials’ median trailing PE ratio is currently 11.9x according to CPMS/Morningstar data. Excluding the 8.1x pandemic panic low, this is the lowest median trailing PE since 1994 (10.5x).
SPAC Rout Erases $75 Billion in Startup Value Shares in this once-hot sector have dropped 25% since mid-February, highlighting the risk of piling into the latest sure thing.
Evergrande’s Grand Finale Won’t Be Pretty for Investors Beijing has good reasons to ensure that apartment buyers don’t get stiffed, but investors might be less lucky
(…) Evergrande had $88 billion of interest-bearing borrowings as of June, a $22 billion reduction from December. But the decrease was offset by an increase in its payables and contract liabilities, mostly obligations owed to home buyers for units it presold. Such payables and contract liabilities together amounted to $180 billion as of June. (…)
Too big to fail.
Chinese Firms Rush to Embrace ‘Common Prosperity’ Slogan
(…) At least 73 companies, including China’s largest insurer Ping An Insurance (Group) Co., food delivery giant Meituan and the state-owned Bank of China Ltd., used the flagship slogan in statements to shareholders filed to the Hong Kong, Shanghai and Shenzhen stock exchanges in the two weeks ending Aug. 31.
While that accounted for less than 2% of the more than 4,000 filings surveyed by Bloomberg News, it featured some of the country’s most-influential firms.
On Thursday, Alibaba Group Holding Ltd. said it would pledge 100 billion yuan ($15.5 billion) through 2025 to support “common prosperity” through programs including improving digital infrastructure in undeveloped regions, reducing costs for small firms, and improving benefits for gig-economy workers, according to the official Zhejiang Daily. (…)
Pinduoduo Inc., the fast-rising online commerce giant now challenging Alibaba in the countryside, went as far as to pledge its next $1.5 billion in profit to farmers’ welfare. Tencent Holdings Ltd., China’s most valuable company, said last month it will double the amount of money it’s allocating for social responsibility programs to about $15 billion. (…)
Chinese regulators demand Didi and Meituan improve worker conditions Ride-hailing and delivery groups summoned over labour reform and data security in tech crackdown
China’s Tech Crackdown: Its about Control, not Consumers or Competition!
FYI: