China’s Manufacturing Sector Slips Back into Contraction
RedStone Resource
April 6, 2022
Inside This Edition
China’s Manufacturing Sector Slips Back into Contraction
China’s manufacturing sector serves as a leading indicator of global economic activity, and it just turned in a poor monthly report on activity. The manufacturing sector PMI came in at 48.1 in March, down from 50.4 in February and firmly in contraction. This was the steepest drop in the PMI in more than 25 months according to the Caixin / Markit report.
Will the US See Waves of Containers Like the Patterns Set in 2021?
There is a lot of concern about the supply chain challenges hitting Europe and Asia, and what that might do to freight flows into the US. It has become clearer that a combination of the Lunar New Year, Olympics, and COVID outbreaks throughout China and parts of southeast Asia have delayed inbound freight volumes. Most US ports are ‘back in cycle’ and throughput of freight (once it hits US ports for docking) is fairly ‘normal’.
Diesel Prices Continue to Hover Near All-Time Highs
According to the Energy Information Administration, diesel prices have hit another all-time high. The previous high was $5.13 hit on March 12th and the EIA is now showing national diesel prices at $5.19. The US has started to increase exports of diesel to Europe to help close the gap left by the war in Ukraine. Many European countries get the majority of their diesel from Ukraine, Russia, or both.
ECONOMIC BRIEFING
US Economy Continues Hiring Binge, For Now
The US economy added 431,000 jobs in March and the unemployment rate dipped to 3.6%. Wages were increasing at a 5.6% annual rate as companies had to work harder to retain and attract key talent. The number of job openings in the United States continues to hover near 11.2 million and the participation rate also improved as more workers rejoined the workforce and quickly found jobs.
The different economic signals being sent right now are perplexing. The labor market is very strong for US households but inflationary pressure is stripping most of the income benefits from the average household. With inflation increasing at 7.5% and wages increasing at 5.6%, there is still a mismatch and households in the lower middle and lower income ranges are beginning to struggle under the weight of that pressure.
And yet manufacturing remains in a solid growth trajectory, corporate investment continues to break records for now, retail spending was still strong on a historic basis, and many additional aspects of the economy were still pointing to growth. But it remains to be seen what these additional inflationary pressures do to the US economy in the longer term.
China’s Manufacturing Sector Slips Back into Contraction
China’s manufacturing sector serves as a leading indicator of global economic activity, and it just turned in a poor monthly report on activity. The manufacturing sector PMI came in at 48.1 in March, down from 50.4 in February and firmly in contraction. This was the steepest drop in the PMI in more than 25 months according to the Caixin / Markit report.
The big problem for China was a reduction in output due to COVID lockdowns and problems in the global supply chain getting raw materials into the country. Manufacturers were reporting that they had difficulty getting input components and the War in Ukraine was beginning to have an impact on new orders. New export order demand fell to its lowest levels in 22 months.
TRANSPORTATION BRIEFING
Will the US See Waves of Containers Like the Patterns Set in 2021?
There is a lot of concern about the supply chain challenges hitting Europe and Asia, and what that might do to freight flows into the US. It has become clearer that a combination of the Lunar New Year, Olympics, and COVID outbreaks throughout China and parts of southeast Asia have delayed inbound freight volumes. Most US ports are ‘back in cycle’ and throughput of freight (once it hits US ports for docking) is fairly ‘normal’. Capacity is not slack near the ports, but in states that experience a lot of inbound volumes, shippers are finding capacity available as opposed to last year when there was a significant shortage, and it took weeks to get freight out of the port.
Looking forward, shippers are still reporting that they have cargo stranded in China because of inland distribution challenges and lockdown impacts on suppliers. Those orders will eventually get filled, and that cargo will be inbound at some point in time. Based on timing, it appears as though a wave of containerized freight will hit US shores in mid to late April and freight rates are still elevated across the Asian region. The timing of this inbound volume will hit at roughly the same time that ILWU/PMA contract negotiations get underway to agree to a new contract.
The National Retail Federation and Hackett Associates are still showing an average of 2.2 million TEU’s hitting US shores in each of the first 7 months of the year – which would trend closely to a new record inbound volume.
Diesel Prices Continue to Hover Near All-Time Highs
According to the Energy Information Administration, diesel prices have hit another all-time high. The previous high was $5.13 hit on March 12th and the EIA is now showing national diesel prices at $5.19. The US has started to increase exports of diesel to Europe to help close the gap left by the war in Ukraine. Many European countries get the majority of their diesel from Ukraine, Russia, or both.
Reports suggest that the US was exporting approximately 1 million barrels of diesel per day in March to destinations worldwide, the highest since early 2019. Approximately 70% of that was headed to European destinations. The US can produce a significant amount of diesel, but the global diesel shortage crisis is likely to keep inventories ‘tight’ for some time to come. Fuel surcharges are still running 50-60% higher year-over-year and based on some of these recent metrics, relief does not seem to be near.
An end to the conflict would release a significant amount of petroleum products onto the market and would likely push crude oil prices from $105/barrel on average today to $80-$85 a barrel almost overnight according to Wall Street analysts.
