Manufacturing Remains Stable in May
RedStone Resource
June 2, 2022
Inside This Edition
Consumer Confidence Softens Slightly in May
There are several different consumer confidence measures in the industry, but the one from the Conference Board is a good representation of a stable measure that has been reactive to various economic conditions over the years. The current index came in at 106.4, down from 108.6 in April but still above levels hit in 2020 during the height of the pandemic.
Semiconductor Supplies Start to Improve, Slowly
Chip shortages could be easing at a much faster rate than expected. Chip producers were reporting in late May that supplies were improving, and output was accelerating. There were individual responses in the May manufacturing reports showing that producers were seeing some improvements in the frequency and volume of microchip availability.
Shanghai Eases Restrictions
Covid lockdowns in China have now stretched for more than 45 days, shutting down big portions of the world’s second largest economy. That has roiled supply chains around the world and has cut demand for certain raw materials and core commodities like oil, diesel, and gasoline. With Shanghai ports reportedly back to 90-95% operational capacity, it will still take weeks to relieve backlogs and get operations back to “normal”.
ECONOMIC BRIEFING
Manufacturing Remains Stable in May
There are several ramifications coming out of a strong set of manufacturing data released in May. Firms such as the ISM and S&P Global showed PMI figures expanding in May with strong new orders data. S&P Global’s PMI came in at 57.0 in May, down just slightly from 59.2 posted in April but historically still in a firm range showing growth and expansion trends continuing. New orders were also increasing.
There are two important conclusions that come out reports like this. First, the manufacturing sector and industrial production have high correlation rates to overall transportation activity. When these sectors are expanding, US freight volumes are typically steady and growing. Secondly, these figures are helping alleviate concern that the second quarter of 2022 could show a contracting economy. This would have made the second quarter in a row that the economy would have contracted had it continued at a Q1 pace, signaling that the economy was in recession. As Q2 data flows and data like these manufacturing PMI’s are released, it becomes unlikely that Q2 would slip into contraction this month. That does mean that it can not happen, but the odds become less likely.
Consumer Confidence Softens Slightly in May
There are several different consumer confidence measures in the industry, but the one from the Conference Board is a good representation of a stable measure that has been reactive to various economic conditions over the years. The current index came in at 106.4, down from 108.6 in April but still above levels hit in 2020 during the height of the pandemic.
The historic consumer confidence measures show that the current index is still above levels experienced between years spanning the Great Recession through 2016. Recent increases in inflationary pressure and some new job concerns have started to weigh on consumers.
In the data, the current situation indexes remained strong and suggest less risk of recession in the near term. But the future expectations index continued to weaken, suggesting that consumers do not expect the economy to gain steam in the quarters head. That being said, most still see it performing fairly well in the long term despite future purchase intentions for big ticket items like homes, vehicles, vacations falling slightly.
TRANSPORTATION BRIEFING
Semiconductor Supplies Start to Improve, Slowly
Another significant bit of news out of the semiconductor industry suggests that chip shortages could be easing at a much faster rate than expected. Chip producers were reporting in late May that supplies were improving, and output was accelerating. There were individual responses in the May manufacturing reports showing that producers were seeing some improvements in the frequency and volume of microchip availability.
The auto sector has been struggling with chip availability since the pandemic started. Automotive inventory to sales ratios are currently 57% lower than they were prior to the pandemic and total domestic auto inventories are still sitting at all-time lows.
Consider the implications of a US auto sector that accounts for nearly 4.5% of all jobs in the US, contributes nearly $70 billion in tax revenues and the sector as a whole can contribute nearly 3.5 percent of overall US Gross domestic Product. When the auto sector is building vehicles at 95% of its capacity, it creates a wave of reactivation across a vast array of the US supply chain and all the support industries that get pulled along with it.
Shanghai Eases Restrictions
Covid lockdowns in China have now stretched for more than 45 days, shutting down big portions of the world’s second largest economy. That has roiled supply chains around the world and has cut demand for certain raw materials and core commodities like oil, diesel, and gasoline. With Shanghai ports reportedly back to 90-95% operational capacity, it will still take weeks to relieve backlogs and get operations back to “normal”.
Two primary items are worth watching. First, many supply chains will enjoy the “return to normal” for flows of parts, components, and finished goods that have slowed down construction projects, manufacturing assembly lines, and other activities in the United States. Getting products flowing and once again replenishing stockouts is a welcome sign.
On the downside however, there is global pressure on certain commodity materials and energy, and those pressures will intensify as China reopens. This is not a reflection on China, but a concern about the disruptions to the global flow of energy due to the War in Ukraine. The US is still exporting record volumes of energy out of the country and diesel inventories in the US are still declining. Petroleum prices are still increasing with WTI trading near $116 a barrel at the time of writing.
A wave of container ships should be loaded and released from Chinese ports as they reopen and this will put pressure on domestic distribution and capacity availability in the months to come. Much like 2021, it took the global supply chain 3-4 months to process backlogs of freight that were sent inbound once lockdowns in Shanghai released last year. That created port congestion across the country. Given some higher inventories in the US this time around, the backlogs and inbound flood of containers may not be as dramatic, but it will still be significant.
