Twenty Countries with PMIs in Contraction – Good for US Manufacturing?
RedStone Resource
December 16, 2022
Inside This Edition
Federal Reserve Does Not Ease Market Tension
The Federal Reserve hiked interest rates by 50 basis points as expected, the Federal Funds Effective Rate is now at 4.28% and is likely to continue to increase until the rate hits 5.1% – 5.2% according to Fed estimates.
What to Make of the Cass Freight Data from November?
The Cass Freight Shipment Index was released this week, and it showed some interesting data. The index came in at 1.201 which was 1.9% lower month-over-month (which could be due to seasonality), but it was also 0.4% lower year-over-year. When looking back at pre-pandemic levels, the index was lower month-over-month by 2.4% (worse than the 2022 figures) and was down by 3.27% year-over-year, a bigger decline than is being witnessed today.
Twenty Countries with PMIs in Contraction – Good for US Manufacturing?
The latest Producer Price Index (PPI) covering TL, LTL, and Freight Rail released on November 16th showed that this is more likely a normalization trend. Although all three PPIs fell month-over-month, each remained higher year-over-year against very difficult comparisons.
ECONOMIC BRIEFING
Fourth Quarter GDP Still Running Hotter Than Expected
The Atlanta Federal Reserve publishes a Nowcast of GDP which tracks monthly releases of economic data to build an ongoing picture of how GDP in the quarter is materializing. Expectations for Q4 were largely negative, most prime financial institutions had predicted contraction in Q4 of 0.5%. Based on the latest data, current GDP is trending at 2.8%, much hotter than expected.
Most forecasting agencies have now changed their forecast for the full quarter and expect Real GDP to come in closer to 2%. Much of that will be driven by consumer spending, US energy exports, some inventory building activity, and government spending. Most forecasts are still calling for at least a mild recession (referred to as a soft landing) early in 2023. But most analysts expect companies to lower inventories by next year’s peak season and go through another inventory building cycle sometime over the summer leading into next year’s peak.
Many factors can affect spending, and consumers are facing a lot of pressure at this time. Credit card use is up, 63% of households in the US are in a check-to-check mode, they don’t have any money left at the end of the month. In fact, most of those households have run their credit card balances to nearly 97% of their borrowing limits. The US savings rate has also now tied its lowest level in history, despite 37% of households still sitting on a record $3.5 trillion in excess savings. Seventy percent of US GDP is comprised of consumer spending. What happens at a consumer level has a critical impact on transportation volumes and supply chain activity.
Federal Reserve Does Not Ease Market Tension
The Federal Reserve hiked interest rates by 50 basis points as expected, the Federal Funds Effective Rate is now at 4.28% and is likely to continue to increase until the rate hits 5.1% – 5.2% according to Fed estimates. This would be the highest level since 2007 and not far from the highest rates since 2000. With 63% of the US population now living check-to-check and inflation running at 7% growth annually while wages are growing at just 5%, most US households are at risk. The Federal Reserve cannot afford to have 63% of the nation’s households underwater financially (failing), and thus it will err on the hawkish side and lean toward the risk of creating a recession.
For the Fed to get inflation under 5% (a minimum to get inflation below the wage growth rate) and closer to its target rate of 2%, it will likely have to push unemployment to 4.5% (to bring down wage inflation). Other measures of inflation are showing mild easing, but not enough to convince the Fed that inflation has peaked and is under control.
TRANSPORTATION BRIEFING
What to Make of the Cass Freight Data from November?
The Cass Freight Shipment Index was released this week, and it showed some interesting data. The index came in at 1.201 which was 1.9% lower month-over-month (which could be due to seasonality), but it was also 0.4% lower year-over-year. When looking back at pre-pandemic levels, the index was lower month-over-month by 2.4% (worse than the 2022 figures) and was down by 3.27% year-over-year, a bigger decline than is being witnessed today.
The headline shipments index itself was decelerating as mentioned, but it remained overall near the top end of the 15-year range. Despite some of the dismal news that seems to be spreading throughout the transportation sector, shipment activity was slightly better than expected through November. There is no denying that freight shipment volumes are falling, but is it more of a normalization process as the market returns to 2019 levels of activity, or is it because of a possible recession early in 2023? For now, the data would suggest the former rather than the latter scenario.
Payments are not inflation adjusted, and total payments are still near all-time highs through November. They remained 4.7% higher year-over-year and were 1.8% higher month-over-month.
Twenty Countries with PMIs in Contraction – Good for US Manufacturing?
Oddly, the US could benefit from a global manufacturing recession. Many critical industries like automotive, aerospace, agricultural equipment, pharmaceuticals, electronics, and many other sectors are still struggling because of stock shortages of critical components. Any number of improvements in supply chain continuity could help many US assembly lines and production improve, and that could be what a global manufacturing recession does for these sectors.
Companies that supply key industries like automotive are expected to increase allotments for US buyers of those products (microchips for instance), and this in turn will help move production schedules up. Many large construction projects have been put on hold because of a lack of materials, and those materials will become more available if key competitors for US companies are under recession pressures.
Of course, one cannot ignore the fact that 20 countries had manufacturing sectors in contraction at the end of November. That was up from 15 in the prior month and historically when the global market has seen this level of downward pressure, the world has been in a technical recession. This cycle could be different as mentioned. For instance, US auto dealers still have a tremendous amount of pent-up demand for autos, and it could take the sector more than 16 months to replenish dealer inventories which are still near historic lows.
