U.S. manufacturing activity shows signs of peaking: Kemp

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LONDON (Reuters) – U.S. manufacturing output likely peaked in the second quarter, though the data is noisy and conflicting, and a turning point won’t become evident until September or October.

U.S. manufacturing output in June fell 0.4% from March, although it was still up 3.6% from the same month a year earlier, according to estimates prepared by the Federal Reserve Board .

Three-month production growth was the weakest since the start of 2021 and confirms the slowing momentum evident in other production, orders and employment data (“Industrial Production and Capacity Utilization “, Federal Reserve, July 15).

US manufacturing employment rose 30,000 in July and 476,000 from the same month a year earlier, according to separate estimates prepared by the US Bureau of Labor Statistics.

But the three-month job creation rate has halved since April, another sign that momentum is fading (“Current Employment Survey,” BLS, August 5).

Manufacturers are almost evenly split on whether to expand or contract business activity, based on survey data from the Institute for Supply Management (“Manufacturing report on business,” ISM, Aug. 1).

The ISM composite activity index slipped to 52.8 in July (50th percentile for all months since 1980) from 57.1 in March (72nd percentile).

But the new orders component was only 48.0 in July (15th percentile) compared to 53.8 in March (37th percentile) and 61.7 in February (84th percentile), implying that the sector will slow further in the future. course of the next few months.

The employment component fell even more sharply to just 49.9 in July (30th percentile) from 56.3 in March (85th percentile).

More manufacturers have reported job cuts than job increases in each of the past three months (https://tmsnrt.rs/3QdQJCe).

The reduction in manufacturing jobs implied by the ISM survey is consistent with the peak in industrial production, but inconsistent with the continued growth reported by the Bureau of Labor Statistics.

Over time, changes in the ISM employment index and BLS manufacturing payroll data have tended to track each other closely, with the ISM measure leading by 3-4 months.

If this relationship holds, the obvious weakness in the ISM employment index for April and especially May should start to show up in the August or September BLS measure, each released a month later.

The Chicago Federal Reserve’s National Activity Index (CFNAI) tracks all of these indicators and dozens more to gauge whether the economy is growing above or below its long-term trend rate.

The CFNAI showed the economy growing below trend in the three months from April to June for the first time since the first wave of the pandemic in 2020.

The spike in manufacturing activity is also tentatively evident in the movement of raw materials, semi-finished items and finished goods through the transportation system.

Domestic freight movements by road, rail, air, barge and pipeline appear to have peaked in the first quarter, according to data from the Bureau of Transportation Statistics.

Freight volumes were down nearly 0.5% in May from March, although up 2.6% from the same month a year earlier (“Freight Transport Services Index”, BTS, July 15).

Consumption of distillate fuel oil, the main liquid fuel used both in manufacturing industry and in the transport of goods, has been low since the end of the first quarter.

The sluggishness in distillate consumption is partly due to exceptionally high prices, but also corresponds to a spike and then a slowdown in manufacturing and freight demand.

Overall, the data is consistent with the peak in manufacturing activity in the second quarter of 2022, with declines likely in the third and fourth quarters.

It remains to be seen whether the slowdown in manufacturing activity will be very mild, a mid-cycle soft patch, or large enough to qualify as an end-of-cycle recession.

Crude oil and middle distillate futures prices are already pricing in a significant slowdown that will reduce fuel consumption and allow depleted inventory to replenish.

– US diesel shortage shows economy reaching capacity limit (Reuters, August 4)

– US power producers are consuming near-record gas volumes (Reuters, August 2)

– Low U.S. oil inventories imply deeper economic slowdown will be needed (Reuters, July 28)

– Oil futures and interest rates point to cyclical slowdown before end of 2022 (Reuters, July 22)

John Kemp is a market analyst at Reuters. Opinions expressed are his own.

Copyright 2022 Thomson Reuters.

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