ISM hints at forward deceleration
As a former manufacturing guy I am well aware of how monetary policy and the state of the US dollar affects US manufacturers. But I have not been that guy for so long now that I tend not to look at it as closely anymore. But the current time seems appropriate for a review of the manufacturing sector.
I actually used to look down upon the ‘services’ economy as something almost artificial, given that the US had been exporting its manufacturing base (and thus, much of its productivity) for decades and replacing normal economic cycles with monetary chicanery (like the Fed’s ability to regulate the economy through interest rate manipulation) in order to keep the consumerist racket going.
The latest round of monetary manipulation (the post-2020 cycle was driven by the Fed’s latest inflationary operation) is being addressed by the bond market, which is forcing the Fed to raise interest rates. The anticipation of which is a primary driver of the US dollar, which has been diverging the inflation for a year. USD is on a heater now much like it was in 2014 when NFTRH caught that bottom in real time amid the post-2011 Goldilocks phase (in the US, while deflationary pressure persisted globally).
USD has retraced 62% of its decline into the 2007 low and is now at a long-term resistance area. Will it ‘sell the news’ of a hawkish Fed just as it bought the news (in 2021, which we also nailed in real time) of a terrible inflation permeating the macro? That is for another article, as this one is about the ISM. For the purposes of this article, suffice it to say that a strong USD impairs US manufacturing exports.
Let’s break down the details of the Institute for Supply Management report for April.
‘At a glance’ the PMI is stable and still expanding, albeit at a slightly slower rate. Of the forward-looking components that matter, New Orders are stable but employment is dropping (in a general economy that is still supposedly starving for workers).
I clearly remember back in 2020 as we began managing the coming inflationary effects upon the economy noting the first ticks and the big jumps upward in prices. Well, in April we see a downward tick in the growth rate of prices. They are still accelerating but the pace is slowing a bit and if the inflation starts to fade as expected, they will eventually crater. Backlogs are declining and combined with declining employment we have the seeds of future price drops.
However, the overwhelmingly dominant reason for any slowing continues to be the supply chain, according to many respondents. Also in effect is the old ‘raw materials’ Kabuki Dance that I remember so well (conjuring memories of not being able to pass on raw material price increases to customers, but when the copper price crashed in 2008 a customer’s operations manager sitting in my office with a chart of copper at $1.60/lb, down from $4, looking for price cuts).
Inflation continues to be at the forefront of everybody’s economic mind. But said inflation – as it morphs Stagflationary – plants the seeds of its own destruction. That holds especially true now as the tardy Fed flashes its hawk eyes.
Breaking down the more important (forward looking) ISM components, a 3 month declining growth rate trend in net New Orders is in effect.
Net Employment growth has decelerated from February with a March anomaly in between as broader employment boomed at +431,000.
Prices have only just eased on a one month basis, so let’s pump the breaks on the inflation’s end and the dawn of deflation for now. But 2022 is a year that has the makings of potential changes on the macro and so it is prudent to watch incoming economic and monetary data, don’t you think? April saw an easing of manufacturer’s prices from the March anomaly.
As a side note, might March-April have been the top in ‘cost-push’ inflation effects, fears, expectations? Possible, but again, more incoming data (May 9-13 will see a blitz of incoming inflation data) will be needed for firm conclusions.
Inflation Expectations should be watched closely going forward. These are available at the St. Louis Fed in the form of inflation breakevens and this Inflation Expectations ETF. 2022 has seen a near vertical spike upward, in tandem with the bond market indicators like the 2yr Treasury yield and the 3 month T-bill yield (viewable at the link just above). These indicators jerked the Fed into action; finally!
One of the most important ISM forward-lookers is Backlogs, and the trend here has been declining growth for 3 months. Here we see a troubling trend of waning growth. A backlog of orders is what future orders are filled from.
Okay, tap the breaks on deflationary Armageddon just yet. But do realize that the Fed manufactured a product of its own; today’s inflation problem by producing too many paper and digital currency units per finite asset markets. It’s simple monetary supply/demand fundamentals. With respect to the manufacturing segment of the economy it is doubly a problem because rising costs and prices sew the seeds of the sector’s own demise over the inflated boom and bust cycles.
Manufacturing is traditionally an early indicator on the broader economy. Sure, the Good Ship Lollipop will probably sail on for a while with its massive ‘services’ sectors doing the lifting. I could even envision a phase of Goldilocks (not too hot, not too cold) celebration among the service-oriented areas like Tech and a host of leisure, financial and other segments while manufacturing – long ago kicked to the curb as a less important part of our consumerist economy – slowly erodes under the pressure of inflation first, and the logical product of that, disinflation or worse, deflation later.
If the economy skips the Goldilocks phase, it’s either going to be accelerating Stagflationary pressure or a harsh resolution of the inflation by not the gentle sounding disinflation, but a much more severe deflation of the excesses. I will not sit here and put a guru hat on (which means I will not make guesses to make headlines) and try to predict what’s upcoming. But I sure will continue to lay out the macro as I see it and have my service prepared for it with patience, perspective and oh yes, incoming data.