Economic activity decelerated in early August, flash PMIs out Monday suggested, underscoring what, by now, it’s fair to call a ubiquitous “peak growth” narrative.
IHS Markit’s composite gauge for the US dropped to 55.4, the lowest since December. The new orders gauge similarly fell to an eight-month nadir, while the employment index fell to 51.1, barely in expansion territory and the lowest in more than a year.
“The expansion slowed sharply again in August as the spread of the Delta variant led to a weakening of demand growth, especially for consumer-facing services, and further frustrated firms’ efforts to meet existing sales,” Chris Williamson, Chief Business Economist at IHS Markit, said.
The services gauge missed badly, printing 55.2 versus an expected 59.2 (figure below).
The employment gauge for the services sector now sits less than one point above the 50 demarcation line between expansion and contraction. An index of new business in the services sector fell to the lowest in a year.
“Some hesitancy among customers was attributed to the renewed increase in COVID-19 cases,” the color accompanying the survey said. At the same time, service providers’ input costs rose at one of the briskest clips ever “amid significant hikes in supplier prices and greater wage bills.” And, so, service providers raised their own selling prices.
That isn’t a great scenario. Prices keep rising, as do COVID cases (figure below), with both contributing to cooling demand. That’s stagflation. Sorry, but it is. Or if it’s not, it’s stagflation-ary. That is, we’re not there yet, but we may be on the way.
As long as the trend shown in that figure (above) persists, so too will ambiguity around the future of the economy.
Speaking of ambiguity, it doesn’t sound as though the myriad “bottlenecks” and “frictions” are anywhere near abating, let alone resolving.
“Not only have supply chain delays hit a new survey record high, but the August survey saw increasing frustrations in relation to hiring,” Williamson remarked, adding that “jobs growth waned to the lowest since July of last year as companies either failed to find suitable staff or existing workers switched jobs.”
When combined with the preliminary read on University of Michigan sentiment for this month, the “V” is starting to look like a different letter (figure below).
“Fortunately” (and the scare quotes are there to denote that this isn’t exactly the optimal outcome), surging prices have a built-in cure.
“Prices look set to continue to rise sharply due to the persistent upward pressure on costs arising from shortages of materials and labor, though if demand continues to cool due to rising case numbers this should alleviate some of the inflationary pressures,” IHS Markit said.
That was the last sentence from the report. The finality seemed apt.
Enterprises dependent on cheap labor will shut down as well, releasing their workers to ventures that can afford to pay $15 an hour.
Interesting article in NYT this morning about Catrike, a recumbent tricycle manufacturer with five hundred bikes sitting unsold in a workshop while it waits for a missing critical part, a $30 derailleur made in Taiwan. “We’re sitting on $2 million in inventory for one $30 part,” Mark Egeland, the company’s general manager, said. According to the Times, Egeland thinks it could take 12 to 18 months to sort out issues across Catrike’s suppliers, and he doesn’t think the firm will ever return to the kind of lean manufacturing process — carrying limited inventory — that it used to use.
Bet a lot of domestic manufacturers are thinking the same thing — or should be. So add “peak global supply chain” to “peak oil” and “peak growth” as trends to keep an eye on over the next three, five, ten years.
https://www.nytimes.com/2021/08/23/business/economy/supply-chain-bottlenecks-coronavirus-inflation.html
The derailleur is located in the lowest stress portion of the drivetrain. For a few thousand dollars, the manufacturer could set up a 3D printer to manufacture the parts. Sitting helplessly on $2m in inventory just demonstrates the manufacturer’s lack of resourcefulness. Maybe the takeaway from the story is that engineering and additive manufacturing are about to see a boom. Or we can all sit around licking our butts and pine for days gone by. https://www.ge.com/additive/additive-manufacturing
I was trying to touch up some kitchen chairs for my parents last week. I went to Ace hardware and I ended up purchasing my third choice of paint types because the first/second choices were out of stock. Not only were the base color paints in short supply, my Ace Hardware Man told me they can’t restock the powder color tints. I asked him if I should try Lowes and he said, “Even Sherwin Williams can’t get paint or color tint”.
Then I went to the paint brush aisle for a 1/4 inch paintbrush. Out of stock.
Yeah, love the Cartrike article, where there is one cock roach there will be others would seem to apply in this idea that how much production is being held up by a single or a few parts. To the extent the supply side won’t normalize it would seem wise to not to continue to stock the demand side with additional fiscal and monetary easing. Obviously the Fed is debating this but is also quite aware of Delta and negative economic momentum seen in CESIUSD