I had it pre-written.
I was all set to serve up a delightfully sarcastic take on a further deceleration in US factory activity.
Here’s how it was going to go:
“Peak growth!” Shouted someone, somewhere.
The latest snapshot of US manufacturing suggested the world’s largest economy is cooling off, fanning the flames of hyperbolic narratives about an autumn mini-recession and the coming stagflationary quagmire.
Alas, I was forced to go in a different direction when ISM manufacturing managed to best expectations for August.
At 59.9, the headline print was a reasonably comfortable beat. The market was looking for 58.5. The range, from more than five-dozen economists, was 55.3 to 59.8. Gauges for production and new orders rose, but the employment index dipped into contraction territory, falling to 49 (from 52.9), the lowest since November.
Meanwhile, the final read on IHS Markit’s manufacturing gauge for August ticked slightly lower from the flash print, to a still-elevated 61.1 (figure above).
At this point, it’s very difficult to craft a coherent narrative based on the balance of the incoming data. Consumer sentiment has obviously fallen off the map. The Conference Board’s gauge caught down to the Michigan survey in the latest read, but PMIs are hopelessly distorted by the combination of strong demand, a tangled web of supply chain problems, soaring input costs and, now, the Delta variant, which only complicates things further.
“Not only were firms facing difficulties trying to clear outstanding work, they also faced further hikes in supplier costs,” IHS Markit said Wednesday. “The pace of cost inflation exceeded the previous series record amid a pervasive scarcity of inputs,” Senior Economist Sian Jones remarked, adding that “favorable demand conditions allowed finished goods prices to also rise at an unprecedented rate, as firms sought to protect their margins.”
That latter bit is part of what’s unnerving consumers, who now face higher prices along with headlines lamenting the ongoing loss of life tied to the pandemic, especially in locales where politicians still don’t take the virus as seriously as they should, despite the desperate pleas of their own health officials.
“Panelists reported that their companies and suppliers continue to struggle at unprecedented levels to meet increasing demand,” ISM’s Timothy Fiore said, noting that “all segments of the manufacturing economy are impacted by record-long raw-materials lead times, continued shortages of critical basic materials, rising commodities prices and difficulties in transporting products.”
Meanwhile, ISM respondents said the surge in COVID cases is (naturally) making “pandemic-related issues” worse. Those issues include worker absenteeism and fleeting shutdowns due, in many cases, to a shortage of parts, but also to “difficulties in filling open positions and overseas supply chain problems.”
I generally eschew the temptation to lapse into colloquialisms, but this is a mess. There’s no more apt way to describe it.
Across almost all surveys, participants are optimistic. Because how could you be otherwise with demand as strong as it is and more fiscal stimulus on the way? At the same time, it’s frustrating to find yourself unable to meet that demand due to various pandemic dynamics which policymakers continue to insist will go away soon enough.
It’s not clear (at all) whether it makes sense to talk of “beats” and “misses” on PMIs anymore. There’s only confusion, uncertainty and, oddly, a prevailing sense of optimism. This is one case where ambiguity and confidence coexist — peacefully and otherwise.
The data is confusing right now, so investors need to focus on the “big picture” stuff they do know – or are willing to infer/predict – and position accordingly. Trying to trade every disjointed data point seems, well, too challenging.
On August 30, WHO added Mu, another covid variant of interest. First identified in Columbia, it has been found in 39 countries.
Accordingly to WHO’s statement, “The variant contains genetic mutations that indicate natural immunity, current vaccines or monoclonal antibody treatments may not work as well against it as they do against the original ancestral virus”
However, WHO’s statement also included this passage: “Since its first identification in Colombia in January 2021, there have been a few sporadic reports of cases of the mu variant and some larger outbreaks have been reported from other countries in South America and in Europe,” the bulletin said. “Although the global prevalence of the mu variant among sequenced cases has declined and is currently below 0.1%, the prevalence in Colombia (39%) and Ecuador (13%) has consistently increased.” So it could be complicated. Speculating baldly, it seems possible that Delta is more infectious and outcompeted Mu in the early part of the year. But perhaps the success of Mu in Colombia and Ecuador is related to an increased ability to reinfect people who have already been infected with other variants, or have been vaccinated. We’ll find out, in time.
Regarding ongoing supply chain issues: It’s been a year and a half since the COVID-related supply chain issues began. They aren’t going away right away, it’s now clear. Add to this the upheaval in the Chinese economy, and possibly long-term increases in the costs associated with shipping. Why don’t we see more announcements of investment in US (or at least North American) manufacturing capacity? Especially with increased automation to offset (or avoid) higher labor costs, I would think that it’s about time for this to happen.