The data calendar may be sparse in the US this week, but Empire manufacturing served up some unexpected fireworks on Tuesday.
“After eighteen months of positive readings, the general business conditions fell a steep 33 points to -0.7,” the New York Fed said.
To call that a “miss” would be to woefully understate the case. Consensus expected 25. The lowest estimate from nearly three-dozen economists was 15. The figure (below) is fairly dramatic.
Similarly, the new orders index dove a harrowing 32 points to -5. The shipments index dropped as well and delivery times “continued to lengthen significantly,” the New York Fed went on to say.
While the employment gauge was relatively stable, it too fell. The price gauges moderated a bit, which is obviously good news, but at 76.7 (prices paid) and 37.1 (received), there’s still ample evidence of what the survey euphemistically called “substantial increases” in input costs and selling prices.
On the bright side, firms remained optimistic about the outlook. The future conditions index was stable.
Nevertheless, the drop in the headline index and new orders gauge were perhaps another canary. It would be easier to ignore were it not for last week’s lackluster read on retail sales, dour consumer sentiment and unexpected decline in factory output.
“The pullback in energy prices surely contributed to the inflation gauge within this release, so we’re reluctant to assume there are any broader implications for core consumer prices,” BMO’s Ian Lyngen remarked, calling the big Empire miss “just a reflection of flagging momentum in the goods producing sector with the backdrop of lingering pandemic constraints.”
Yihaa!
Stagflation or wage price spiral is possible of course, but I choose to read that as the first signs that the US consumer is finally getting stretched and things are going to cool down.
Goldilocks/secular stagnation again later this year anyone?
Talking my book there, of course.
But if it pans out that way (i.e. inflation sags strongly in H2 b/c the US consumer stops spending quite as much as in 2021), I’ll be pretty proud.
A narrative I’m following/testing is if inventory rebuild is done (from an early holiday buying season and general pandemic), which would mean channels are now full and require sales to pull through more demand at factories. Dec retail sales don’t help this dynamic. It does alleviate port congestion and to some degree the inflation that is supply driven.
But by all means, lets keep jawboning more tightening. Group Think is a hell of a drug.
If the economy is slowing, Fed will not want to raise rates. Low rates and bond buying will continue, which means that global money will continue to flow into US equities.
If the economy is doing well, then the economy can handle a rate increase and QT (possibly reduce balance sheet?). Corporate results will support continued inflows into global equities.
Supply problems do not seem permanent (they will resolve). Fed and US government will do a lot of talking and take little action while this is resolving- leaving this to corporate America to fix.
Does anyone really think the Fed will raise rates in a slowing economy? This would be the nightmare scenario and money would flow out of equities, for sure. The only scenario where I would be nervous.
I learned something interesting this past weekend while I was out and about. At the nearby state run liquor store I found many empty shelves as had existed prior to the holiday season. I commented to the cashier that I guess supply chains are still a problem even after the holidays. She replied that actually they had plenty of inventory in the back, they did not have the labor to restock the shelves however, and thus the shelves were mostly empty.
This is a new nugget of a thought on the above data set. Our assumptions have been that the empty shelves everywhere were due to supply chain issues and lack of product available to sell. I had not considered that the reduced workforce meant that those positions that retailers were able to fill were being given to those who run point of sale and not to those who stock the shelves. This may mean that manufacturers need to slow down because retailers already have full stockrooms and are not ordering more product.
Unless the Fed can find 80,000 experienced truck drivers, money won’t solve the supply chain problem.