Bad news. Good news. What’s the difference these days?
It’s hard to say in an environment when evidence of economic resilience is the surest way to prod nervous policymakers into more aggressive action to constrain activity.
Shortly after a mixed round of key data showed US consumers are still spending amid an incremental slowdown in generationally high inflation, more top-tier data suggested activity in the manufacturing sector contracted last month.
At 49, ISM’s factory gauge was short of consensus. November’s print counted as the lowest since May of 2020, when the rebound from the original pandemic lockdowns in the US was just underway (figure below).
The final read on S&P Global’s gauge, also released on Thursday, was little changed from the flash print. At 47.7, it too is the lowest since May of 2020.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, described an inventory glut. Demand is depressed both domestically and abroad amid surging rates and a cost of living crisis in developed economies, leading firms to cut production at the fastest pace since the financial crisis if you exclude the COVID lockdowns. “Even with the latest production cuts, the downturn in demand has still led to one of the largest increases in unsold stock recorded since survey data were first available 15 years ago, which suggests that companies will continue to reduce production in the coming months to bring these inventories down to more manageable levels,” Williamson said Thursday.
That’s good news at least to the extent it presages slower price growth. Williamson said waning demand is creating a buyers’ market “for a wide variety of goods.” Price pressures, he remarked, are “abating rapidly.”
ISM’s prices paid gauge for the manufacturing sector dropped to just 43 for November (figure below), the lowest in 28 months. It was the ninth straight monthly drop.
Before anyone celebrates, don’t forget that in the context of economy-wide inflation, the services sector is where the “sticky” price growth resides. And the US is a services-based economy.
“Managing head counts and total supply chain inventories remain primary goals,” ISM’s Tim Fiore remarked. “Order backlogs, prices and now lead times are declining rapidly, which should bring buyers and sellers back to the table to refill order books based on 2023 business plans.”
ISM’s new orders gauge fell to 47.2. The backlogs index printed 40. The employment gauge was the lowest since June after printing in contraction territory. ADP data released Wednesday showed a very large drop in factory payrolls.
Notably, stocks are calling the bottom (figure below).
I’m not a big fan of that chart, but I suppose it’s useful in some contexts.
All of the above is pretty consistent with what the Fed is trying to engineer — namely, slower demand in the name of fighting inflation. The ISM anecdotes almost universally told of a burgeoning slowdown.
S&P Global’s Williamson echoed those anecdotes. “Concerns are increasingly moving away from the supply side to focusing on the darkening outlook for demand, meaning the business mood remains among the gloomiest seen over the past decade,” he wrote Thursday.
The news doesn’t get much “better” than that.
“Notably, stocks are calling the bottom (figure below).”
I’m gonna stick my neck out and say “I’m not a stock, I’m big ol’ bear.”
For me, today’s data reinforces the notion that the Fed is in fact engineering a soft landing. Not saying there won’t be a few bumps ahead, but a 50bps hike at the next meeting followed by 50/25bs in February and a pause should be enough to curtail demand and inflation expectations while allowing the economy to grow (at about ~2%). Might be a couple of years before inflation returns to 2%, but given the almost unprecedented nature of the COVID shock, that seems like an acceptable outcome.
I believe the Fed is being cautious because it understands the damaging effects of the torrid increases in the bank rate in 2022 have not been fully played out in the economy. So the Fed is for now sticking to its script. Inflation has not yet been vanquished and so interest rates need to continue to rise.
An important factor in the calculus of possible 2023 permutations is that the now divided house and senate means a broad stimulus package in 2023 is not likely.
So it is even more important now that the Fed be cautious though it may also already be too late to achieve the desired soft landing in 2023. No one has that crystal ball.
H-Man, a light at the end of the tunnel?