The manufacturing sector in Column-U.S. has likely entered recession: Kemp
John Kemp
LONDON, (Reuters) – U.S. manufacturing companies are likely to enter a recession in 2022’s fourth quarter, according to a variety high-frequency indicator. This is due to a global downturn of industrial output, which is creating some slack on the commodity markets.
The Institute for Supply Management’s (ISM) manufacturing purchasing managers’ index fell below the 50-point threshold dividing expanding activity from a contraction in both November and December.
The Federal Reserve’s manufacturing production index declined in both November and December and showed output down 0.4% at the end of 2022 compared with 2021.
U.S. manufacturers increased their selling prices in fourth quarter but the rate for producer price inflation has slowed as input costs pressures have eased, and there has been a drop in demand.
Producer price inflation of goods other than energy and food slowed to 4.2% annually in the three-months ending in December 2022, from 11.5% for the three-months ending in April 2022.
U.S. manufacturers have also increased employment. However, jobs are not a leading indicator and the sector’s response to declining demand has led to a slowdown in growth.
The annualized rate of manufacturing payroll growth was 1.6% in the three-months ending December. This is down from 5.5% annualized growth in the three-months ending April.
The November container freight through the nine largest ports decreased to 2.49 Million Twenty-foot Equivalent Units (TEUs), compared to 2.81 Million in November a year ago. This is the lowest rate of container freight since 2015.
Container freight transported on the major U.S. railroads declined to 1.07million TEUs in November, from 1.13million in the same month last year. This was the lowest rate for this time of the year since 2012.
According to the Association of American Railroads, containerized freight volumes decreased by 9% over the previous two weeks compared to the same period 2022.
Chartbook: U.S. Manufacturing and Freight Activity
Reduced demand for freight and merchandise is starting to manifest itself in higher discounts to encourage sales and clear out excess inventories.
In the three months ending December, U.S. consumer prices other than for food and energy decreased at an annualized rate of 4.8%.
Electric vehicle manufacturer Tesla this month announced price cuts by between 6% and 20% in the United States for its top-selling models (“Tesla turns up heat on rivals with global price cuts”, Reuters, Jan. 13).
In response to falling demand, Federal Express plans to scale back Sunday parcel deliveries for many parts of the country from March (“FedEx to further trim Sunday deliveries”, Reuters, Jan. 10).
Overall, the picture shows that manufacturing and freight volumes are declining due to rising interest rates, declining real incomes, and significant price increases.
The slump in commodity prices towards 2022 is due to the weakness in American manufacturing, and more so in Europe.
As real incomes continue to fall and interest rates rise, the downturn will likely get worse over the next few weeks.
In six of the last seven months, the new orders component of ISM’s manufacturing survey was below the threshold of 50 points.
December’s index dropped to 45.2. That is only eight percentile in all months since 1980. It was also its lowest level since 2012, when the pandemic began.
According to the ISM, more than twice as many manufacturers reported that new orders decreased (32%) than they increased (16%) in December, which suggests even lower activity levels.
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– U.S. manufacturing decline will decrease diesel consumption (Reuters Jan 5)
– U.S. diesel use slows as manufacturing, freight falter (Reuters, December 1)
– U.S. container freight is shrinking. (Reuters November 16).
– A recession by any other name won’t reset the economy (Reuters November 2)
John Kemp is a Reuters analyst. His views are his alone
(Editing by Bernadette Holz)