- by New Deal democrat
There were a couple of reports last week about the manufacturing sector that I didn’t cover then. Let’s take a look at them now. What I am interested in is whether the rebound in manufacturing is continuing, is it more or less inflationary, and is it supported by sales?
First up, both the NY and Philadelphia Fed manufacturing indexes were reported. The below several graphs average the two to minimize noise. Ideally I would like to show the three month average, but unfortunately it is one of the few things that FRED does not indulge.
The headline index average (blue in the graph below) shows that the rebound is very much in place, and if anything has accelerated in the past few months. The more forward looking new orders (red) suggests that the rebound, if not ebbing, might be a little past its peak:
In other words, still strongly positive, and set to continue for a few more months, all else being equal.
The prices paid (blue) and prices received (red) index averages tell a less positive story:
Not only are inflationary pressures still very widespread (in the prices paid subindex), but the indication is that they are increasingly being passed on to customers (in the prices received subindex).
So if there is an industrial expansion, it very much remains an inflationary one - and the inflationary aspect may be accelerating even more.
Now let’s look at the second report from last week: business sales and inventories.
The first thing for me to repeat is that sales lead inventories by several months at least, as shown in the below graph of the absolute levels of sales and inventories (/1.5 for scale) in log scale (note these are both nominal, but since we are interested in the trend, we don’t need to worry about the proper deflator):
Sales always turn up and turn down first. Once business see that their sales have turned, they either increase or decrease inventories in reaction.
But an even better way to show this same data is YoY, as below:
This makes it easy to see that inventories change, up or down, after sales do.
Now here is a close-up of the last few years in absolute terms:
Note that sales have stalled since May, declining slightly and then, as of August, the last month reported, only 0.5% higher. While this isn’t a downturn, and there have been a number of similar sideways moves before, if this were to continue several more months I would expect inventories to react as well - which would mean a cutback in production and, if pronounced and long enough, in employment.
Which brings me to my final graph, which is the average of the employment subindex in the two regional Fed reports:
Manufacturing employment has continued to grow at the best pace since the immediate post-pandemic Boom, if at a slower pace than at its June peak. The three month average is slightly down from there, but still quite positive.
In summary, the business sales and inventory report, and the NY and Philadelphia Fed manufacturing reports, show that the inflationary expansion is still both an expansion and inflationary, with employment growth as well. But new orders suggest that in a few months it might begin to decelerate somewhat, exacerbated by customers reacting to increased costs; and if that shows up further in sales, then production and employment might then begin to flag as well.
