MANUFACTURING PMIs (2)

USA: Production falls for first time in seven months

The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI®) posted 47.9 in August, down from 49.6 in July and below the 50.0 no-change mark for the second consecutive month. The latest reading signaled a modest deterioration in the health of the manufacturing sector, and one that was the most marked in 2024 so far. (…)

Firms scaled back production in response to falling sales as demand across the sector waned. Indeed, new business decreased for the second month running. The solid reduction in new orders was the most marked since June 2023. In some cases, clients showed a reluctance to commit to new projects given a slowdown in market demand. Inflationary pressures also had a negative impact on new business.

New export orders were down again, falling for the third month running and at a solid pace. Geopolitical issues were partly responsible for the latest reduction in overseas demand, according to respondents.

As was the case with production, manufacturers saw a renewed decline in employment midway through the third quarter. Staffing levels decreased for the first time in 2024 so far, reflecting falling new orders and lower output requirements.

Purchasing activity was also scaled back, with the pace of decline the sharpest in the year-to-date. Firms reported efforts to draw down inventories in response to falling new orders, resulting in a sixth successive monthly drop in stocks of inputs. In part, the reduction in pre-production inventories also reflected efforts to improve cash flow.

Despite a reduction in capacity, manufacturers were again able to work through outstanding business as new orders fell solidly. Backlogs of work were depleted for the twenty-third month running, and at the fastest pace since April. (…)

In contrast to the picture for stocks of purchases, inventories
of finished goods increased during August, the second month in a row in which this has been the case. Some respondents indicated that they had made use of the spare capacity provided by a reduction in client demand to replenish stocks of finished products, while others noted unintended inventory accumulation.

The rate of input cost inflation quickened to a 16-month high in August and was above the average seen prior to the COVID-19 pandemic. Higher costs for shipping and labor were reported, alongside rising raw material prices. In turn, output prices also increased at a faster pace, albeit one that was still the second-slowest in 2024 so far. (…)

• ISM Rises for the Wrong Reasons in August

(…) Only two of the five components that feed into the headline rose in August. Employment (up 2.6 to 46.0) and inventories, which rose twice as much (+5.8 points to 50.3). Production, supplier deliveries and new orders were all lower. The most disconcerting development is the 2.8 point drop in new orders, which took this leading indicator to its lowest since May of last year.

While a sub-50 print may indicate a discouraging backdrop for the factory sector, it takes an even lower reading to signal outright recession for the broader economy; 42.5 in fact, according to the ISM. So today’s report for August activity is broadly consistent with a theme that has been in place for the better part of the past two years: the economy is still expanding even if the factory sector is not. (…)

The new orders component slid nearly three points to the lowest reading since May of last year, and the only of the six largest industries to report an increase in new orders was the computer & electronic products—which has been a notable bright spot in an otherwise flagging sector. The measure of current production also slid deeper into contraction last month.

As mentioned, most of the strength came from inventories. While inventories can be volatile, it’s the first time this component crested above 50 since early 2024 and the release notes manufacturers adjusting to lower output levels and timing issues. In other words, this inventory was unintended and a consequence of slowing demand. Without the inventory build, the overall ISM composite index would have seen a decline twice as large in August. (…)

Canada: PMI moves closer to stabilisation in August

(…) August’s survey revealed weaker contractions in both output and new orders. Panellists nonetheless continued to report a subdued economic environment, both at home and abroad. Clients were said to be hesitant in committing to new work linked to some uncertainty in the geopolitical and global economic outlooks.

New export orders declined for a twelfth successive month, although the rate of contraction also softened noticeably to its slowest since May.

The lack of incoming new work and reduced production requirements meant firms cut their staffing levels for the second time in the past three months. The decline was also the steepest in 2024 so far, with reports of the nonreplacement of leavers and some concerns about the economic outlook leaving firms reticent to hire new workers. (…)

Some firms remained concerned over the impact on demand of elevated prices and high interest rates.

Price pressures intensified during August. Input price inflation accelerated to its steepest level since April 2023, linked to higher prices for a variety of inputs (plastics were especially noted). There were also reports that unfavourable exchange rate movements and high shipping costs had raised overall input prices. In response, manufacturers raised their own charges to the greatest degree since last November. Meanwhile, firms also reported ongoing sea freight delays. (…)

Global manufacturing production, new orders and employment all decline slightly in August

The J.P.Morgan Global Manufacturing PMI™ – a composite index produced by J.P.Morgan and S&P Global Market Intelligence in association with ISM and IFPSM – fell to an eight-month low of 49.5 in August, to remain below the neutral 50.0 mark for the second successive month.

Out of the 31 surveys for which August data were available, 18 registered a PMI reading consistent with a deterioration in manufacturing operating conditions. This included downturns in the US, the euro area as a whole and Japan. Although, the China PMI moved slightly back above the nochange mark, at 50.4 it remained at a subdued level. Solid growth was seen in India – which was also the best performer by far – the UK and South Korea (among others).

August saw global manufacturing production decrease, albeit only slightly, for the first time in 2024 so far. Output contracted in both the intermediate and investment goods industries. Although the upturn at consumer goods producers continued, the rate of growth was only mild and the weakest during the current 13-month sequence of expansion.

July and August have seen back-to-back contractions in the level of new work received by global manufacturers. The rate of growth was also identical to the prior survey month.

All three of the sub-industries covered by the survey (consumer, intermediate and investment goods) saw new order intakes decrease. The trend in global trade was especially subdued, as the volume of new export business flows fell for the third straight month and at the quickest pace since last December. China, the US, Japan, Germany and the UK were among the larger exporting nations to register reduced new export order intakes. (… )

The outlook for the global manufacturing sector remained potentially lacklustre in August. Business optimism remained below its long-run survey average and among the weakest over the past one-and-a-half years. The forward looking new orders-to-finished goods inventory ratio was also unchanged from July’s nine-month low. Manufacturers’ cautious outlook was also reflected in further reductions to purchasing activity and inventory holdings.

Average purchase prices rose for the thirteenth consecutive month in August, albeit to the weakest extent since May. Part of the increase in costs was passed on to clients, as highlighted by a further rise in average selling prices.

China Services Expansion Cools in New Sign of Economic Weakness

The Caixin China services purchasing managers’ index fell to 51.6 in August, versus 52.1 the previous month, according to a statement released by Caixin and S&P Global on Wednesday. (…)

“Competition in the sector was still fierce, and boosting sales through price cuts became a priority for businesses,” Wang Zhe, senior economist at Caixin Insight Group, said in a statement. “Surveyed companies adopted a cautious approach to hiring to save costs, leaving the labor market under pressure.” (…)

Official data published over the weekend showed service industries from restaurants to tourism near contraction during the last month of summer. The sector is at the center of piecemeal government action to revive consumer demand weighed down by a prolonged real estate crisis. (…)

The non-manufacturing measure of activity in construction and services eked out growth last month thanks to consumer appetite during the summer holiday season, the National Bureau of Statistics said on Saturday. Unlike the official services PMI, the Caixin survey focuses more on smaller private firms. (…)

Bloomberg omitted this important, more forward-looking, segment of the survey:

Service activity expansion was sustained by rising new business inflows in August according to the latest data. Chinese service providers often linked the expansion of new work to better underlying demand conditions and a widening of service offerings. In line with overall business activity, new work inflows expanded at a softer rate compared to July.

In contrast, export business increased at an accelerated pace. According to panellists, there was an uptick in overseas client interests, including in the tourism industry, which supported faster export business growth.

How Immigration Remade the U.S. Labor Force A historic influx of migrants has changed the size, makeup and outlook of the U.S. labor market and the economy.

Good article by the WSJ’s Paul Kiernan, supplementing my arguments that surging immigration helped “normalize” the U.S. labor market (see Lucky Fed!).

(…) Immigrants who have arrived since the start of 2020 face higher jobless rates than the broader population. Unemployment for recent immigrants averaged 8.2% between May and July, versus 4.2% for American-born workers and 3.5% for earlier immigrant cohorts. Overall unemployment has crept up this year, to 4.3% in July, in part due to the swelling numbers of immigrants looking for jobs.

Recent immigrants tend to earn less than U.S.-born workers because of their lower level of education, lack of English, and in some cases because they are working without permission. They might also compete with existing workers with less education and put downward pressure on their wages, too. Through these channels, the surge in immigration could weigh slightly on overall wages and productivity in the near term, according to the CBO.

However, the drag fades over time as migrants gain experience, and those with college degrees contribute to innovation, the CBO says. And from the day they start working, migrants pay federal taxes, helping to reduce the federal deficit. (…)

For Volkswagen, the Bumpy Road to Electric Vehicles Starts to Hit Home The auto giant is considering cuts it has long avoided in Germany as it contends with tepid interest in a high-cost technology.

(…) Group Chief Financial Officer Arno Antlitz blamed the poor result squarely on the poor postpandemic recovery. “In Europe, two million fewer vehicles are currently sold than before Covid,” he said.

However, a big bet on electric vehicles under former CEO Herbert Diess with products such as the ID.3 and ID.4 is another reason for today’s weak profitability, according to analysts.

“There are plants dedicated to EVs that aren’t producing at the levels expected and costs are out of whack,” said Bernstein analyst Stephen Reitman.

A few days before Volkswagen announced its December deal with the union, the German government unexpectedly canceled EV subsidies. The technology has struggled to win over fresh cohorts of buyers who may be wary of patchy public charging infrastructure and high prices.

EV sales in Germany, where Volkswagen is the market leader, fell by a fifth in the year through July, compared with the same period of 2023. (…)

The company also needs to compete with lower-cost, faster-moving Chinese EV makers, not just in China but increasingly in Europe too. Chinese manufacturers have a cost advantage of as much as 30%, according to industry estimates. (…)

BYD, the Chinese brand that last year overtook Volkswagen in China, is still a marginal player in Europe, but it is growing fast and spending lavishly. This summer it sponsored the high-profile Euro 2024 soccer tournament and last week agreed to buy its German distributor. (…)

In his statement, Blume noted that “Germany in particular as a manufacturing location is falling further behind in terms of competitiveness.”

Labor costs in Germany are the highest in Europe, according to an analysis by the German Association of the Automotive Industry. A German auto worker cost roughly €62 an hour last year—equivalent to roughly $68.50—compared with €23 for a Czech worker and €29 for a Spanish one. In Hungary, where BYD is building a factory to avoid European Union tariffs, auto workers are paid only €16 an hour.

Germany’s energy costs also have risen since the country lost access to cheap Russian pipeline gas as a result of the war in Ukraine. (…)

Axios has this important factoid:

VW is also a bloated company compared with its competitors, meaning it has less margin for error. The company had some 684,000 employees in 2023. That’s about 309,000 more than the ever-efficient Toyota, which sold about 2 million more vehicles than VW worldwide last year.

Meanwhile

China EVs, Hybrids Set to Cement Sales Lead Over Gasoline Cars

Sales of electric and hybrid vehicles in China likely surged in August, surpassing faltering deliveries of conventional gasoline cars for the second month in a row.

Sales of electric and plug-in hybrid vehicles rose 42% year-on-year to just over a million units, according to preliminary data from China’s Passenger Car Association Wednesday. Overall vehicle shipments meanwhile shrank 1% from the same period last year to 1.9 million units. Sales of EVs and hybrids are expected to be 53% of the total in the month. (…)

The strong momentum in the EV segment for what is normally a slow period for car production and sales comes after the government doubled subsidies for trading in old vehicles at the end of July. Buyers who purchase qualifying new EVs or gasoline cars can receive up to 20,000 yuan ($2,811).

EV makers benefited from the boost. Stellantis partner Zhejiang Leapmotor Technologies Ltd.’s August sales surged 113% compared with the same time last year, and premium brand Zeekr grew 46%. Market leader BYD Co. increased deliveries in August by 30% to 370,854 vehicles.

Yuqian Ding, head of China autos research at HSBC Qianhai Securities Ltd., said BYD’s monthly volumes into September and October will continue to be robust with its strong new model supply, expanding overseas footprint, and enhanced trade-in subsidy “likely to refresh new highs on monthly deliveries.”

Cooling Inflation in July Amid Sustained Consumer Spending

[Thursday’s] GDP report already showed that consumer spending was stronger in the second quarter than first reported; [Friday’s] personal income and spending report reveals July data and shows that the third quarter is off to a compelling start.

The report also offers affirmation that inflation is indeed on a cooling path with core PCE inflation at 2.6%. For policymakers at the Federal Reserve, maintaining restrictive policy is becoming difficult to justify with the three-month annualized rate now back below target at 1.7%.

At the start of this month, financial markets were cast into a tailspin when July employment data came in much softer than expected. It is difficult to square that jobs market weakness with not only sustained consumer spending, but income gains that feel more like the sort you would see in a stronger labor market.

Driven by a 0.3% increase in wages and salaries, overall compensation also rose 0.3%. Both measures are up 4.4% over the past 12-months. After accounting for inflation and taxes, real disposable personal income rose 0.1% in July and is up 1.1% over the past year. (…)

In order to sustain the increased outlays, households have pared back saving to 2.9%. That is just the second time in 16 years that the savings rate has had a 2-handle.

The retail sales report for July gave us a bit of a sneak preview of the spending action in today’s broader and more comprehensive personal income and savings report. The big takeaway from both indicators is that auto sales accounted for much of the surge. The 4.1% real increase in spending on autos was far-and-away the biggest gainer. Still, with only gasoline spending down (and only slightly) it is also fair to say that spending gains remained broadly based across other categories. (…)

But the composition of spending is not exactly reflective of the more cautious and choosy consumer so often discussed in corporate earning announcements. Discretionary spending is once-again outpacing non-discretionary outlays. (…)

Spending growth in July combined with upward revisions to second quarter sets us up for some pretty decent growth in Q3 despite not yet having data for two out of three months. Even if consumer spending sputtered out in August and September, Q3 spending is still on track to come in comfortably north of 2%.

The income side remains reasonably solid: nominal spending growth is keeping pace with labor income growth in the 5% range while inflation has steadied around 2.5%.

The rising angst stems from the gap developing between real disposable income and real expenditures, bringing the savings rate down to only 2.9%.

ING:

The obvious answer is that we are running down our savings and using debt. That is not sustainable so are we burning ourselves out? Well, the savings rate has dropped to just 2.9%. The only time we have ever been down here consistently is just ahead of the Great Financial Crisis. That suggests if unemployment does continue to climb there is less buffer to support consumer activity.

Actually, the buffer this time is real household wealth which keeps rising along with homes and equity prices while inflation growth recedes. Real household wealth is up 17% since 2019, well above trend, allowing Americans to spend merrily.

A lot of attention will now focus on employment growth to sustain spending, but the focus should also be on equity prices. Look at how the savings rate rises when household wealth drops below trend.

Ed Yardeni reminds us that “September has a history of being the worst month of the year for the stock market”, the only month with more down months (53) than up months (42) and the only month with a clearly negative average decline (-1.17%) since 1928. But he admits being currently “hard pressed to find what could possibly go wrong in September”.

What could go wrong is a Fed admitting (or, more likely, Mr. Market realizing) that its monetary policy actually did not slow demand as intended and mulling the idea that the recent inflation slowdown might only be transitory (), possibly delaying further declines in interest rates beyond September. Why?

• Real personal spending was up 2.0% YoY one year ago and early this year. It was up 2.8% on average in the last 3 months.
• Real expenditures on durable goods, the most interest sensitive category, are up 3.4% YoY in July vs +1.4% in April. They are up 16.9% annualized since April and +10.0% a.r. in the last 2 months. Booming, relentless demand! Remember when Mr. Powell said that goods consumption was about to slow from a lack of storage space?
• Fortunately, durable goods prices deflated at a 4.0% annualized rate since March and are down 2.5% YoY, the average YtD. However, nonfuel import prices (most goods Americans consume are imported), which declined 1.0% a.r. in the second half of 2023 are up 2.7% a.r. in the first 7 months of this year (+1.2% YoY in July). They were down 0.9% at this time one year ago. (See Lucky Fed)
• Meanwhile, real spending on services, the largest consumption category at 65%, keeps charging above 3.0% annualized in the last 6 months, far outpacing disposable income (+1.0%). In the 5 years to 2019, the average annual growth rate was 2.0%.
• So far, however, services prices have slowed to +2.5% a.r. in the last 3 months from 3.7% the previous 3 months. On a YoY basis, the slowdown was only from the 4.0% range to 3.7% in July. In the 5 years to 2019, the average annual growth rate was 1.9%.

BTW:

Americans Are Really, Really Bullish on Stocks The surging stock market has minted millionaires and helped send many Americans’ net worths sharply higher. Many are betting that the rally has more room to run.

As of the second quarter, the number of 401(k) retirement accounts at Fidelity Investments worth at least $1 million reached around 497,000, according to the firm. That is up 31% from a year ago and a record high. 

U.S. households’ stock allocations have steadily inched up this year, according to JPMorgan estimates, and recently accounted for around 42% of their total financial assets. That is the most on record in data going back to 1952. (…)

“This melt up is exactly what any investor should be waiting for,” said William Bohrod, a 67-year-old dentist in Springfield, N.J. “The most conservative approach is ‘all in, all the time.’”

Bohrod says the big stock gains in recent years have helped him pay for a boat at his vacation house on the Jersey Shore. He is optimistic about the market and doesn’t plan to touch any of his holdings.

Professional investors have also embraced the rally. (…)

“We’re bullish, and to our clients we say now is an opportune time to invest,” said Thorne Perkin, president at Papamarkou Wellner Perkin, a multifamily office.

• “What Me Worry: My “Euphoriameter” indicator (which incorporates investor confidence signals from valuations, surveys, and risk pricing) not only shows no worries from the Aug-bust, but has actually gone on to new all-time highs. And why not? Investors got rewarded for buying the dip and the Fed is keen to keep the party going.” (Callum Thomas)

Source:  Topdown Charts Professional

• This has been one of the most anticipated Fed rate cut cycles. (The Daily Shot)

Source: MRB Partners

Threat of Strike This Fall Hangs Over U.S. Ports Officials at the dockworkers’ union will meet next week to discuss walkout plans at ports from Maine to Texas if demands for a 77% wage increase aren’t met

(…) Fears of a strike have prompted importers this year to pull forward orders for goods ahead of the fall retail shopping season, causing an earlier-than-usual flood of cargo, and pushing up shipping rates. “The prospect of an East Coast shutdown comes up in every client meeting,” said Nathan Strang, director of ocean freight at freight forwarder Flexport.

The early surge of cargo is exacerbating strains on ocean shipping networks caused by attacks by Yemen’s Houthi rebels on commercial vessels in the Red Sea. Diversions of containerships away from the Suez Canal that opens into the Red Sea are adding 10 days or more to sailing times from Asia to the U.S. and Europe, eating up cargo capacity as ships take longer routes around the Horn of Africa.    

Almost 1.4 million containers, measured in 20-foot equivalent units, were shipped from Asia to North America in June, a record for that month, according to transportation data firm Xeneta. The average short-term contract rate to ship a 40-foot container from Asia to the U.S. East Coast at the end of August was $9,518, the firm said, more than double the cost in April.

Port tensions are mounting at a time when dockworkers from Germany to Australia have slowed and stopped operations in disputes over pay and working conditions. Last year, U.S. West Coast dockworkers sporadically disrupted cargo flows from Washington state to California during tense talks. (…)

MANUFACTURING PMIs

Eurozone: Eurozone manufacturing remains in contraction, weighed down by Germany and France

The HCOB Eurozone Manufacturing PMI, a measure of the overall health of eurozone factories compiled by S&P Global, registered 45.8 in August, as was also the case in both June and July, thereby signalling another solid deterioration in operating conditions across the euro area manufacturing sector. The headline index has registered in sub-50.0 territory on an ongoing basis since July 2022.

Of the nations covered by the PMI surveys, it was the euro area’s big-two economies – Germany and France – that provided the strongest drags on aggregate factory performance in August. In both instances, manufacturing conditions worsened. The only countries that registered growth were Greece, Spain and Ireland, although in the former two, rates of improvement slowed.

Factory performance was dented by a further steep contraction in new orders during August. The decline in total sales was the most pronounced in the year-to-date and broadly in line with that seen on average across the current 28-month period of shrinking demand. Weaker intakes of new export business were also recorded, with the rate of decline its steepest for eight months.

A sharper downturn in sales placed a greater onus on eurozone manufacturers’ backlogs as a means to support production. Indeed, outstanding business volumes fell at the fastest rate since February. The decline in output slowed slightly and was markedly softer than that for new orders.

Nevertheless, retrenchment and cost-cutting efforts were seen across the survey data in August. Purchasing quantities decreased at a pace that was not only substantial, but also the strongest since April. For a nineteenth month in a row, the volume of inputs held as stock contracted, while inventories of finished products likewise fell. Rates of decrease did slow in both cases, however.

Meanwhile, factory employment levels within the eurozone were reduced further midway through the third quarter, extending the current run of job cutting to 15 months. Lower staffing numbers coincided with another month in which business confidence weakened. Overall expectations for output growth in the year ahead were at their weakest since March and below the series long-run average.

For a third consecutive month, eurozone manufacturers reported an increase in their overall input costs. The rate of inflation slowed fractionally but held close to July’s 18-month high. Despite sharp and sustained contractions in new orders, eurozone goods producers lifted their prices charged for the first time since April 2023. The extent of the increase in selling prices was only modest, however.

China: Manufacturing sector conditions improve as new orders return to growth

The headline seasonally adjusted Purchasing Managers’ Index™ (PMI®)  rose to 50.4 in August, up from 49.8 in July. Rising past the 50.0 neutral mark, the latest data signalled that conditions in the manufacturing sector improved following the brief deterioration in July. The rate of improvement was only marginal, however.

Manufacturing production expanded for a tenth successive month in August, led by firms in the consumer and intermediate goods sectors. Although modest, the rate of growth accelerated from July’s low as incoming new orders returned to expansion. Survey respondents revealed that better underlying demand conditions and promotional efforts underpinned the latest rise in new orders.

Export orders were subdued, however, falling marginally for the first time in the year-to-date amid reports of deteriorating external conditions. (…)

Some relief on price pressures was observed with average input costs falling fractionally for the first time in five months. Survey respondents often linked the decline to the lowering of raw material prices. In turn, Chinese manufacturers reduced their selling prices, with some firms indicating offering discounts to remain competitive. (…)

Japan: Manufacturing sector moves closer to stabilisation in August

The headline au Jibun Bank Japan Manufacturing Purchasing Managers’ Index™ (PMI) recorded 49.8 in August, up from 49.1 in July and indicative of a fractional contraction in the health of the Japanese manufacturing sector.

Latest data showed a renewed increase in output in August that was the second in the past three months. The rate of growth was modest, yet reached the highest since May 2022. Firms also signalled a softer preference for the use of existing inventories, with the rate of accumulation stagnating on the month. There were also reports of improving new order volumes, which declined again in August albeit at a softer rate than that seen in July. New export volumes meanwhile declined at a solid rate that was the most marked since March amid evidence of low demand from key export markets including Mainland China and South Korea.

(…) prices data showed that showed input price inflation picked up in August. Input prices rose to the steepest degree since April 2023. The weak yen and higher raw material prices were cited as key sources of inflation. Firms responded by raising their own charges, though at the softest rate since June 2021. (…)

Bank of Canada poised to cut rates again in widely anticipated move Economists and investors are nearly unanimous in predicting the central bank will lower its benchmark interest rate to 4.25 per cent

ABOUT SEASONALITY

From Callum Thomas:

Seasonal Uptick in Seasonality Commentary: here’s a quick look at the monthly seasonality stats table, this one covering all years — September does boast the worst stats. It has the lowest (and negative) average returns, and the lowest probability of gains. But…

(…) a couple of caveats.

First, 45% is pretty darn close to 50/50 — i.e. you could state that there’s only a 55% chance the market drops in Sep based on historical probabilities. Further, note the best vs worst Septembers; in one year Sep saw 9% gains.

In other words, be mindful of seasonality, but note that it is just historical statistics — and when we look at historical averages we need to remember that there are distributions around the average, exceptions to the rule. Your mileage may vary.