U.S. MANUFACTURING PMIs
Another episode of conflicting PMI surveys. As usual, everybody is focusing on the ISM survey:
US Factory Activity Contracts as Orders Slide, Output Weakens ISM May factory index fell to three-month low of 48.7, new orders decreased by most in two years
US factory activity shrank in May at a faster pace as output came close to stagnating and a measure of orders fell by the most in nearly two years.
The Institute for Supply Management’s manufacturing gauge fell 0.5 point to 48.7, the weakest in three months, data out Monday showed.
The purchasing managers group’s measure of new orders slid 3.7 points, the biggest drop since June 2022, to 45.4 in May. The bookings index now stands at the lowest level in a year, suggesting demand across the economy is weakening. As a result, ISM’s production index slipped to 50.2.
Seven industries reported contracting activity in May, led by wood products, plastics and rubber, and machinery. Seven sectors reported growth.
“Demand remains elusive as companies demonstrate an unwillingness to invest due to current monetary policy and other conditions,” Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement. “These investments include supplier order commitments, inventory building and capital expenditures.”
The figures indicate US manufacturing is struggling to gain momentum due to high borrowing costs, restrained business investment in equipment and softer consumer spending. At the same time, producers are battling elevated input costs.
“I think we plateaued,” Fiore said on a call with reporters. “Without some kind of movement on the monetary side here, we’re probably sitting where we’re going to sit for quite some time.”
One hopeful sign for domestic producers was a gauge of export demand grew for the third time in the last four months.
Another was a pickup in factory employment. The group’s measure climbed to 51.1 in May, the highest since August 2022 and suggesting producers are having more success securing labor.
John Authers piled in:
The ISM survey of supply managers in manufacturing, published on the first day of each month, therefore came as a nasty shock. The overall level was consistent with a recession. And in a nasty surprise, new orders dropped sharply, below the score for inventories. This is generally a signal that any restocking cycle is over, and that companies will find themselves producing less:
I have combed the media as usual, but failed to find any mention of S&P Global’s own PMI survey, also out Monday morning (actually 15 minutes before the ISM).
S&P Global’s headline:
Renewed increase in new orders in May
The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI®) rose to 51.3 in May, after having posted in line with the 50.0 no-change mark in April. The reading signaled a modest improvement in the health of the manufacturing sector, the fourth in the past five months.
May saw a renewed expansion in new orders, following a modest reduction in April. While customer demand improved during the month, overall economic conditions remained muted, according to respondents. As such, the rate of expansion in new orders was only marginal.
In fact, the rise in total new business was softer than that seen for new export orders, which increased at the fastest pace in two years. Firms reported signs of improving demand in Europe, alongside growth in new orders from Asia, Canada and Mexico.
The increase in new orders, alongside better material availability, led manufacturers to expand production at a solid pace in May, with the rate of growth quickening from that seen in April.
Firms were also confident that production will rise over the coming year, thanks to optimism that the renewed expansion in new orders will be sustained in the months ahead. Plans to increase capacity also contributed to positive sentiment.
Optimism regarding future new orders and production requirements encouraged manufacturers to take on additional staff, raise purchasing activity and accumulate stocks of finished goods.
Employment increased for the fifth consecutive month, and at the fastest pace since July 2023. Alongside positive expectations, higher staffing levels also reflected the filling of previously vacant positions.
Meanwhile, the rise in purchasing activity in May was the first in three months, but only marginal. The expansion in input buying was not sufficient to prevent a further reduction in stocks of purchases, but it at least restricted the pace of depletion to the weakest in the current three-month sequence of falling inventories.
Stocks of finished goods on the other hand increased for the second month running, and to a larger extent than in April. Expansions to capacity and recent muted demand conditions meant that manufacturers continued to lower their backlogs of work. The pace of depletion was only slight, however, and the weakest since February.
The rate of input cost inflation continued to accelerate, quickening for the third consecutive month to the fastest since April 2023. The latest increase was also sharper than the pre-pandemic average. Higher costs for aluminium and copper in particular, and metals more generally, were reported, as were increased fuel costs feeding through to rising transportation prices.
With input costs increasing sharply, firms also registered a rise in selling prices, although here the pace of inflation eased from April to a five-month low. Finally, suppliers’ delivery times were broadly unchanged in May.
Interestingly, Reuters’ yesterday piece on world PMI surveys quoted S&P Global for all the countries it discussed except the U.S. where it quoted the ISM.
I have often explained why S&P Global’s survey is superior to the ISM. For objectivity, I asked Perplexity to provide more details. Basic AI in action:
The ISM Manufacturing PMI and the S&P Global Manufacturing PMI are two closely watched surveys that measure the health of the US manufacturing sector, but they often diverge due to differences in methodology.
Key Differences
- Sample Size: The ISM survey covers a relatively small sample of around 300 manufacturing firms, while the S&P Global survey samples over 800 companies.
- Firm Size: The ISM survey is skewed towards larger companies, while the S&P Global survey has a more balanced mix of small, medium, and large firms.
- Seasonal Adjustment: The surveys use different methods for seasonal adjustment. S&P Global uses X-13ARIMA-SEATS, while ISM uses an in-house technique.
- Weighting: The ISM PMI is an equally weighted average of its components, while the S&P Global PMI is weighted based on industry contributions to GDP.
While both surveys are valuable indicators, their differences in sample composition and calculation methods can lead to contrasting signals, especially during periods of economic transition.
Based on the provided search results, the S&P Global Manufacturing PMI survey has been more accurate than the ISM Manufacturing PMI in reflecting actual manufacturing output and new orders data over the past 10 years.The key evidence supporting this is:
- Statistical analysis from 2007 to 2018 showed the S&P Global Manufacturing PMI had consistently higher correlation coefficients and adjusted r-squares compared to the ISM PMI when regressed against official output and new orders data. This indicates the S&P Global PMI was more closely aligned with the actual manufacturing activity.
- The analysis found that the ISM PMI tended to overstate manufacturing growth, especially in 2017 and 2018, while the S&P Global PMI provided more accurate signals. The ISM PMI overstated output growth in 24 out of 28 months leading up to December 2018.
- The S&P Global PMI’s broader sample, including a better mix of small, medium and large firms, likely contributed to its superior performance in tracking the overall manufacturing sector compared to the ISM’s bias towards larger companies.
- Methodological differences, such as the ISM’s equal weighting of components versus S&P Global’s GDP-weighted approach, and varying seasonal adjustment techniques, also impacted the accuracy of the two surveys.
While both surveys are widely followed indicators, the evidence from the provided sources suggests that over the past decade, the S&P Global Manufacturing PMI has outperformed the ISM survey in providing more reliable and accurate signals about the actual health of the U.S. manufacturing sector.
Tomorrow we get the more consequential services PMIs. As a preview, here’s what S&P Global wrote in its flash PMI survey released May 23rd:
The headline S&P Global Flash US PMI Composite Output Index rose sharply from 51.3 in April to 54.4 in May, its highest since April 2022. The 3.1 index point rise (the largest gain for 15 months) signals a marked acceleration of growth midway through the second quarter. Output has now risen continually for 16 consecutive months, with May’s acceleration contrasting with the slowdown seen in March and April.
May’s improved performance was led by the service sector, where business activity surged higher to register the fastest growth for a year, reversing the slowdown seen over the prior three months. Services activity has now risen for 16 straight months. Inflows of new work into the service sector also picked up, having slipped into decline in April, registering one of the strongest gains seen over the past year, though demand was again subdued by a further fall in services exports.
Yesterday, markets reacted to the bearish ISM release, on the heels of last Friday’s weak consumer spending data for April. The strong flash PMI however noted that
Employment fell for a second successive month in May, contrasting with the continual hiring trend seen over the prior 45 months. The overall reduction in workforce numbers was only very marginal, however, and less than witnessed in April, as an upturn in manufacturing payrolls was accompanied by a slower rate of job shedding in services.
While factory jobs grew at the fastest rate for ten months in May, buoyed by rising order books and improved business prospects, services employment has now fallen for two successive months, albeit in part due to staff shortages.
Let’s see what tomorrow’s releases reveal and how this will translate into the May employment report on Friday.
Vehicles Sales Increase to 15.9 million SAAR in May; Up 2.5% YoY
Wards Auto released their estimate of light vehicle sales for May: May U.S. Light-Vehicle Sales Continue 2024 Trend of Slow, Steady Growth (pay site).
Further confirming as a theme for 2024, growth in May largely was centered in the most affordable CUV and car segments. Other sectors during the first five months of 2024 have either recorded sporadic gains or fell into steady decline, including some, such as fullsize pickups, that are coming off lengthy periods of strong results. Sales in May (15.90 million SAAR) were up 1.0% from April, and up 2.5% from May 2023.
Flat for the past 12 months.
Majority of Middle-Class Americans Say They Struggle Financially A third of respondents feel ‘extreme stress’ about paying debt
(…) In the large poll of 2,500 adults, conducted by the Urban Institute think tank, 65% of people who earn more than 200% of the federal poverty level — that’s at least $60,000 for a family of four, often considered middle class — said they are struggling financially.
A sizable share of higher-income Americans also feel financially insecure. The survey shows that a quarter of people making over five times the federal poverty level — an annual income of more than $150,000 for a family of four — worry about paying their bills.
Overall, regardless of the income level, almost 6 in 10 respondents feel that they are currently financially struggling. (…)
About 40% of respondents were unable to plan beyond their next paycheck, and 46% didn’t have $500 saved. The February poll found that more than half said it’s at least somewhat difficult to manage current levels of debt. (…)
The poll also highlights the divide between debt-free households who are sheltered from the impact of rising rates and families who are overwhelmed with ballooning loan and credit-card payments. One third of the respondents said they have no debt at all.
The responses on savings also show wide disparities. About one in five respondents have at least $10,000 saved, but 28% have no savings at all. Overall, one in six said they have to make tough decisions on which bill to pay first on a regular basis. (…)
Some of the findings tracked with the Federal Reserve’s annual survey of household economics and decision making, published last month. In that poll, close to half of respondents could cover a $2,000 expense, but 18% of adults said the largest emergency cost they could handle right now using only savings was under $100, and 14% said they could afford an expense of $100 to $499.
Since the pandemic, core CPI is up 18.8% but my “CPI-Essentials” series (food,energy, shelter) is up 24.0%.
Similar dichotomy in corporates:
Big Tech Companies Unplug Stock Market From Reality The big-vs.-small-stocks phenomenon reflects the same disconnects we see in the broader economy
The average stock in the S&P 500 is hurt more by rising yields—and helped more by falling yields—than any time this century. Yet the S&P itself is far less affected by the outlook for interest rates, because the Big Tech stocks that make up so much of the standard, value-weighted index are insulated from the Fed by their enormous cash piles. (…)
The valuation split is clear. Divide the market into tenths by size, and the valuation of the groups rises fairly steadily as company value rises. Valuation isn’t as vertiginous, either: The median stock in the S&P trades at 18 times forward earnings, against more than 21 times for the Big Tech-dominated index. (To be clear, that still isn’t cheap by historical standards.)
The sensitivity to interest rates can be gauged by comparing the ordinary S&P 500, which gives more weight to larger companies, and the equal-weighted version, which treats tiddlers the same as titans to measure the average stock. The ordinary S&P is up over 10% this year through Friday, while the equal-weighted version is up less than 5%.
The link to bond yields is also split, with the average stock more strongly linked to bond yields—rising when they fall, and vice versa—than any time since 1999 over a 100-day period. The gap between this correlation and that of the ordinary S&P, which has a much weaker link to Treasury yields, is unprecedented in data back to 1990. (…)
The Big Tech stocks that dominate the market sit on huge cash piles, while the biggest companies chose to lock in low interest rates for a long time by refinancing their bonds before the Fed began raising rates in 2022. Smaller companies tend not to have cash piles on which to earn fat savings interest and have more need to issue bonds to raise cash. The smallest don’t even have access to the bond market, one reason the Russell 2000 index of smaller companies has lagged so far behind the S&P this year, eking out a gain of just 1.6%. (…)
ECB Rate-Cut Expectations Start to Unravel Before First Move Strong wage growth risks slowing return of inflation to 2%
While most economists still foresee quarterly reductions following this week’s initial move, some reckon sticky inflation, rapid wage growth and surprisingly robust euro-zone output will constrain monetary loosening.
Traders, too, have pared easing bets, reinforced by Executive Board member Isabel Schnabel and Bundesbank President Joachim Nagel seeming to take July off the table, as Austria’s Robert Holzmann said two decreases in 2024 may suffice.
Cautious officials fret that lowering borrowing costs at consecutive meetings could prompt markets to take that pace as their baseline. They may also have less confidence than some of their colleagues that ECB policy can truly diverge from the Federal Reserve, which is likely to stay on hold for a while yet.
A key gauge of euro-zone pay that policymakers had hoped would show inflation had finally been conquered failed to moderate — indicating price pressures, particularly in the services sector, may take longer to ease. Indeed, inflation picked up to 2.6% last month from 2.4% in April — more than expected.
At the same time, the 20-nation economy bounced back more resoundingly than anticipated after the mild recession it suffered in the latter half of last year, with the labor market staying resilient, unemployment recently hitting an all-time low and business surveys even showing signs of life at struggling manufacturers. (…)
Almost half of respondents in a Bloomberg survey before the ECB’s April meeting anticipated four or five rate reductions in 2024. Nobody predicts five anymore, and the share that sees four has declined.
Similarly, markets — having priced three reductions for this year as recently as April — have now ruled out July and only put the chances of a September step at 60%. (…)
“In the past, a first rate cut was always followed by further rate cuts to support growth and/or to response to a crisis.” said Carsten Brzeski, ING’s head of macro. “This time around, however, there’s none of these two. Therefore, there’s a high risk that the ECB could be forced to move from ‘one is none’ to a ‘one-and-done’ stance.”
Joblessness rose by a seasonally adjusted 25,000 in May, while economists polled by Bloomberg had expected a gain of just 7,000. The unemployment rate held at 5.9%, the Federal Labor Agency said Tuesday. (…)
An early indicator by the German Institute for Employment Research fell last month, with researcher Enzo Weber saying the labor market’s strength during the economically weak winter means there’s limited recovery potential now.
Analysts reckon households will be an important growth driver, mainly as their incomes continue to catch up to the inflation experienced in recent years. Real wages rose at a record pace in the first three months of the year and are expected to increase further in the coming quarters.
China sees property silver lining but can’t shake Japan comparisons
A plunge in China’s new housing construction is fuelling hopes the battered property sector is finally coming to terms with chronic oversupply, but a clean-up of bad assets is the missing policy piece that keeps Japan-like stagnation fears alive.
On paper, the world’s second-largest economy is almost where the U.S. and Spain were when their late 2000s property crises began to stabilise, with new Chinese housing construction now at less than half its 2021 peak.
This could indicate, analysts say, that home building activity may find a bottom within a year or so, removing some of the weight China’s real estate troubles are placing on economic growth.
New home starts in China fell 63% from their peak to 634 million square metres (7.46 billion square feet) in the 12 months through April.
Taking into account demographics and other factors, the International Monetary Fund estimates fundamental demand for housing in China to average 950 million square metres over the next 10 years.
Some of the demand would have to absorb China’s giant existing inventory, therefore the Fund projects new housing starts to average 715 million square metres – slightly above current rates.
This could mean real estate investment, whose steep 10% back-to-back annual declines JPMorgan estimates chopped 1.5 percentage points off China’s economic growth in each of the past two years, may be close to finding a floor.
George Magnus, research associate at Oxford University’s China Centre, says that could come in 2025 or even sooner. (…)
New home prices in China have fallen 11%, according to official data. JPMorgan estimates prices for older apartments dropped by a similar amount.
The 30-40% peak-to-trough plunge in the U.S. and Spanish downturns started in 2006-07 and lasted more than five years. In Japan, the correction took more than 18 years, pushing prices down by 47% in the end.
So far, China’s pace has matched Japan’s. Odds are that it will continue to do so, analysts say.
What’s missing from both the Chinese and Japanese responses to the crisis is an early recognition of losses.
Japan asked banks to purchase land to slow down the fall in prices. China achieves something similar by placing limits on how much developers can lower new home prices and through a drip-feed of other support measures.
JPMorgan analysts say this is “perhaps an intentionally chosen strategy to mitigate financial spillover risks.”
A stock of unsold homes estimated at almost twice the size of London still exists on the balance sheets of cash-strapped Chinese developers, whose debts sit on the books of banks and other institutions.
By contrast, the United States spent an initial 5% of gross domestic product to absorb toxic assets from financial institutions through its Toxic Asset Relief Program. Spain created a bad bank.
China is not keen on sweeping bailouts, one policy adviser said, asking for anonymity to discuss a sensitive topic.
“The government has no intention to prop up the property market,” the adviser said. “It aims to stabilise it, or at least slow down its decline.” (…)
Analysts say the purchases transfer bad assets from developers to local governments, delaying writedowns. But eventually, the losses will have to be recognised, which is why comparisons with Japan’s lost decades persist.
Alicia Garcia-Herrero, Asia Pacific chief economist at Natixis, says local governments may suffer a similar fate to the Japanese banks, which ultimately had to be recapitalised, implying a “longer, more protracted adjustment.”
“There hasn’t been a clean-up,” Garcia-Herrero said. “This is why China looks more like Japan and not like the U.S. or Spain.”
One important difference is that Beijing can indefinitely support local governments, even many of the state-owned banks.
China Vanke’s Sales Slump Eases as Housing Market Picks Up
The value of homes sold gained 11.5% last month from April to 23.3 billion yuan ($3.2 billion), the Shenzhen-based company said. From a year earlier, sales dropped 29.3%, narrowing for a third month. (…) Vanke’s month-on-month improvement in home sales surpassed the 3.4% increase at the 100 biggest real estate companies tracked by China Real Estate Information Corp. (…)
“Vanke’s liquidity challenges are set to persist as long as its contracted sales shortfall continues,” Bloomberg Intelligence property analyst Kristy Hung wrote in a Monday note. “A fundamental recovery in sales is needed to improve the odds of staying solvent through 2025.”
