Manufacturing PMI Dec22
Manufacturing data is a forward indicator for earnings and trends especially New Orders which have been contracting and in December we had the sharpest decline since 2008-2009.
December US PMI Composite Output at 44.6 (November: 46.4). 4-month low.
December US Services Business Activity Index at 44.4 (November: 46.2). 4-month low.
December US Manufacturing Output Index at 46.0 (November: 47.4). 31-month low.
December US Manufacturing PMI at 46.2 (November: 47.7). 31-month low.
US private sector signaled further decline in output in December. Business activity fell at sharpest rate since May 2020. Manufacturing and service firms registered steeper decreases in output as a result of:
1. Weaker demand conditions
2. Still elevated inflation
3. Rising rates
Quicker decrease in New Business. Purchasing power pressures led to strong decline in New Orders. Weak demand broad based but New Orders WEAKER with steeper decline than service. New export orders also contracted further in December.
Average input prices have been in a deceleration since June and this month continued their pattern of increasing at a softer pace. Reduced demand for inputs reduced supplier price hikes. A positive here to stabilize the rapid supply side price increases since the pandemic but how far can it go before it can become a problem on the other side of spectrum.
Looking at service sector, there has also been a steep decline in activity and output. The fastest 4 month decline with this month being the quickest since October 2009.
The service decline was led by the decline in New Orders as all these parts are interrelated.
Customer spending has been impacted by: 1. Higher cost of debt and capital 2. Housing and financial sector weaknesses 3. Inflationary pressures.
Service sectors continued to increase their workforce in December with marginal increase. Business expectations remained upbeat but still at lowest confidence in 2 years so let’s put that in perspective.
New Orders (forward indicator for earnings and trends) had the sharpest decline since 2008-09 with customer spending down significantly causing further decline in production levels.
The positive is that inflationary pressures subsided this month with improvement in supplier delivery times. Lower demand for inputs causing the slowest rise in costs since July 2020. Lower prices for fuel and metal especially steel. Although, these are all positive and moving in the right direction (downward) I don’t believe we can claim victory that inflation is coming down to 2%. We may remain at an elevated new level of inflation in the 3-4% range for some time as many inflationary costs are very sticky and embedded at all levels. The higher rates will take time to work through the system which should present further challenges to markets as costs of debts and capital rise. Patience is key.
“Business conditions are worsening as 2022 draws to close, w/steep fall in PMI indic of GDP contracting in the fourth quarter at about an annual rate of 1.5%”
Customer demand is weakening so manufacturing and services firms have slowed their hiring and been more cautious so job growth is slowing.
The positive, as there is always a positive, is that weaker demand has taken pressure off of supply chains which had many issues especially exceptionally long lead times. In December there was a 2nd consecutive month of faster delivery times which signals 2 important positive trends:
1. Improving supply chains and conditions
2. A shift of pricing power from sellers to buyers which can facilitate savvier pricing as buyers markets tend to favor the buyers who want better pricing.
Price pressures are moderating sharply. Input cost inflation cooled the most in 13 years, this month in December except for lockdown related drop in April 2020. (COVID data is an outlier for many situations)
This PMI data is suggesting that the FED rate hikes are effective in cooling inflation but there are systemic risks mounting such as economic costs and recession risks, very possibly stagflation.
Let’s remain positive and flexible as things can change quickly, however, keep an eye on the data and proceed with caution to remain liquid amidst tightening liquidity and be aware that most real assets can exhibit NEGATIVE returns in a Stagflationary environment.