US Manufacturing on Fire, Inventories Crashing

Summary

US manufacturing data continues to surpass expectations but sharply declining inventories look set to trigger a new wave of supply chain concerns. Global manufacturing momentum remains a tailwind for the US. 

Another huge beat for US manufacturing data set the tone on Monday. February’s ISM manufacturing survey results came in well above expectations for all major categories, most notably prices paid. The headline, employment and prices paid series are now accelerating away from one-year averages. New orders remain elevated but are outperforming the one-year average by a shrinking margin.

These comparisons will grow more challenging as the worst of the sudden stop falls out of the window, though less problematic than year-over-year comparisons. 

Less well publicized were sharp declines in ISM Manufacturing surveys for customer and business inventories. The index for customer inventories has crashed to just 32.5 as retailers and wholesalers struggle to maintain stocks. 

Manufacturing inventories further upstream also declined. The first wave of restocking demand after the reopening is fighting rising frictions in the shipping industry. Given the flood of stimulus and pent-up savings, further supply constraints seem inevitable. 

That realization is making its way into earnings discussions this quarter as expected. Three sectors in particular, technology, industrials and consumer discretionary, are seeing supply chain mentions in the management discussions shoot higher again.

In contrast to the sudden stop last year, other industries like consumer staples, health care and materials are not yet seeing these discussions return to the forefront. 

Supply chain concerns have not yet bubbled up to financial news outlets to the same degree. We monitor on-air mentions of supply chain issues and other topics via the Television News Archive. The chart shows rolling monthly totals for mentions of supply chain keywords on financial news networks. Only Bloomberg saw a material rise in discussions in recent weeks, followed by a modest pullback.

Overall, discussions are nowhere near their peak during the sudden stop when these issues were at the front of investors’ minds. 

Supply chain frictions may continue to build in some industries but the resilience of global manufacturing should still remain a tailwind for the US. The chart shows our Economic Strength Indices for industrial production data across the world’s largest economies. ESIs measure incoming data relative to one-year averages just as we did at the top of this post.

All regions are seeing industrial production and relative econ data outperform one-year averages. All but the Asia Pacific region have seen that margin of outperformance grow in recent weeks. The window of opportunity for significant disruption to manufacturing activity before the next stage of reopening is closing quickly. 

Our last update highlighted four categories where we expected to see strength in global manufacturing help pull the US higher this spring. The last charts show four-week averages of search activity relative to three-month forecasts for these key categories. 

We have already seen US activity improve relative to forecasts and begin to converge with stronger global activity in construction and industrial materials. We expect to see further convergence in chemicals and manufacturing as well.  

Not long ago the optimistic case was for residual momentum in housing and manufacturing to help carry the rest of the US economy to the post-vaccine reopening. Now we are watching industrial activity gaining momentum instead of just conserving it. This should help investors put the rising yields in context. 

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