U.S. manufacturing activity has declined for the 13th consecutive month, making this an unusually lengthy downturn. The manufacturing purchasing managers index by the Institute for Supply Management (ISM) clocked in at 46.7 (14th percentile for all months since 1980) in November 2023, marking the 13th straight month the index has dipped below the 50-point threshold since November 2022.
Reuters has noted that the current prolonged manufacturing downturn is more common during a cycle-ending recession than with a mid-cycle slowdown. But here’s one positive: the downturn has been very mild, with only a very small decline in manufacturing output as well as associated energy consumption.
Another big positive: the much-larger services sector has actually seen activity accelerating in the third and fourth quarters after a brief slowdown in the first half of the year. The ISM non-manufacturing index grew to 52.7 (21st percentile) in November, up from 50.3 (11th percentile) in May. The services sector is critical for the economy as a whole because not only is it larger than its manufacturing brethren but it’s also more labor-intensive. Although the strength of the services sector is to partly blame for the inflation rates remaining above the Fed target, it has helped to largely offset a much deeper downturn in manufacturing.
Underlying inflation eased again in October, with the Federal Reserve's Multivariate Core Trend (MCT) inflation clocking in at 2.6% in October, from 2.88% recorded in September. The MCT index measures inflation persistence and how broadly price pressures are changing. The Fed has signaled a willingness to restart its rate hike program with inflation pressures well below pandemic levels though the current inflation rate is above the central bank’s 2% target. Consumer prices increased 3.2% last month, way lower than 9.1% year-over-year inflation recorded in June 2022.
Last Friday, Fed Chairman Jerome Powell said the economy is "better balanced," and that "we are getting what we want."
Diesel Demand Resilient
Diesel is the most important fuel for the industrial sector, accounting for 75% of the fuel used in manufacturing and freight transport. It, therefore, comes as a pleasant surprise that diesel demand has not followed a similar trajectory as the manufacturing sector. Diesel and distillate fuel oils demand remained flat in the September quarter compared with the corresponding periods in 2022 and 2021. However, consumption grew by 2% compared with 2022 and 4% from 2021 if you include the fast-growing biodiesel and renewable diesel sector. Related: Crude Oil Tanks Nearly 4% as US Output Overshadows OPEC
With experts predicting that the manufacturing downturn may be drawing to a close, it will be interesting to see how the energy markets respond with diesel stocks already severely depleted. At 16 million barrels, distillate inventories are-13% or -1.15 standard deviations below the 10-year seasonal average. Unlike crude markets where fund managers have become very bearish, speculators are very bullish on diesel demand. Indeed, fund positions in U.S. diesel have jumped to the 84th percentile for all weeks since 2013. In contrast, positions in European gas oil have dipped to the 28th percentile thanks to the region’s weak economy.
Overall, the U.S. economy has been doing far better than feared, thanks in large part to robust consumer spending helping the economy expand at a brisk 5.2% Y/Y clip in the third quarter, better than the government’s estimate of 4.9%. Growth in the third quarter more than doubled from the second quarter when it only increased 2.1% Y/Y.
The majority of economic indicators have been promising. Consumer spending increased 3.6% in the third quarter, a level considered healthy despite being a downgrade from the previous estimate of 4%. Private investment rocketed at a 10.5% annual pace, including a 6.2% increase in housing investment despite higher mortgage rates. After hitting the highest level since 2000, the national mortgage rate has started trending down: the average rate on 30-year fixed mortgages fell to 7.41 percent last week from 7.55 percent the previous week. The decline has been attributed to a slowing job market as well as encouraging signs that the Federal Reserve’s ongoing war on inflation is bearing fruit. Mortgage rates topped 8% in October, a level last seen more than two decades ago.
The U.S. economy has also received a shot in the arm from companies building inventories at a faster clip in anticipation of future sales, a metric that added 1.4 percentage points to quarterly growth. An uptick in spending and investment at both state and federal levels have also contributed to the expansion.
By Alex Kimani for Oilprice.com
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