NAM: Monday Economic Report
Manufacturing production edged down 0.1% in June, pulling back after rising 0.9% in May. Motor vehicles and parts production plummeted 6.6% in June, with the chip shortage and supply chain issues continuing to restrict activity. Excluding motor vehicles, manufacturing production increased 0.2% in June, a disappointing but at least positive reading.
Manufacturing capacity utilization ticked down from 75.4% in May, the highest since January, to 75.3% in June. Since February 2020, output in the manufacturing sector is down 0.8% from pre-pandemic levels. Moving forward, I would expect for manufacturers to be back to pre-pandemic levels in the third quarter, with production rising 6.3% and 3.3% in 2021 and 2022, respectively.
Regional manufacturing surveys from the New York and Philadelphia Federal Reserve Banks reflected significant expansions in activity in July, with the Empire State Manufacturing Survey’s headline index jumping to a record high. Input costs also rose sharply once again in both surveys. The Philly Fed report noted record expected growth in hiring over the next six months.
Consumer prices soared 0.9% in June, the largest monthly gain in three years. Excluding food and energy, consumer prices also increased 0.9% in June, matching the reading in April, which was the strongest pace since April 1982. The consumer price index has risen 5.3% year-over-year (seasonally adjusted), the fastest growth since September 2008, and core inflation (which excludes food and energy) increased 4.5% year-over-year, the most since November 1991.
Meanwhile, producer prices for final demand goods and services rose 1.0% in June, with 7.1% growth (seasonally adjusted) over the past 12 months, the biggest on record. Core producer prices have increased a record 5.5% since June 2020.
Manufacturing leaders continue to cite supply chain disruptions as a key challenge, and the data reflect additional sharp rises in raw material prices. While some of these increases will likely be transitory, there will also likely be some cost pressures that will not abate, particularly given the strength of the rebounding economy. That will put pressure on the Federal Reserve and its stance of keeping rates near zero with aggressive bond-buying for the foreseeable future.
In my view, the Federal Open Market Committee will start the process of tapering asset purchases by year’s end (if not in the coming months), with the federal funds rate edging higher by mid-2022.
Even so, Federal Reserve Chair Jerome Powell’s congressional testimony last week continued to suggest that the Fed was not yet ready to alter its current path on asset purchases and rates.
Yet, consumer sentiment slipped to a five-month low in preliminary data, largely on worries about pricing pressures in the economy, according to the University of Michigan and Thomson Reuters.
More encouragingly, retail sales rose 0.6% in June, but spending on motor vehicles and parts fell 2.0% for the month. Excluding automobiles, retail spending increased 1.3% in June. Overall, retail sales have jumped 18.2% since the pandemic began, and with motor vehicles and parts excluded, spending soared to an all-time high, up 16.4% over the past 16 months.