The announcement of the Institute for Supply Management’s April 2023 State of US Manufacturing report wasn’t exactly what we’d call “good news.” And the reason it recorded that the Purchasing Managers’ Index (PMI) was for the fifth month in a row below 50%.
More specifically, in April it was at 47.1%, i.e. below 50% which is the limit below which we talk about contraction. The percentage was a little better than the previous month, which was 46.3% but it is not going to be a negative indicator.
Things are getting worse as 73% of the total manufacturing GDP is now shrinking, while in March the corresponding figure was 70%. On the contrary, the percentage of manufacturing GDP decreased where the PMI was below 45%.
Five categories of manufacturing industries recorded growth, while eleven recorded decline. Slightly more optimistic was the PMI index announced by S&P for April, which was 50.2%, that is, just above the 50% mark.
Added to this not-so-good news is another: in the US, demand for diesel oil has fallen in recent months, partly because there is a slowdown in transport, and it is estimated that many motorists are likely to want to cut costs of. All this also points to an impending recession.
In particular, demand for refined products including diesel fell 6% in the first quarter of 2023 compared to the same period a year ago.
This has to do with the decline in transport, trucking and trains in particular, where industry representatives are already talking about a sectoral recession. In contrast, demand for gasoline, which has more to do with private transportation and travel, did not have the same decline, as the decline compared to the same period a year was about 2%. And this despite the recent reduction in fuel prices. In the summer, when leisure travel increases, demand is expected to increase, but estimates are that it will be lower than last year.
The decline in growth
Against this background, the decline in growth rates recorded in the first quarter of 2023 is interesting. On an annual basis, US growth grew by 1.1% in the first quarter of 2023.
This is a relatively sharp deceleration from the 2.6% rate recorded in the final quarter of 2023 and was well below the 2% that experts had been converging on.
This retreat becomes more pronounced if we see that in the same period other countries have done better than expected, with the most notable example being the Chinese economy which registered an annual growth rate of 4.5% for the first quarter of 2023, proving that the decision of the Chinese government for a radical policy change in relation to the restrictive measures for the pandemic led to a significant increase in consumption and overall stimulation of economic activity.
At the same time, inflation still does not appear to be abating, as two indicators related to US inflation continued to move higher.
First, the Labor Department’s labor cost index had a 1.2% increase in the first quarter of 2023, above the 1% rate in the final quarter of 2023 and slightly above economists’ estimates of 1.1%. However, in some categories of employees, there was a decline in the rates of salary growth.
At the same time, the Personal Consumption Expenditure (PCE) Price Index, an index that does not include the prices of products that have a high degree of variation due to seasonal factors such as energy and food, i.e. essentially an index of “structural” inflation, which in fact always closely monitored by the FED, it insisted in March at 4.6%, above forecasts, while there was also an upward correction of the index for February to 4.7%.
This means that it is unlikely that the FED will change course on interest rate hikes at this time, as long as inflation persists.
Signs of Recession and Policy Dilemmas
The persistence of inflation, even though it seems that some signs of a decline in economic activity are beginning to be recorded, a decline which is, after all, the ultimate goal of raising interest rates, forms a relatively difficult field for policy growth.
And this is because the balance should be sought between dealing with inflationary policies and avoiding a recession that could have overall negative effects.
In fact, at the beginning of April, Bank of America announced that there are increasing signs that the American economy will enter a recession, despite the strength of both the labor market and private consumer spending.
In particular, the bank highlighted the following parameters: (a) the decline in industrial activity, with signs of shrinking manufacturing, (b) the decline in orders resulting from the decline in industrial activity, (c) the decline in earnings per share (EPS) ), (d) the potential inversion of the bond yield curve, and (e) the decline in oil prices.
