Today, July 1st, is the first day of the third quarter 2019. As typical some of the earliest economic reporting from June is released. One of the first reports comes from the Institute for Supply Management (ISM) as they compile the manufacturing sector.
As noted in the ISM review, manufacturing growth remains strong with an overall index of 51.7 (anything above 50 is growth), and the results are stronger than initially predicted by the financial media (Wall Street).
The manufacturing production index for June is 54.1 versus last month’s 51.3 (May); generally this means manufacturing outputs are growing, order backlogs are being reduced, orders are being fulfilled faster. This is an indication that new production investment is now coming on-line and delivering actual products from orders.
In the past CTH had noted the heavy Main Street investment which began in 2017 would start to come on-line in Q2 2019, it generally takes about two years for a new manufacturing facility to start producing, and then increases in production efficiency follow. The ISM result shows we were pretty close with that forecast.
Within the review there are particular notes for additional interest. First, the June manufacturing employment index is 54.5, very strong; (last month 53.7). In essence manufacturers are hiring at a fast rate. One cause is better weather (seasonal), and the majority cause is filling the jobs from new production facilities coming on-line.
Secondly, and very interestingly, the June price index is 47.9 (deflation) and reflects a very significant drop in manufacturing material prices from May’s 53.2 index. This is exactly the opposite result of what all financial media were claiming would happen based on tariff predictions. The prices of manufacturing materials are lower in June, significantly lower, which will ultimately mean no higher consumer prices.
A key point to note is how lower prices are not driven by excess inventory. The inventory index in June is 49.1 (lower than May’s 50.9). So it’s the actual material cost and production efficiencies driving lower manufacturing prices.
So the question is: “if tariffs are present -even enhanced higher- and not driving manufacturing material prices higher, then what’s lowering that price”?
The answer is likely a combination of two factors:
#1) Global material supply is consistent, but global demand is weak. It’s the U.S. material demand that leads the world. As the U.S. economy is the strongest economy, the in-bound manufacturing supply costs reflect prices lowered because we are the biggest customer (and strongest need).
#2) China has to retain manufacturing position. To retain position Beijing is subsidizing export costs. In essence China is offsetting the tariffs by lowering their prices. Yes, China paying the tariffs – not the U.S. consumer.
When reviewing President Trump’s economic policies in 2015 and 2016, CTH saw the potential for significant Main Street wage growth starting in Q2 2018. The wage result in the second quarter 2018 jumped to 3.4% and has remained in that range for over a year.
At the same time in 2015/2016 CTH saw the potential for significant ‘new’ Main Street manufacturing coming on-line in Q2 2019. We are happy to report all things are on track.
“Against the backdrop of a slower economy and heightened uncertainty on the trade front, the fact that manufacturers are not only hiring but doing so at a faster pace suggests a degree of confidence in the business outlook.”
~ Jim Baird, chief investment officer at Plante Moran Financial Advisors.