Government data released this week provided the latest official read on the state of U.S. factories and consumers — two critical pillars of freight demand. Outside seemingly omnipresent natural disaster zones, freight demand has been distinctly cooler in early September, though relative to historic norms it remains strong. As consumption and production patterns settle into a more stable routine — fewer consumer surges, fewer input shortages, and fewer production line outages — freight demand should begin to provide a higher fidelity read on the state of households and businesses. Here are our main takeaways from the most recent numbers.
The consumer sector was remarkably resilient for much of August despite fiscal austerity headwinds.
Consumer spending capped a remarkable three months, rebounding sharply from April’s low and quickly returning to pre-pandemic highs — the second time in two years that consumers have come to the rescue of the U.S. economy. (The first was during the trade war-induced industrial slump last year.) Retail spending was mostly stable in August about 5% above pre-pandemic levels. Credit card data suggest that spending began to dip toward the end of the month, and discretionary spending categories (e.g., sporting goods) are distinctly softer than two months ago. The lapse in federal Pandemic Unemployment Insurance primarily hit lower-income families, but those households were never the consumers driving discretionary spending in the first place. Fiscal policy aside, it’s natural that consumers would begin to cool their credit card swipes: Pent-up demand from the lockdown months is now in the rearview mirror and some degree of balance sheet rebuilding should be expected. Overall, I expect consumer spending to cool further going into the fall.
Industrial output stabilized in August, but we should expect dips at automotive and food processing plants.
Factory output for most sectors remained roughly in line with where it was in July, but the automotive sector was an outlier. Auto industry production declined 9% from July when it had been approaching pre-crisis levels. Though this understates the magnitude of the monthly decline as auto plants typically temporarily shut down for retooling in August, which is reflected in large seasonal adjustment factors for the month. For the most part, that did not occur this year as automakers attempted to recover lost production from March and April, and hit pause for new models. The September numbers should also be worse for nondurable goods (particularly processed food) manufacturers. With large swaths of the western United States’ agricultural heartland disrupted from record wildfire activity, food supply chains could experience a new round of stress.
Factory capacity utilization has reached its plateau.
With the exceptions of aerospace and mining, oil and gas extraction — which are both facing structural headwinds beyond the Covid-19 recession — factory utilization stabilized in July and August at or a few percentage points below long-term averages. Utilization is 3 percentage points below its historic average at food processing plants and 7 points below at paper/paper product factories. The easy wins for increasing factory utilization in a social distancing world have been made; further improvements are going to be harder to come by moving forward.
Producer price pressures are rising.
The Federal Reserve Bank of New York’s Empire State Manufacturing Survey, which was released yesterday and provides the first read on industrial activity for the current month, showed a continued improvement in business conditions among manufacturers in the Mid-Atlantic region. Current conditions are approaching their strongest levels since 2018, and forward-looking (six-month ahead) expected conditions are close to their highest readings since 2017. (I caution against extrapolating too much about future developments from the survey results: The Current New Orders index does a reasonable job at nowcasting current-month outbound load volume from the tri-state region, but the Future New Orders Index fails has no forecasting power.) Perhaps the most relevant point from the survey is the gap between input and sales prices for New York area manufacturers: Upstream price pressures are rising and sooner or later that will be reflected in end-user prices — not necessarily in the rip-roaring inflation of emerging economies, but a more subdued ocean-boiling inflation of production processes under strain.
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