Summary
AIER’s Leading Indicators Index was unchanged again in December, holding at the neutral 50 mark for a third consecutive month. The three-month run joins three other periods of weakness in the Leading Indicators Index over the last decade: a five-month run associated with the 2020 lockdown-induced recession, a seven-month run from January through July 2019, and a six-month string in mid-2016. The Roughly Coincident Indicators Index was unchanged in December while the Lagging Indicators Index posted a second consecutive gain but remains below neutral.
The string of neutral readings for the Leading Indicators Index suggests that a somewhat slower pace of growth may be coming. That slower pace could potentially ease some of the upward pressure on prices. The critical issue will be whether any deceleration in activity comes from softer consumer demand or from production. Some recent data suggest it may be the former while the latter continues to strengthen. Overall, the outlook is for continued economic expansion but with elevated risks from current upward price pressures as well as the recent wave of new Covid cases.
AIER Leading Indicators Index Holds at 50 in December
The AIER Leading Indicators index held steady in December, posting a neutral 50 reading for the third consecutive month. The index is still down 42 points from a reading of 92 in March. Holding steady at the neutral 50 mark may be foretelling somewhat slower economic growth in coming months; caution is still recommended.
Two indicators had offsetting changes in December: real retail sales weakened from a positive to a neutral trend while the treasury yield spread improved from an unfavorable trend to a neutral trend. Among the 12 leading indicators, five were in a positive trend in December and five were trending lower with two trending flat or neutral. Initial claims for unemployment benefits, manufacturing and trade sales to inventory ratio, real new orders for core capital goods, real stock prices, and debit balances in margin accounts were the five indicators maintaining favorable trends while the average workweek in manufacturing, the University of Michigan Index of Consumer Expectations, real new orders for consumer goods, total heavy truck unit sales, and housing permits all remained in unfavorable trends.
Ongoing disruptions to labor supply and production, rising costs and shortages of materials, and logistics and transportation bottlenecks continue to exert upward pressure on prices. Furthermore, continued waves of new Covid cases have the potential to exacerbate these problems. However, businesses remain focused on improving supply chains and expanding production and are likely to be successful eventually. Some recent data reports suggest there may be some progress being made on the production side while somewhat slower consumer spending could help bring supply and demand back to balance more quickly and help reduce price pressures.
The Roughly Coincident Indicators index was unchanged in December, holding at 75 as two indicators changed signals. The consumer confidence in the present situation indicator fell for a second month, dropping from a neutral trend to a negative trend while real manufacturing and trade sales improved from a negative trend to a positive trend. Overall, four indicators were trending higher while one was trending lower, and one was in a neutral trend.
AIER’s Lagging Indicators index increased to 42 in December, up from 33 in November and 25 in October. That was the 24th consecutive month at or below neutral. The average over the last 24 months is 29.2. One indicator – Commercial and industrial loans outstanding improved from a negative trend to a neutral trend – leaving three indicators with unfavorable trends, two indicators with favorable trends, and one with a neutral trend.
Manufacturing-sector Demand Remains Strong Amid Early Signs of Supply Chain Improvement
The Institute for Supply Management’s Manufacturing Purchasing Managers’ Index fell to 58.7 in December, off 2.4 points from 61.1 percent in November. December is the 19th consecutive reading above the neutral 50 threshold but is the lowest reading since a similar result in January 2021. The survey results suggest that the manufacturing sector continues to expand but at a slightly less robust pace.
Demand measures remained strong overall despite a slight pullback in the New Orders Index. The index fell 1.1 points to 60.4 percent in December. It has been above 50 for 19 consecutive months and above 60 for 17 of the last 18 months. The new export orders index, a separate measure from new orders, fell slightly to 53.6 versus 54.0 in November. The new export orders index has been above 50 for 18 consecutive months.
The Backlog-of-Orders Index increased in December, coming in at 62.8 versus 61.9 in November. This measure has pulled back from the record-high 70.6 result in May but has been above 50 for 18 consecutive months and above 60 for 11 consecutive months. The index suggests manufacturers’ backlogs continue to rise at a rapid pace but slower than in early 2021.
The Production Index registered a 59.2 percent result in December, a drop of 2.3 points from November. The index has been above 50 for 19 months and has been trending sideways at a high level, averaging 60.0 over the last nine months.
The Employment Index rose again in December, posting its third consecutive increase and fourth consecutive reading above the neutral 50 level, rising to 54.2 percent. That is the strongest result since April. The run of increases and results above neutral may be an early indication that some of the labor issues plaguing production could start to ease in coming months.
The Bureau of Labor Statistics’ Employment Situation report for December is due out on Friday, January 7th. Consensus expectations are for a gain of 400,000 nonfarm payroll jobs including the addition of 35,000 jobs in manufacturing. Manufacturers have added 49,389 workers per month over the last 18 months for a total gain of 889,000, putting payrolls at the highest level over the recovery, but they are still down about 253,000 compared to pre-pandemic levels.
Customer inventories in December are still considered too low, with the index coming in at 31.7. That is up 6.6 points from November and matches the highest level since February (index results below 50 indicate customers’ inventories are too low). The index has been below 50 for 63 consecutive months. Insufficient inventory is a positive sign for future production.
The index for prices for input materials fell sharply in December, dropping 14.2 points to 68.2 percent versus 82.4 percent in November. The index is down from a recent peak of 92.1 in June and is now at the lowest level since November 2020. Meanwhile, the supplier deliveries index registered a 64.9 result in December, also down sharply, falling 7.3 points from the November result. The drop suggests deliveries slowed again in December but at a significantly slower pace. While both of these indexes remain elevated by historical comparisons, the significant declines over the last few months are likely early signs that some of the issues restraining supply may be easing. Progress is also reflected in some of the comments made by respondents to the survey.
“Chemical supply chains are filling very slowly. Still not full, but (my) gut feeling says it’s getting easier to source chemical raw materials.” [Chemical Products]
” Price increases appear to be slowing. Lead times are shrinking slowly, and inventories are growing. I hope we have reached the top of the hill to start down a gentle slope that lets us get back to something that resembles normal.” [Fabricated Metal Products]
“We are still seeing shortages with various metals. Plastic resins seem to be slowly improving. Electronic component lead times are still moving out.” [Electrical Equipment, Appliances & Components]
“Costs for steel seem to be coming down some. We have seen a little relief on steel prices, but they are still very high. Overall performance by suppliers has improved. On-time deliveries have improved.” [Machinery]
There were also several comments about continuing materials shortages, labor issues, and transportation and logistical problems, but the possibility of easing in some industries is a positive sign. Overall, demand for the manufacturing sector remains robust as labor difficulties, materials shortages, and logistical problems continue to hamper the ability to meet that demand in many areas. While there are early signs of some easing, new waves of Covid threaten to extend the period of normalization and sustain upward pressure on prices.
Services-Sector Growth May Have Slowed in December
The Institute for Supply Management’s composite services index fell to 62.0 percent in December, falling 7.1 points from 69.1 percent in the prior month. The index remains above neutral and suggests the 19th consecutive month of expansion for the services sector and the broader economy. However, the decline in the latest month suggests that growth may have been somewhat less robust. Compared to the manufacturing sector, the decline was more severe though the level of the index remains above the manufacturing-sector index.
Among the key components of the services index, the services new-orders index fell to 61.5 percent from 69.7 percent in November, a drop of 8.2 percentage points from November. New orders have been above 50 percent for 19 months and above 60 for the past ten months – a strong performance overall. For December, 13 industries reported expansion in new orders in December while three reported drops. Manufacturing new orders ticked down in December and was trending near 60 percent, a still-healthy level but down from readings around 65 from August 2020 through September 2021.
The nonmanufacturing new-export-orders index, a separate index that measures only orders for export, increased to 61.5 percent in December versus 57.9 percent in November. Six industries reported growth in export orders against five reporting declines.
Backlogs of orders in the services sector likely grew again in December though the pace may have slowed as the index remained above the neutral 50 level but decreased to 62.3 percent from 65.9 percent. Backlogs of orders have grown for 18 of the past 19 months. Eleven industries reported higher backlogs in December while six reported a decrease.
The business-activity index (comparable to the production index in the ISM manufacturing report) decreased to 67.6 percent in December, down from 74.6 percent in November, a decline of 7.0 points. This measure has been above 50 percent for 19 consecutive months. For December, 15 industries in the services survey reported expansion versus three reporting contraction. For the manufacturing sector, the production index ticked down in December and remains in a sideways trend around 60, a strong reading but down from the 62 to 68 range from August 2020 through April 2021.
The services employment index remained above the neutral 50 percent level, coming in at 54.9 percent in December, down from 56.5 percent in November, and a generally healthy level by historical comparison. Eleven industries reported growth in employment while three reported a reduction.
The manufacturing employment index posted a 0.9-point increase to 54.2, also a solid reading by historical comparison. Improvement in these indexes could be a sign that companies are attracting and retaining needed employees.
Supplier deliveries, a measure of delivery times for suppliers to nonmanufacturers, came in at 63.9 percent, down sharply from 75.7 percent in the prior month. It suggests suppliers are falling further behind in delivering supplies to services businesses, but the slippage has decelerated significantly from the prior month. Still, the index remains elevated. Fifteen industries reported slower deliveries in December while none reported faster deliveries.
There was also a sharp decline in the manufacturing supplier deliveries index, falling 7.3 points to 64.9 percent. The sharp declines in both could be early favorable signs that some of the upward price pressures may start to ease.
The nonmanufacturing prices paid index rose slightly to 82.5 percent, up from 82.3 percent in November, a very high level. Seventeen industries reported paying higher prices for inputs in December while none reported lower prices. However, the manufacturing prices paid index fell sharply, losing 14.2 points to 68.2 percent.
The December report from the Institute of Supply Management suggests that the services sector and the broader economy expanded for the 19th consecutive month in December. Respondents to the survey continue to highlight robust levels of activity and strong demand but also continued price pressures, materials shortages, logistics, and transportation issues, and challenges hiring and retaining workers, but the declines in some of the survey indexes suggest some of the issues may be starting to ease.
Unit Auto Sales Fell in December but Assemblies Rose in November
Sales of light vehicles totaled 12.4 million at an annual rate in December, down slightly from a 12.9 million pace in November and 13.1 million in October. The December result was the seventh consecutive month below the 16 to 18 million range, beating the six-month span from March through August 2020. Weak auto sales are largely a result of component shortages that have limited production, resulting in plunging inventory and surging prices.
Breaking down sales by origin of assembly, sales of domestic vehicles decreased to 9.9 million units versus 10.4 million in November, a drop of 4.9 percent, while imports rose to 2.56 million versus 2.51 million in November, a rise of 1.8 percent. Domestic sales had generally been in the 13 million to 14 million range in the period before the pandemic, averaging 13.4 million for the five years through December 2019. The domestic share came in at 79.4 percent in December versus 80.5 in November.
As with some other recent economic reports, there may be some early signs of easing supply chain issues. Domestic assemblies increased for a second consecutive month in November, coming in at 9.3 million at a seasonally adjusted annual rate. That is up from 9.0 million in October and 7.6 million in September, but still well below the 11.2 million pace for the five years through December 2019.
However, component shortages, especially computer chips, continue to disrupt production for most manufacturers, creating a scarcity for many models, leading to lower inventory and higher prices. Ward’s estimate of unit auto inventory came in at 109,300 in November, near the all-time low. The Bureau of Economic Analysis estimates the inventory-to-sales ratio was a record low 0.242 in November.
The plunging inventory levels have pushed prices sharply higher over the last two years. However, prices did tick down in November (another possible sign of easing conditions) with the average consumer expenditure for a car falling to $32,241 in November while the average consumer expenditure on a light truck fell to $47,875. The November levels represent 12-month gains of 17.6 percent and 12.5 percent, respectively.
As a share of disposable personal income per capita, average consumer expenditures on a car came in at 58.9 percent versus just 41.6 percent in March 2021 while the average consumer expenditure on a light truck as a share of disposable personal income per capita was 87.4 percent versus 64.5 percent as recently as March 2021.
Retail Spending Posted a Modest Gain in November
Retail sales and food-services spending rose 0.3 percent in November following a 1.8 percent gain in October. Retail sales have posted gains in four consecutive months but November is the slowest pace of the four. The increases put total retail sales up 18.2 percent from a year ago and at a new record high; they remain well above the pre-pandemic trend.
Core retail sales, which exclude motor vehicle dealers and gasoline retailers, posted a modest 0.2 percent increase for the month, following a gain of 1.6 percent in October, leaving that measure with a 16.5 percent gain from a year ago. Core retail sales are also at a new record high and well above the pre-pandemic.
Most categories were up in November though breadth was weaker than in October. Six categories posted gains while five showed declines and two were essentially unchanged. The gains were led by a 1.7 percent increase in gasoline stations, followed by sporting goods, hobby, and bookstore sales (up 1.3 percent) and food and beverage store sales (up 1.3 percent). Gasoline sales often reflect large price movements; the average price for a gallon of gasoline rose 2.8 percent in November. Electronics and appliance store sales led the decliners, down 4.6 percent, while general merchandise store sales fell 1.2 percent and health and personal care stores sales were off 0.6 percent.
While retail sales are running well above the recent eight-year trend, measured as a share of disposable income, retail sales are returning to the range that persisted for much of the 1992 though 2007 period. As a share of income, sales were typically in the 35 percent to 38 percent range, well above the 10-year average of 32.3 percent through the end of 2019. This suggests that if the sales share were to stabilize, then retail spending growth should be roughly in line with growth in disposable income. If the share were to fall back to the more recent pattern, then retail spending would slow to a pace below the growth in disposable income.
Furthermore, slowing sales may help the demand/supply imbalance that has been putting upward pressure on prices. Retail inventories have improved for several industries in recent months. Motor vehicles continue to be the laggard with regard to inventories, coming in at about 63 percent of the December 2019 level. Beyond motor vehicles, only clothing and accessories and department stores show lower inventories relative to December 2019.
Overall, total and core retail sales posted modest gains in November and remain well above recent trends. However, as a share of disposable income, sales are returning back to their 1992 through 2007 range. Retail sales growth may slow over coming quarters, more in line with the rate of growth in disposable income. This could help alleviate upward pressure on prices, particularly if production/supply continues to make gains. The economic outlook is for continued growth and upward pressure on prices is likely to continue for a while longer, but progress towards easing pressures may be accelerating.
