Hopefully you all had a wonderful Easter weekend. Due to the very late spring we are having here in the upper Midwest, there were no tulips or other spring blooms in existence. What we do have, are snow peas, Frost Flowers and Snow Drops. On the upside, no need to worry about cutting the grass anytime soon.
The March numbers are slowly coming out. They are reflective of an economy that is quickly fading. While January was quite good, February was mediocre at best, March was as scary as the weather we experienced.
The ISM Factory report came in at 46.3. Removing the Covid Pandemic slump of 2020, you need to go back to 2008 to find a lower number. Manufacturing peaked in May of 2022. It passed from expansion to contraction in September of last year. For the past two months the sector has been shedding jobs, down a 1,000 in March. Forward indicators in the ISM report reflect continued softening will occur for the foreseeable future. This includes new orders, 44.3, production at 47.8 and back logs which are now down to 43.9. With the dollar weakening you would expect that exports would have been a bright spot, however they fell 2.3% from 49.9 to 47.6. This is a very distressing report.
The ISM service report barely reflected a plus with a drop of 3.9% from the February number of 55.1 to 51.2. As with the manufacturing report, anything above 50 is expansion, below is contraction. The future indicators in the report saw significant decline. New orders fell precipitously from 62.6 all the way to 52.2. A clear indication that the consumers are in full cutback mode. Backlogs are no longer growing as they fell from 52.8 to 48.5. New Export Orders caught everyone by surprise, falling from 61.7 to 43.7. A drop of that magnitude has not occurred in memory.
After starting off strong in January at over 16 million units, new vehicle sales have fallen for two months in a row to 14 million in March. While supply chains appear to have been corrected, showrooms appear to be vacant of customers.
The job market continues to chug along with initial jobless claims continuing to moderate downward. This continues in spite of layoff notifications being announced on a regular basis. As stated in earlier reports, the lack of a spike in the unemployment numbers could be due to severance packages and/or jilted employees quickly finding jobs. How far this rubber band will stretch is still unknown.
The announcement by OPEC of a production cut could not have come at a worse time for consumers. The US appears to have peaked in the level of oil wells, holding currently at 751 operating wells. This is below the overall peak of nearly 2000 in 2015 and just over 1000 just before the pandemic. There appears to be little interest in oil well investments at this time. Production of crude oil, gasoline and heating oil stocks, all fell late in March. This continues a trend that started in February. Supplies are running down quickly, in spite of a jump in imports.
Last year when the Biden Administration tried to offset high oil and gas prices by depleting the Strategic Oil Reserve they reached an informal agreement with the oil industry promising not to tank the price too far. In this agreement the government set a floor price of $70 a barrel. If oil were to fall below that level the government would begin refilling the Strategic Oil Reserve, maintaining the $70 strike price. Since oil prices did not fall beneath $70 for any prolonged period, the SOR was never refilled. At this time the government may need to purchase oil for replenishment at the same time supplies are limited and declining further due to OPEC cut backs. It is easy to see how oil could rise above $100 a barrel in the near future.
Based on the numbers we likely have seen the best of 2023 in the rearview mirror. With January and February performance, the first quarter will show a positive GDP. However, March is a good indicator of what to expect for the second and third quarters. As the consumer runs out of steam, businesses start to cut back due to slowing demand, energy prices ravage our pocket books, bank lending becomes tighter due to illiquidity as well as economic concerns and earnings for most companies soften, it is time to hunker down. My grandfather was an old farmer, he could sense the change in the weather. When he saw the signs, he would look up and say, “I feel it, there’s a storm coming”. In looking at the economic signs, I feel it, there is a storm coming.
Have a great week.
