We are on the cusp of the college football season. I have been partial to the Golden Gophers and the Sooners of Oklahoma. Sadly, neither are expected to do all that well this year. The news breaking on Friday was a blow to the already struggling PAC 12, with the invite of Oregon and Washington to join the Big 10. The consolidation that is occurring is likely to leave us with three or maybe four conferences nationwide. This, of course, will promote a true College Football Playoff System. The only question I see remaining is how will the Big 12 survive and where will the rest of that divisions teams go?
The service sector in the US continues to expand. The ISM report for July showed a level of 52.7% which exceeds the break even point of 50%. While consumers continue to spend on services, which account for close to 80% of our economy, there are some concerning trends embedded in the report.
The July activity represents a decrease from a stronger June report of 53.9, so we are experiencing a slow leak in the service balloon. New orders grew slower, dropping from 55.5 to 55.0. Employment in services seems to have plateaued hitting the mark of 50.7, down from 53.1 last month. Looking forward, the leading indicators reflect caution ahead. Comments from participants include continued concerns about higher labor costs due to lack of job seekers as well as a lack of qualified candidates, the ability to maintain margins as well as select supply chain issues.
The ISM Manufacturing report reflected a flattening of the bottom of the curve in the industry. The sector continues to contract, but at a similar level to May and June. Coming in at 46.4% it was a bit stronger than June, but still a long way off from expansion. It does appear that manufacturing firms now hold sufficient to a surplus of workers. Layoffs in the past two months indicate that companies are not expecting growth anytime soon. New orders, backlogs and export orders are all contracting at the June level or more, leaving little chance for a recovery anytime soon. Participant comments reflect what we see in the numbers, nothing is expected to improve until maybe the fourth quarter, sales are soft. Suppliers are actually being proactive and reaching out seeking new orders. Of the industries covered, only two reported growth in July while 16 reported contractions. Only petroleum and furniture segments increased in the last month. These are not industries to build a recovery on. This is a major concern for the manufacturing outlook for the rest of the year.
We have all watched as gas prices have shot up in the past month. There are a couple factors at play here that need to be watched. In late June, the Saudi’s announced a curtailment in production. OPEC+ has announced that they are not going to pick up the slack. In the US we have now dipped to 659 total rigs which include oil and natural gas. We are currently only at 525 oil rigs, half of what we had prior to the pandemic. Thus supplies of crude oil have fallen domestically as well as worldwide. The economies in China and India appear to be on an initial growth cycle which has increased the demand for all refined petroleum products. An indication that things are going to get worse before they get better is an absolute collapse in the crude oil supplies. In the past week inventories of crude in the US alone dropped by 17 million barrels. A drop like this in one week has not occurred in 25 years! At this time supplies of all refined products have been pretty steady, pretty much equal with demand. Without sufficient crude oil in the pipeline, refineries will be unable to meet the existing demands for gas and distillates. We can expect a high run up on energy prices at least in the coming months. This is not a good sign for an economy that seems to be losing air speed already.
Have a great week.