In like a lion, out like a lamb? It is one of those time-honored Farmer’s Almanac adages here in the Midwest that we say about March. This year March seems to be coming in like a lamb so we will have to see how that lamb gets eaten by the lion as the month ends.
Going to start with the January inventory levels, as that leads in nicely to the manufacturing reports released this past week. January wholesale inventories grew by a meager .8% well off the December increase of 2.3%. Retail inventories, not including autos, increased only 1.7%. When you add the autos the inventory levels went up by a total of 1.9%. These are levels that are not sustainable.
The February manufacturing numbers reflect the low inventories of January. As shared in the past couple of weeks, the regional Fed manufacturing reports were positive. This past week the Dallas Fed released their February numbers, a huge jump from the January number of 2 to 14. This was followed on Tuesday with the ISM Manufacturing Reports that showed a slight increase overall. The PMI report rose from 55.5 to 58.6. Any number over 50 is growth. As we get closer to 60, the number is considered very strong. Throughout the ISM report there was strength, both short term and in the long term indicators. New orders jumped from 57.9 to 61.7. The level of back orders rose from 56.4 to 65, one of the largest jumps seen in the past two years. Employment continues to be an issue. While manufacturing employment grew, it is at a slightly lower level than prior months. The comments reflect an issue with finding qualified workers. Overall, the manufacturing sector is doing well and could do better if the supply chain would improve.
The jobs report released on Friday was over the top on expectations. The February new job creation was 654,000 well above the expectations of 378,000 and the January number of 448,000. Manufacturing only accounted for 36,000 of this increase. The majority of the new hires were in hospitality, food and tourism industries. While these industries pay less than others, it is a very good sign that the economy is recovering from the pandemic AND consumers are continuing to spend prompting an optimistic outlook for upcoming travel.
The Non-Manufacturing report showed a slight bit of softening in February. The comments in the report point to staffing shortages, supply chains and inflation as causing the issues. Demand is still there, it is just the firms can not meet the level of sales required with the current staff and inventories. Another indication that the consumer is not yet holding back, or at least not in February anyway.
The Russian-Ukraine conflict is sending ripples through our economy that will be felt in the March numbers. The increase in gas prices are like a massive tax increase and will impact the budgets of the consumers. With the overall price level increases on virtually everything, we should expect the consumer to re-think some purchases soon. Unfortunately, the energy markets appear to be trending toward getting worse, much worse, before they get better. The supply numbers this past week were not good. In the US, both gasoline inventories and crude oil inventories contracted. Gasoline production is flat. At the same time, even with oil prices spiking over the past two week, the number of oil rigs stayed the same.
The domestic oil industry is currently in limbo. The eager investors of 5 years ago were wiped out in 2020, with little new appetite in investing in the industry, even with prices that are approaching 2008 record levels. The uncertainty of the industry in the long run with the current administration curtailing new leases as well as imposing new regulations, leaves any expectation of profitability very cloudy. Add to that the possibility of restricting Russian oil purchases with no way to replace the supply, we could see gas prices above the current California price of $5.00. This is one reason the President is likely allowing the Russian crude to continue to flow.
Have a great week.
