The third quarter ended with a whimper. The initial GDP numbers show growth for the quarter at 2%. This was well off the early part of the quarter when the economy was moving forward nicely. During the third quarter the primary portions of the stimulus programs ended. The enhanced unemployment benefits were phasing out and the supply chain started to plug up. Interest rates started to rise which also constricted the economy.
The question now is, will the fourth quarter continue in the same direction or will the course reverse and the economy pick up? The October numbers point to a quick rebound. The jobless claims dropped by 20,000 so far in October. Good sign that the many jobs that are open are starting to be filled. The Kansas Federal Reserve reports on manufacturing rose from 10 to 25 in October reflecting a strong growth in production. At the same time inventory levels have remained flat showing that the growth in production is quickly being absorbed. The Richmond Fed manufacturing report was also much improved between September and October. The Richmond report rose from a negative 3 to a positive 12. The Dallas Federal Reserve service index rose from 8.3 to 20.7. These improvements seem to be the result of low inventories that were allowed to fall in August and September. Firms lived off the inventories but now need to have them replenished. With the inventory levels holding and new orders increasing we might be seeing a very good start to the fourth quarter.
The ports seem to be starting to gain on the back log of ships. Transportation continues to be the weak point. One thing to recognize. We actually have more truckers now than we had a year ago. The issue is not that the level of truckers has fallen, but that the level of demand is well above the supply of truckers needed. The trucking schools cannot graduate the drivers fast enough. The key is to get the materials through the ports and on to the trucks and trains faster. This means less red tape. There is quite a bit of talk that once the longshoreman in LA settle their union contract, things will improve. This may have partially been a union issue.
On November 1 the ISM manufacturing report will be released. Sadly, it will be sent out after my update. However, as a precursor on Friday, the Chicago PMI report was super strong. The index rose from last month’s number of 63 to 68.4. While respondents indicated that supply chain issues are still a concern, new orders were up in October along with employment gains. Prices were a concern as they rose to a 42 year high. As for the ISM report, from the numbers shared above, I would expect the October report to be slightly ahead of the September number of 60.4. We could see a number of 61 or 62 to be supported. One aspect of the report, prices, should be much higher. Inflation continues to be a problem and one that will not likely ebb until 2022.
Overall, the October numbers show a slight rise in manufacturing economic activity. That is a good sign, but as I have said before, one is not a trend. Let’s see what November holds. It should be noted the fourth quarter is beset by work stoppages for various holidays as well as the last week of the year which is one of the least productive, outside of the NCAA March Madness period. So December can be kind of soft.
Have a great week.