Mid Week Economic Update, August 5, 2020

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As the Institute for Supply Management posted their reports early in the week, I thought I would provide a recap of what the results were.

The PMI Manufacturing Report came in at 54.2% up from the June report at 52.6.  The May report was 43.1% so the recovery in manufacturing is impressive.  Over the past 12 months, the last two months are the strongest we have seen.  The level of inventories that had piled up during late 2019 have been exhausted, prompting a boost in manufacturing.  Deeper in the report we are seeing signs that the future is looking pretty good.  New orders are growing faster, the back log of orders went from contracting to growing and inventories are contracting where in June they were expanding.  It appears that production is unable to keep up with the demand.  Employment in manufacturing continues to pull back but at a much slower level than it was.  New reports I am seeing is that want ad postings are starting to rise with more employers now looking for people. 

Of the 18 industries that are covered in the manufacturing sector, 13 reported growth in July.  Specific areas of growth include wood products, which is related to housing construction, Apparel, Food/Beverage and Computer products, all indicators of increased consumer demand.  Three industries of the 18 pulled back.  These were Transportation Equipment, Machinery and Fabricated Metal Products.  This is not a surprise as each of these industries support areas where there is excess capacity right now.  What was a surprise is that mining and petroleum industries were on the rise.  Will have to watch this over the next month to see if this continues, no real reason for it to be expanding based on the supply levels that currently exist.

The Services PMI, formerly the non-manufacturing report, rose to 58.1%.  This was up 1% from June.  Like the manufacturing report, there is optimism in the deeper numbers.  Overall the reopening of the economy is requiring both retailers and service industries to meet a pent up demand that is pretty strong.  Most of the industry comments reflect a concern that the bump is fragile and may not last.  However for the time being most are cautiously optimistic.

In both service and retail new orders are up significantly and a back log of orders is growing rapidly. Employment continues to contract in this area, due mostly to loss of retail positions.  The other issue that is plaguing this sector is the lower capacity requirements upon opening.  Employers are recognizing they need less people with the lower capacity that is being required. 

The only area that is of concern is prices on both reports.  Prices are rising across the board.  With higher costs associated with new regulations along with productivity levels being lower in the new normal, business are hiking prices to consumers.  If you have gone out for a meal you will note most food providers have both cut back their menu while raising prices for what they do offer.  The inflation rate this year may be close to 5% rather than the past lower levels we have been used to.

Overall both reports are favorable.  If we can continue to reopen the economy and boost the productivity levels the rest of the third quarter and the fourth quarter should be very good. 

Have a great rest of the week.



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