By Dr. Uric Dufrene, Sanders Chair in Business and Professor of Finance, Indiana University Southeast
–Bottlenecks to build subsequent demand
The past couple of weeks saw an increase in market volatility leading to a pull back in major indices. Upward movements in the 10-year yield resulted in the NASDAQ trimming record gains. The close of the week saw a reversal and markets recovered some losses of the previous two weeks. Monday, October 4th, was another return to volatility, and as of this writing, heavy losses were across the board.
Despite some of this market volatility, the real economy is poised for continued growth. We see this both with the consumer and manufacturing, a sector particularly important to Indiana and Louisville Metro. The consumer represents about 2/3rds of the nation’s economy, and the national consumer has relevance locally, particularly with the heavy concentration of transportation and warehousing.
First, let’s examine manufacturing. Last week, the ISM Manufacturing Index increased from an August level of 59.9 to a solid 61.1. The highest level occurred back in March 2021 when the ISM came in at 64.7. A reading of 61.1, except for the 64.7 in March, would be the third-highest reading since 1992. The second highest was 61.2, and that occurred in May 2021. The September report showed that demand increased, with high levels of new orders, backlog of orders, and low inventories.
Challenges in hiring and filling vacant positions can be seen in the employment index of the report. The employment component did increase past 50, signally expansion in employment from August. As we have discussed in this column, labor scarcity continues to challenge all employers, including manufacturers. Despite the hiring difficulties, manufacturers continue to meet demand and ramp up production. Turning out more output with fewer employees implies that productivity is increasing. As labor challenges continue to plague manufacturers, they will increasingly turn to automation and investments that will simply rely on fewer workers.
Supply chain problems are evident in prices paid. For the 16th month in a row, the price index increased. Manufacturers report that commodities are up in price, and short in supply. Three commodities were reported as down in price: lumber, scrap steel, and wood. The overall prices index came in at 81.2, but this is down from the pandemic high of 92.1. So, we are at least seeing some deceleration in price increases. In the past 30 years, there have been 12 other times where the price index was within 3 percentage points of 80 or higher.
With low levels of customer inventories, and new orders, and backlog of orders increasing, we will see solid growth in manufacturing. We will likely see advances in productivity, but we will also see positive employment growth.
The consumer continues to show strength. Last week’s Bureau of Economic Analysis report on consumer spending showed that the consumer is not going into hibernation. Goods spending was the highest in five months, and services saw an increase, despite the Delta variant threats.
Supply chain issues are presenting challenges to growth. Labor bottlenecks make it difficult for some employers to meet demand, and companies face shortages of varying degrees and kind. At the same time, while consumer spending remains strong, some consumers are deciding to wait on the sidelines, postponing major purchases until conditions normalize. My view is that the current challenges to the economy are also building subsequent demand. For example, some automobile owners continue to rack up miles but are delaying purchase decisions until more choices are available and wait times are minimized. Some consumers just don’t want to deal with current hassles and are intentionally delaying purchase decisions. The combination of bottlenecks, backorders, new orders, and consumer purchase decisions should deliver strong growth in the near to medium term.
Data sources: FactSet, BEA Personal Income and Expenditures, ISM Report on Business