PMI Data Starting to Bounce after 18m in the Doldrums
The March ISM and S&P Global PMIs both came in above 50 for the first time since September 2022.
Assuming the gradual, if perhaps noisy, recovery in the sector continues, and there is no reason to expect that it shouldn’t, this sets up a unique moment this summer when the Fed will begin cutting rates after a full ISM cycle when the series is not just inflecting higher but solidly back into positive territory (see more here, ‘A Cutting Cycle That Begins Just as the Global IP Cycle Turns Up? Another Post-Covid Novelty’).
Corporate sentiment, along with recent consumer measures as well, seems to be perking up as the long-awaited and planned for recession gets pushed to the back burner, the economy continues to move past and adjust to its covid-era shocks, and financial market performance adds an additional tailwind.
While Powell seems to want the Fed to begin cuts relatively soon if the inflation data is at all cooperative (see more from his Friday appearance here), the bounce in manufacturing and housing makes it increasingly likely that we see a much more shallow and short-lived cutting cycle than most envision. A shallow cycle would be quite in-line with historical mid-cycle cut behavior but goes against current return-to-neutral driven logic.
One also has to take quite seriously the risk that even if the March and April inflation data allows the Fed to start cutting in June, they may only end up cutting 1-2x in 2024.
It’s been one of my higher conviction views that the troughing and gradual bounce in the manufacturing and housing sectors, the two most cyclical parts of the economy, would set a higher floor on growth in 2024 than many had assumed to start the year. Even if consumer spending decelerates some with a bit further labor market easing, this should help set a floor on growth and keep GDP growth for the year in the 2-3% range (anything more specific feels like false precision and history shows that the economy very rarely ever grows below trend outside of recession, an important base rate to keep in mind).
While besting 2023’s GDP growth still feels quite unlikely, as an investor noted to me during a back and forth a few weeks ago, ISM and housing turning up should have one thinking about right tails (as much or more than left tails).
The prices paid numbers (55.8 up from 52.5 in ISM and now seemingly somewhat durably off its cyclical low) raise the possibility that core goods deflation might wrap up sooner than helpful for the dovish inflation cases. That core goods ex used autos inflation has been positive the past few months doesn’t help the dovish case either. The risk here is not so much a large jump in core goods price levels but rather that the dovish inflation and rates forecasts for 2024 are dramatically harder to realize in a world where core goods inflation is ~0% rather than -1 to -2%. It also likely injects more volatility m/m which makes it harder for the Fed to come to any more robust conclusions about the underlying pace of inflation. A faster than expected wage growth deceleration could be an offset to this but the skews there seem a bit hawkish relative to expectations as well, although closer to neutral than my views on housing or core goods inflation.
A few quotes from each release’s writeup below tell the story quite well:
- “Signs of improving wider economic conditions and market demand fed through to a further expansion of US manufacturing production in March, with the rate of expansion hitting a 22-month high.” – S&P
- “Stronger demand was also evident in data for new orders, which showed an increase for the third month running. The pace of expansion was solid, but softer than that seen in February. Total new orders rose more quickly than new business from abroad, which increased only marginally in March. Firms remained confident that output will increase over the coming year, thanks to expectations for improving economic conditions, marketing efforts and improving capacity.” – S&P
- “Demand remains at the early stages of recovery, with clear signs of improving conditions. Production execution surged compared to January and February, as panelists’ companies reenter expansion. Suppliers continue to have capacity but are showing signs of struggling, due in large part to their raw material supply chains.” – ISM
- “Input costs increased sharply, with the rate of inflation ticking up from that seen in February. Higher oil and raw material costs, plus increased transportation rates, reportedly added to cost burdens at the end of the first quarter. Meanwhile, the impact of rising labor costs was mentioned as a factor pushing up selling prices at a number of manufacturers. As a result, the rate of output price inflation quickened for the fourth month running to a sharp pace that was the fastest in just under a year.” – S&P
- “The Prices Index moved further upward in moderate expansion (or ‘increasing’) territory as commodity driven costs remain unstable.” – ISM
