Consumers shift their spending back to services. The spending boom on goods is over, and it will eventually show up in manufacturing.
By Wolf Richter for WOLF STREET.
Manufacturing in the US, as measured by new orders received, ramped up further in May, with raging inflation being part but not all of the equation, and unfilled orders ticked up further, and the key inventory ratio of inventories-to-shipments – which eliminates the effects of inflation – held at the lowest levels since August 2019.
The impact of the rate hikes or any slowdown is not yet visible in the manufacturing data for May. But surveys of executives conducted in June and released last week as the Manufacturing PMIs hint at a first dip in orders in June from the fairly strong May.
New orders for manufactured goods in May rose by 1.6% from April, seasonally adjusted, to $543 billion, according to data from the Census Bureau today: orders for manufactured durable goods +0.8% to $267 billion; orders for manufactured nondurable goods +2.3% to $276 billion.
On a year-over-year basis, new orders for manufactured goods jumped by 14% in May, after a series of massive year-over-year increases for the past two years, with orders for manufactured durable goods increasing by 12.2%, and for manufactured nondurable goods by 18.9%.
Durable goods manufacturing.
Transportation equipment is the largest category of durable goods, with $82.8 billion in orders in May, not seasonally adjusted, up by 19.7% from a year ago. The vast majority of this sector is composed of cars and trucks, heavy trucks, buses, components, and trailers, which account for almost 70% of the sector. Aircraft (nondefense and defense combined) account for 18% of the total transportation orders. Ships and boats account for 3% of transportation orders.
| Largest categories of durable goods, not seasonally adjusted | billion $ in May |
% change yoy |
| Transportation equipment (autos, heavy trucks, components, trailers, aircraft, ships and boats) | 82.8 | 19.7% |
| Fabricated metal products | 38.6 | 9.8% |
| Machinery | 38.2 | 11.6% |
| Computers and electronic products | 22.2 | 4.8% |
| Primary metals | 21.9 | 14.9% |
| Electrical equipment, appliances, components | 13.4 | 7.1% |
Unfilled orders rose to $1.11 trillion in May, up by 7.3% from a year ago. All of this year-over year increase is likely accounted for by price increases:
Inventory levels in dollar terms are inflated by cost increases, and are not indicative of whether or not inventories are piling up – the rumored “inventory glut.” But the inventory-to-shipment ratio eliminates the factor of prices and price increases, and in May, the ratio remained unchanged from April at 1.47, the lowest since August 2019, according to the Census Bureau:
The impact of the rate hikes or any slowdown in demand is not yet visible in the manufacturing data for May.
But there are the surveys of manufacturing executives for June: Though the overall ISM Manufacturing PMI for June was in growth mode, the new orders index within it dipped to 49.2, from the fairly strong reading in May (55.1), with 50 being the dividing line between rising and falling orders on a month-to-month basis.
Spending is shifting from goods back to services. For months now, consumers have shifted from the mind-boggling pandemic-related spending boom on goods back to spending on services. Spending on discretionary services had collapsed during the pandemic, and it has been coming back, even as spending on goods dropped. Consumer spending on services accounts for over 60% of total consumer spending. And this shift is huge – even adjusted for inflation. Read… Consumer Spending Shifting Back to Services from Stimulus-Binge on Goods. Inflation Eats into Incomes
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Hmmm…
Discretionary services sounds kinda PG-13.
“Spending on discretionary services had collapsed during the pandemic, and it has been coming back, even as spending on goods dropped. Consumer spending on services accounts for over 60% of total consumer spending. And this shift is huge – even adjusted for inflation.”
Discretionary services include plane tickets, hotel bookings, sports and entertainment venues, discretionary medical services (cosmetic surgery, lots of dental stuff, non-emergency services, etc.), yoga lessons, gym memberships, hair cuts (but I’m not switching back)…
That Flo-Bee must do a good job!
I switched back to my long time barber. I missed the conversation and the huge TV (on sports continuously) in the shop.
I’ve been using a flowbee since sometime back in the last century. I have no idea what a haircut costs.
I’ve been doing my own dentistry since Covid, initially I couldn’t find a dentist and then learned on youtube how to remove wisdom teeth in a jiffy, or pull a problem molar.
Wow! I’m sure that there must be a few caveats concerning your procedures.😬
apendectomy?
We kept our gym memberships. We use the track and the equipment. And, occasionally if it is open and uncrowded, the pool. Both of us are retired so we can go at off-peak times.
We still are NOT participating in any exercise classes. Tai Chi or aerobics.
We go through, probably incorrectly, the 24 step Tai Chi moves we learned, at home.
We have started using resistance bands as suggested by one of our friends. Who is a personal trainer.
Will be interesting how well services hold up. Nearly impossible to hire surveyors around here. People coming out of retirement because it’s name your price. A lot has to do with in migration to NC which requires new construction of housing and infrastructure.
Same here in Hawaii for hiring anyone. I sold all my rental real estate because I couldn’t get anyone to show up to do repairs or maintenance, and I was willing to pay “whatever”. All my usual and reliable handypeople all said “sorry, I’m busy on other projects”. Please keep in mind that I NEVER negotiate on price, will always pay “whatever”, and always pay at end of day by Zelle. In my actual business, we put an add on Craigslist to hire assistants. We offer 1.5x what everyone else is working for since we only have part-time work, but we get zero response. All my colleagues have the same experience. Amazing that we are willing to pay whatever and still it doesn’t interest anyone.
I wonder if all the affordable housing for those workers got bought up for rentals, making it no longer desirable to continue their lives or career in your locale.
Maybe people can’t live off of a part-time job.
Yeah exactly!
A part time job in Hawaii? Then you add inflation to boot!
Lots of tents on beaches ,get high ,surf,and beg not a bad gig
My guess is that part-timers don’t get any fringe benefits: no 401K; no leave; no health plan, etc. The market is telling you that your aren’t paying 1.5X the going rate and, yes, indeed, no one can support themselves on what you are offering to pay part-time.
As for handyman, yes they all got better jobs with more pay. “Whatever” paid sporadically with no guarantees isn’t enough to put food on the table.
How does Blackrock maintain all their properties?
They probably give their handyman stock options. ;)
> Please keep in mind that I NEVER negotiate on price, will always pay “whatever”,
I’ll do it for the price of the house
You sound like a boomer. 🤣
A lot of economist are saying that we need to start worrying about deflation and inflation is yesterday problem. They predict fed will ease by December. What is your take on this?
John,
These “economists” have been falsely predicting deflation my entire life. There have only been a few quarters of deflation in my entire life. The rest was inflation and raging inflation. Any economist that predicts deflation is by definition braindead. I cannot believe these idiots are still out there. Don’t they ever learn anything??? Well, that was a rhetorical question: they’re braindead.
Bingo. Thanks for pointing that out.
Central Banks do not want deflation. They would rather have high inflation (not too high) than deflation. Deflation can spiral down quickly. People stop spending because they think things are going to get cheaper, which leads to job loss, etc.
IMHO. As soon as there is a whiff of deflation, the CBs will helicopter money or send COVID checks right to your checking account over a weekend. Or maybe they will buy up all the bad debt that may be create a deflationary event (HB1 and MBS).
ru82
‘They would rather have high inflation (not too high) than deflation’
high but NOT too high is NOT under their control since they printed money out of thin air into the economy’! Last time the spigot spew almost 4.5 trillion during March of 2020. Assuming that is 40% money expansion, 10% of which went to real economy and towards credit demand. The Rest 30% is still out there! Serious QT is yet to start and reverse REPO is now reaching 2.3 Trillions for over night liquidity. Apparently the inflation rate may persist 7% at the end of of this year and probably 6% by Dec 2023!
h/t Steve Hankinson – Prof of Applied Economics at John Hopkins
IMHO, I think the primary job the last decade for the Fed is to prevent deflation.
They lowered interest rates to combat extremely cheap goods and electronic products coming from Asia and to deflate the massive oil pumping in the US.
Now with Asia in partial shutdown and oil becoming more scarce with the Ukraine war, they have to shift and raise rates to combat inflation.
Media reports indicate that at least some manufacturers are still complaining about supply chain issues, so I think we’re still in a period of those issues working themselves out. Not sure if we’ll see any significant volatility in the short term. Medium to long term, seems nearly certain that we’ll see inventories build that will put pressure on prices to either remain static or go down.
Coupled with whatever happens with oil/gas and the obvious wild-cards Russian war with UKR and Xi’s 2nd Cultural Revolution (Covid Ed.), I’m a bit of an optimist re inflation having peaked or peaking in the short term and going down in the medium to long term. Aside from housing, where the Fed has bloody hands, I don’t see them really being the driving force re our previous inflation. More COVID, geopolitical events, and fiscal policy — which also means they might be overcorrecting on rates in hindsight. Wouldn’t be the first time.
Another underlying driving force for inflation is a really long-term trend change. After 3-4 decades of decline, we’re finally starting to see a return (to historic norms) of workers’ compensation vs. capitalists’ profits.
More GDP flowing to wages is (IMO) a Good Thing, but those payments will initially drive higher demand, whereas the supply chains aren’t there to provide all those goods. In addition, the evidence of labor scarcity also implies constrained supply.
The problem of labor scarcity is demographic and generational, as well as geopolitical. It won’t be solved just by interest rate increases. After wiping out the zombie businesses and freeing up a chunk of labor and supply for higher priority (profitable) products and services, we may find that inflation returns despite higher interest rates…
Automakers are still have huge supply issues:
https://wolfstreet.com/2022/07/05/new-vehicle-sales-in-june-2022-plunged-25-from-june-2019-on-inventory-shortages-to-1970s-levels/
Side note on inventories, I was reading yesterday that wholesalers are buying up way more stock than usual from large retailers, sometimes straight off the dock. One woman they interviewed said she’d just bought winter coats for pennies on the dollar. Obviously out of season but the dollar stores don’t care. Probably stuck on a container ship during the winter.
Later in the article they said that these discounters were handling large appliances- one of them said that was a first but again, they’ll sell anything if the price is right.
My guess is the rising dollar will destroy the current manufacturing numbers as time passes. But then again, maybe there are so few exports (beyond oil), that it doesn’t make much of a difference to the US economy.
Looks pretty bleak to me, as I really can’t point to any major improvement in life for most Americans or the global population. At the moment you’re less likely to get fired, but can’t make ends meet because of inflation. China, Europe and Japan all heading off a cliff, so I don’t see them buying much of our manufactured goods (Movies and Software maybe).
People have more Covid to look forward to, more wars and a climate crisis, while their leaders eat gourmet ice-cream and point fingers at each other. We also have a whole generation priced out of home ownership. Don’t see any of that spurring demand, and of course the rising dollar will likey obliterate the global economy.
> a whole generation priced out of home ownership
Some thought and expressed this in ’08, which is not even a generation ago. Plenty of puffed-up, greedy and over-optimistic folks were shown to the sidewalk.
I bought in a Fed hiking cycle in ’94, with an adjustable rate mortgage no less, and came out OK. I’ll be paid off soon.
We oldies will die forthwith and release these assets from our bony hands.
And the world has shown countless remarkable ways of not ending. Except of course, for every one of us pilgrims individually, eventually. Maybe it really is a go-round, though? Mathematically possible.
I think of buying a house as a long term place to live. (Not an investment). It limits increases in living expenses compared to renting. You will never see another rent increase. If you never sell, your heirs will only care about gains or losses in value.
Every generation has some difficulty purchasing but had some advantages.
Boomers/Gen-X. – High interest rates (13+%) made it difficult to qualify in the 1980s-1990s. However, the subsequent drop in rates during the 2000’s made the purchase much cheaper with refinancing. Many were not able to buy a house because they didn’t qualify. The Boomers that did buy and hold are doing well. Many have paid off their houses and will never pay someone else for a place to live again (except taxes).
Millennials. – Millennials were in their early 20’s to early thirties during the 2009-2014 housing crash. They had low house prices and low rates (which got lower). It was a great time to buy but many didn’t out of fear that the crash wasn’t over or they didn’t have a job. The Millennials that did buy (even at the peak in 2006) are doing well if they could hold on. If they purchased with a 15 year loan in 2006 and held, they have also paid off their loan.
Gen Z and late Millennials are feeling the same pain as the Boomers at the same age. High interest rates and higher house prices. They could buy now and gamble their wages will go up and rates will eventually drop so they can refi, or they can wait and see what happens during the next year.
People thought we were crazy when we paid as much as we did in 1987 for our first house. It turned out OK with refinancing and wage increases. It is paid off now. Some people think you are crazy if you buy now. If you can afford to purchase now and hold with a 15 year loan, it will not seem that crazy after 10 years. Just enjoy the house and don’t worry about any losses on paper. Don’t read any more Housing Bubble blogs.
Historically, if you can afford it now and can hold for the long term, it has worked out for all generations.
Making sure that you can hold on to the house for the long term seems to be the key.
Our advice that we give to our kids.
:) profound…. even the mighty stars in the night sky release their holdings at some point, and others are born from the ashes… Wonder how the civilizations that are unfortunate enough to be present in the vicinity of a soon to be red dwarf must think. Especially if that civilization has not made any plans for continuity.
Do the rise in interest rates in the U.S. strengthen the dollar value?
They might strengthen the exchange rates against other currencies.
In terms of purchasing power of the dollar in the US, that is a function of inflation. And it’s not strengthening, obviously.
Not on commodities and goods traded in US dollars on the world market. And US dollars used to be and do maybe still dominate as currency for trade.
> I really can’t point to any major improvement in life for most Americans or the global population.
I can think of hundreds of moments in human history you would probably not trade, for your perch and prospects now.
> I really can’t point to any major improvement in life for most Americans or the global population.
What? Are you living under a rock?
There are all kinds of improvements, I’ll just mention one big one:
Medical advances in curing diseases and increasing life expectancy.
Yeah. Especially now that the FDA is set up to deliver us medical miracles at warp speed. /max sarc squared
I think the commenter is referring to the sinking middle class. There is a lot of economic insecurity out there that the working class feels. They sense that the economy is turning – and not in their favour. They work and work and don’t seem to be getting ahead – and they fear the shrinking prospects for their children. I have friends in their late 50’s and early 60’s who wonder if they’ll ever be able to retire.
Most, if not all, of the people who comment on this site are of the “investor class.” Plenty of working people in this country are not a part of your club. I think it is significant that your response is “Are you living under a rock?” Well, I turn that phrase back on you. Are you living under a rock? Medical advances in curing diseases and increasing life expectancy is only significant if you have good medical insurance – something many working folks don’t have.
I agree with you Val, except you unfortunately appear to be another believer in “new magic bullets are being delivered almost weekly”.
You are actually VERY lucky if you see a new drug you “like” on TV, then go to a doctor wanting it, and he tells you you can’t afford it.
I don’t think medical advances to extend lives is much of a good thing when it simply involves preservatives and temporary drug assistance to prop up wrecked bodies from years of poor decisions. But go eat another steak and take that cholesterol drug. You do you. I haven’t seen many people over 70 that make me hopeful to live that long, and I’ll end my own life if I somehow make it to 80 (56 now).
Re ” can’t point to any major improvement in life for most Americans or the global population.”
Look harder, using your high-index-of-refraction ultra-light prescription lenses (new in past 10-20 years), or your AI-enabled face-recognizing cell-phone camera (new in past 5 years), or ask your AI assistant what it thinks…
A few improvements since 2008:
Hybrids and EVs.
Less-toxic foods with less-polluting packaging.
Decent electric bikes and scooters for those who don’t want or need cars.
Computers doing more to help you, with less effort by you.
Peer-to-peer payments using Venmo and the like.
Work-From-Home
We survived COVID – now have more “veteran” population better able to handle adversity in the future.
Not that major….
Of the above list, I use a grand total of…
None….
Looks like the economy is still humming along. Nice job, JPowell, with your slow pock FFR increases. This may actually work out for you and the rest of us.
Isn’t it looking like US is in 2nd quarter of GDP decline with real wages not keeping up with inflation and real interest income and dividend income not keeping up with inflation?
You can have improvements in technology you mention, but general quality of life for the average citizen still sinking. Dystopian future might have improvements you mention maxed out, yet the quality of life still like a prison.
I judge my *quality* of life to be very good here in Northern Thailand, because the social milieu is so easy-going and polite. Not because of the tech, which is pretty good too.
Oop –
That was meant to be reply to Wisdom Seeker above.
It seems that everything the prices together. After the algorithms started buying stocks today in the afternoon, they similarly started buying crypto and bonds. It’s very strange to me, as these are supposed to be uncorrelated.
Algos doing straight pattern-recognition plays observed over tiny time frames, regardless of a theory of what is “supposed to be”? This might tease out some weird thing in sentiment that correlates across assets but hasn’t got a stated name or rationale.
Wall Street seems to be torn between hoping for (1) a soft landing, and (2) a sharp but short downturn that immediately opens the door to more govt stimulus, ZIRP & QE (see spring 2020.)
I think they’re starting to lean towards the second, which is consistent with the endless doom & gloom the financial media talking heads are spewing. Wall Street is hooked on ZIRP & QE like a crack addict.
Mfg are surging, but wall street send them down to buy at 50% discount.
My brothers neighbor works at Deere ,company business fell of a cliff ,worried about his job ,new house in flyover country
That’s because they destroyed their brand through Digital Rights Management excesses, the inability of farmers to fix anything without an onsite software technician unlocking the codes before any work can be done.
The word we hear around here is
“BOYCOTT DEERE”
Let me guess, another fricken accountant is ruining that company. And I am one.
The new orders graph is a good sign. A solid increase that’s NOT just a bounceback from the lockdown insanity. Especially in primary metals, an area we had mostly abandoned. Indicates the beginning of a healthy reshoring trend.
I think there is a big shake up in the economy regarding wages. The fortune 20 company I work for had a hiring freeze and no promotions unless absolutely necessary. We are told, due to losses, the promised raise is not happening. They do not have layoffs – instead we have a portfolio career where you are working three positions for the lowest paying one. With a promise if you stick with us – we will do what we can in the future. It is less then motivating. I don’t see any wage growth happening in my industry. I work in both IT and Finance. So this is a little insane.
So now the wage constrictions begin? It will be a dangerous time for many people.
If I were you, I would look for an employment opportunity in 21st century infrastructure building companies. They will be flush with cash, looking to hire people like YOU, and great growth stocks for the next ten years.
Financialization industry is going to take a drubbing. They will be squeezed by higher interest rates, climbing treasury bond yields, dropping corporate bond prices, falling stock prices, wage demands, and QT. Get out and good luck!
Just to weigh in from our little corner or the truck equipment industry…
Just ran FH’22 numbers compared to every year since 2006. Orders are the fourth lowest, with the only three worse years crossing the Great Recession. Sales dollars are the fourth highest, only bested by a really healthy run in 2015-2018. Inflation explains the difference almost entirely. Usually orders and dollars track pretty closely. In nominal dollars, we are having a great year. When adjusted for inflation, or when tracking unit sales, we are solidly in recessionary territory.
Backlog peaked on July 12, 2021 at a record high. Smashing all previous records by a mile. Backlog dollars are down roughly 20% off that peak, and units are down around 40%.
Our prices are up about 40% overall in the last 12-15 months. With commodity prices falling (steel especially), our product prices will begin to fall…maybe halfway back down to “normal”. The rest will stick because of wage increases and other “stickier” cost increases. Probably in early fall, if these cost trends hold, will we see prices start to retreat slowly.
We are all mentally exhausted from dealing with this business since early 2020. The gratuitous government cheese kept us from slashing SG&A too deep to cope with our gross margins being crushed from a normal level of 24% down to a low of around 13%.
Overall the business has been resilient through this mess, but our financial “gas tank” is sitting on quarter-tank, while we like to keep it above half. That means if things start to turn south again, cost cuts will be quite sharp and decisive. There just isn’t much wiggle room otherwise.
There seems to still be solid end user demand for our stuff but chassis production issues are holding everyone back as those truck are the bottleneck to selling upfits
Sg&a is up on the chopping block at my f500 company.
No actual downturn yet but KPIs point towards it so best to get out in front.
The cost cut list is always ready. Slash until the ink stops showing red and clean up the damage after the storm. Totally sucky but a necessary part of being in business.
IMO YOY inflation #s will start coming down due to the fact 12 months ago inflation started to bubble up.
Copper Lumber Corn Soybeans and now crude dropping.
This will provide the Fed a wanted excuse to temper rate increases.
But the Fed is still way behind and even lower inflation rates, sure to be declared a victory for the Fed, will be stacked on this recent 8% spike.
Why isnt the Fed talking about rolling back the 8% price increases, 4 Xs their “2% target”?
Shouldnt they adjust, recalibrate off the surprise inflation spike?
The fact they dont speaks volumes.
Watch out for the difference in commodity prices going down because of lack of purchasing power or glut in the market. If both volume and price are down, it could be lack of purchasing power.
Observe that famines often are caused by lack of purchasing power, not lack of food.
How much of this can be explained by a shift in preference to domestic manufacturers because of the delays at the major ports?
Any visibility into the long-term prognosis for repatriating manufacturing from overseas? Inflation seems to be global, so it doesn’t look like the dollar is losing parity, just value. So labor and environmental arbitrage remains alive and well.
Crazy times.
“ Spending is shifting from goods back to services. For months now, consumers have shifted from the mind-boggling pandemic-related spending boom on goods back to spending on services.”
Is this relevant to US manufacturing…
I would think that consumer shift to services would affect overseas manufacturing more than US because that’s where the majority of the goods spending has occurred…
I can’t see the average consumer worried about a farm combine, a MRI or a Class 8 truck…
The whole article was about U.S. manufacturing statistics, not consumption of goods in from anywhere else. It seemed like the key paragraph toward the end was:
“Though the overall ISM Manufacturing PMI for June was in growth mode, the new orders index within it dipped to 49.2, from the fairly strong reading in May (55.1), with 50 being the dividing line between rising and falling orders on a month-to-month basis.”
So I took that to imply there is a monthly data measure (“new orders index”) that indicates orders to U.S. manufacturers may have started a downward trend.
Two different measures for two different months:
The actual orders at the top of the article (in dollars) are for May.
The ISM orders index is a different measure and is survey-based and is for June. It’s somewhat of a predictor of actual orders. This indicates that the actual orders (in dollars) in June might be lower than they were in May. Actual June orders in dollars will be reported a month from now, and I will cover it.
As a small chemical manufacturer, our April and May were softer than we would like, but June was excellent.
Due to the raw material shortages, we were out of some key products in Q4 21 and early Q1 22, and no doubt we lost some clients over it. Now, our inventory is at 100% again, our global competitors are out of some A-movers and they continue to have ridiculous price increases, all of which are helping us.
At the moment, I am bullish regarding this business through the end of 2022. I do think 2023 is going to be ugly for many people.