If you didn’t know the industrial-manufacturing economy was already in Quad 2, the first name brand macro release of 2021 will suffice as a not so subtle reminder.
Recall, and as we’ve highlighted recurrently, the combination of stimulus support and the pandemic related shift in consumption away from services spending served to juice demand in the goods economy.
With supply constrained by diminished production capacity (primarily lower labor supply), a broad demand-supply imbalance opened up, driving prices associated with those imbalances higher while inventory-to-sales ratio’s piked to cycle lows.
The conjuncture of those dynamics was again on full display in the December data as the Headline breached 60 to the upside (29-month high) while Current Production went for a 119-month high, New Orders spiked to the highest level since 2004 while Prices Paid popped +12.2 pts to a 3Y high at 77.6.
Below is the respondent commentary from both the December and November Surveys. It’s clear and consistent in both that Labor Supply, not demand, remained the gating factor to higher activity.
Mean reversion gravity inherent to diffusion indices will invariably exert itself over the coming months but with supply constraints remaining fairly acute, inventories low, New Orders and Backlogs elevated and COVID consumption patterns being reinforced alongside winter/resurgent case counts, activity will remain solid nearer-term.
That same condition set will continue to support price growth as well – a dynamic that will continue to flow through consumer prices on a lag as scheduled price increases take effect in 1H21.
