The ability to source materials and human capital to meet existing and future demand are risks to economic activity for the remainder of 2021. Several of the economic data points from the prior week highlighted this risk but also reinforced that there is ongoing demand and positive sentiment for the future if these supply issues can be resolved.
Industrial production increased 0.8% month-over-month (MoM) in May, led by a rebound in vehicle production. However, both overall production and vehicle production are well below prior levels.
Inventories continued to act as a restriction, while overall business inventories declined MoM in April. The decline was led by the vehicle component of retail, but excluding this, inventories increased 0.60%. It will likely help if the chip shortages and auto-specific supply chain issues are resolved, however, the inventory to sales ratios are well below normal for all measures.
The regional manufacturing indices highlighted the impact of the supply chains but also potential positives if they can be resolved. The Empire State General Business Conditions Index declined 7 points in June, as delivery times lengthened at a record pace and inventories declined. At the same time, the Expectations Index increased 11 points and future employment reached a record high.
The Philly Fed General Business Activity Index declined by 1 point and noted that supply chain issues continued. The Future Activity Index increased 16.5 points to the highest level since October 1991. Future new orders, shipments, and employment were all near multi-decade highs and capex plans were the highest since 1984.
Based on these data points and others we have been tracking, if supply can catch up, the demand outlook will likely remain positive and should lead to continued increases in economic activity. This should also be a positive for employment and consumers.
The Business Roundtable CEO Economic Outlook Index corroborated this as hiring plans for the next six months reached a record high.
The Langer Consumer Comfort Index increased to the highest level since April 2020 and all three components increased week-over-week (WoW).
From a market signal standpoint, commodities and cyclical equities were down last week and longer-term U.S. Treasury rates declined. The longer-term trends are still in place as cyclicals and commodities are outperforming on a six-month basis and Treasury rates have increased over that same period.
During the decline last week in cyclical equities and commodity prices, high yield spreads did not change and remain low, equity volatility increased but the absolute level was a lower high compared to prior moves in the last year, and oil volatility was stable.
The economic data continues to suggest that demand is strong, and consumer and labor market activity should improve in the second half of the year if supply constraints do not prevent demand from being realized. The market signals show the trends from the last 6-9 months are still in place and suggest that the outlook for economic growth and inflation are still positive.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Senior Vice President, Investment Strategy
Boyd Watterson Asset Management, LLC