Insight - Global manufacturing surge accelerates goods inflation

Growth path: Workers wearing face masks polish bicycle wheel rims at a factory in China. Its manufacturers reported a steady expansion in February, in the 50th percentile, after a post-epidemic surge that peaked last November, when the local index was in the 95th percentile. ─ AP

GLOBAL manufacturing activity is surging as government support programmes and low interest rates protect consumers’ incomes while restrictions on leisure travel and other services divert spending into merchandise.

The result is a two-speed recovery in which manufacturers are struggling to keep up with booming demand, especially for long-lived durable goods, while many services firms are stuck in a slump.

In the United States, for example, prices for durable items intended to last three years or more were up by 3.5% in January compared with the same month a year earlier, compared with inflation of just 1.3% for services.

The twin-speed upturn could complicate decisions about interest rates and government income subsidies if it persists for a significant length of time.

But as the epidemic is brought under control and restrictions on travel and other service sector businesses are relaxed, some expenditure is likely to be directed away from the goods sector and back towards services.

The altered flow of consumer and business spending should ease some of the strong inflationary pressure building up in the goods sector, probably in the second half of the year and into the early part of 2022.

If merchandise inflation persists, however, OECD governments and central banks will be forced to review whether providing so much macroeconomic stimulus remains appropriate.

US manufacturers reported one of the most widespread improvements in business conditions for 30 years last month, the monthly survey conducted by the Institute for Supply Management found.

The composite purchasing managers’ index (PMI) rose to 60.8 in February, the highest level since February 2018, and before that May 2004.

The index was far above the 50-point threshold that divides expanding activity from a contraction, and in the 98th percentile for all months since 1980.

The manufacturing boom is likely to persist for at least several more months, with the new orders component at 64.8, which was in the 96th percentile for all months since 1980.

New orders for non-defence capital goods were rising at an annual rate of more than 8% at the end of last year, data from the US Census Bureau found.

In many industries, production has been unable to keep up with consumption, leading to a rapid depletion of inventories throughout the supply chain, including raw materials, work in progress, and finished but unsold items.

The ratio of manufacturers’ inventories to sales fell to 1.39 in December, after seasonal adjustments, down from an epidemic-driven high of 1.70 in April, but also below the pre-pandemic level of 1.40 a year earlier.

Production will need to continue increasing in the next few months to meet the influx of new orders and stabilise inventories at a manageable level.

The boom in manufacturing activity is not restricted to the US.

Manufacturers in the eurozone reported a similarly broad upturn last month, with the local PMI in the 96th percentile.

China’s manufacturers reported a steady expansion in February, in the 50th percentile, after a post-epidemic surge that peaked last November, when the local index was in the 95th percentile.

The manufacturing surge and associated freight boom is driving strong growth in worldwide consumption of diesel, helping to drain excess oil inventories and lift crude prices by two-thirds in just over three months.

World trade volumes were back above prior-year levels by December and increasing at the fastest year-on-year rate for 21 months, the Netherlands Bureau for Economic Policy Analysis found.

The manufacturing-led upturn is also lifting consumption and prices for a broad range of other commodities, from mineral ores and metals to forest products, fuelling talk about a “super-cycle”.

Semiconductor shortages have forced auto manufacturers to cut production schedules and are limiting the availability of some consumer electronics. But the economy should rebalance as restrictions on travel, tourism, hospitality and the entertainment sectors are progressively relaxed in the second quarter and especially in the second half of the year. ─ Reuters

John Kemp is a Reuters market analyst. The views expressed here are his own.

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