Many experts have been debating whether the current surge in inflation will be temporal or more permanent. When one moves from the theoretical realm to the reality of supply chains the picture becomes more concerning.
The rate of inflation increased to 5.39% in June, pushing the real 10-year Treasury rate to -3.87%. Declining real interest rates are typically a positive sign for durable goods manufacturing and capital equipment consumption.
Automotive industry news during the second quarter of the year was highly concentrated around the financials of the big automakers and the improved profits they generated thanks to strong pricing despite supply chain challenges which suppressed production levels at many factories in the United States and around the world. For this reason less attention was given to monthly volumes (at seasonally adjusted annual rates, SAAR). Production constraints aside, second quarter sales volumes were impressive, led by April’s 19.2 million units reading which then gave way to a May reading of 17.5 million.
The strong growth in the metalworking industry should lead to accelerating growth in machine tool orders throughout 2021.
The Gardner Business Index moved higher in June thanks to a broad-based expansion in business activity. Quickly rising backlog and employment levels played a significant role in June’s higher reading. The month’s results also marked the first time in 2021 that Gardner’s supplier deliveries reading did not increase on the prior month. Slowing supply chains and lengthening order-to-fulfillment times correlate with rising supplier delivery readings.
Easy comparisons with April and May have sent the month-over-month rate of growth in durable goods new orders skyrocketing. With a few months of easy comparisons and strong consumer durable goods spending, the annual rate of growth in durable goods new orders should continue to accelerate in 2021.
Struggling supply chains explain only part of the story behind the inability of industry to keep up with the demand for goods and services and the consequential rise in prices. As America was putting the worse of COVID behind it during the first half of 2021, a large proportion of the workforce failed to return. Just prior to the pandemic, the labor force participation rate was just over 63%. That rate then fell to 60% with the forced closure of large portions of the select industries, but then quickly rebounded to 61.7% by September 2020. In the 9 months that followed, the labor participation rate would remain virtually unchanged.
Business Activity Advances to the Second-Highest Reading in Recorded History After moving lower during the past two months, the Gardner Business Index (GBI) rebounded to a near all-time high of 63.1.
Compared with the last two months, housing permits were down about 10% in May. However, the year-over-year change in the real 10-year Treasury rate went down significantly, which is normally a positive sign for growth in housing permits.
Without an easy comparison with last year due to the economic lockdown, May’s consumer durable goods spending increased more than 25% compared with one year ago.
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