This article appeared first in the Morning Brief. A peak for economic activity sounds more dangerous than it really is.
For some time, economists and strategists have eyed the peak of U.S. economic growth.
And manufacturing activity data released Monday suggests that the time is now — unless you look beyond the headline numbers.
The ISM's Manufacturing purchasing managers index posted a reading of 59.5 for July, down from June's reading of 60.6. This data shows the manufacturing sector grew last month – just a slow pace, but a slow growth rate :
Any reading above 50 indicates contraction while readings below 50 indicate growth. This report also marked the third consecutive month in which ISM's manufacturing PMI was dropped after reaching 64.7 in March.
The headline index reflects, however, what the internals of this data make clear: demand continues to overwhelm supply side of the economy.
The ISM Manufacturing PMI was very solid under the details, said Neil Dutta, head of economics at Renaissance Macro Research. Anyone saying anything but opposite does not know what they are doing.
In other words, debating whether or not the economy is past, at, approaching, or very near its moment of peak growth for this economic recovery doesn't help us understand what this data tells us. Firms cannot produce enough to fulfill customer orders, and inventories are being drawn down to fill the gap.
Business Survey Committee panels reported that their companies and suppliers continue to struggle to meet increasing demand levels, said Timothy Fiore, the chair of ISM's Manufacturing Business Survey Committee.
As we enter third quarter, all segments of the production economy are impacted by near historic raw material lead times, critical shortages of critical basic materials, rising commodity prices and difficulties in transporting goods, Fiore added.
Worker absenteeism, short-term shutdowns due to parts shortages and difficulties filling open positions continue to be issues limiting manufacturing growth potential, he wrote.
As one contact told ISM: Business levels continue to demonstrate strong demand, with no signs of backing down. Additionally, the data from IHS Markit released Monday indicates manufacturing activity increased at a faster pace in the U.S. in the last month with this index hitting a record high.
Michael Pearce, senior U.S. economist at Capital Economics, said Monday that the ISM report details suggest supply constraint, even though still severe, are now beginning to ease.
While the comments section once again reflected widespread supply problems and cost increases, the supplier delivery time index declined from 72.5 to 75.1 and the price paid index edged down to 85.7, from 92.1, with the latter also reflecting recent declines in commodity prices.
Had the demand-driven recovery expanded and, while an overall peak in the data appeared to be emerging from headline data or sub-indexes declining slightly, there is little doubt that a demand-driven recovery continues apace.
And as this recovery continues, economic data reveals time and again that the switch for "On Off" switches was removed as COVID vaccines in the spring rolled out and economic restrictions were'reversed' doesn't work quite so easily.
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