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1. Is the U.S. Manufacturing Boom Over?

• We have seen a sharp reversal in US manufacturing confidence and capital expenditures since earlier this year.
  
• Company leaders now expect just a 1% increase in capital outlays this year, down from December 2023's estimate of nearly 12%.

What you need to know:  US factory activity shrank faster in May¹, with output nearing stagnation and orders dropping the most in nearly two years. This follows doubts about the Federal Reserve’s policy and future inflation, one clear reality stands out – the prolonged period of high interest rates increasingly burdens those refinancing low-cost loans and curbs manufacturing investment. 

Why it matters:  U.S. manufacturing construction spending, particularly in the electric vehicle and semiconductor sectors, has driven significant growth over the last two years. For instance, spending surged to a record annualized pace² of over $200 billion in 2023, up from $76 billion in 2021. Keep in mind that this investment created jobs, higher wages, and economic growth. But now it seems to be sharply reversing. 

Now the Dunham Deep Dive: Well, it appears like the U.S. manufacturing Capex (aka capital expenditures and spending) boom has ended.

The latest data all shows that big producers are scaling back investments and further spending – for instance:

• Capital investments in manufacturing are projected to rise by only 3.9% this year, down from an earlier estimate of 6.7% in January, according to S&P Global Market Intelligence.
  
• The Institute for Supply Management's (ISM) latest economic forecast indicates that company leaders expect a mere 1% increase in capital outlays this year, significantly lower than the nearly 12% estimate from last December.
  
• The Association for Manufacturing Technology reported a notable decline, with average monthly orders from contract machine shops down by 11.3% in 2024 compared to 2023.

So, what could be causing this slowdown in what was once a key growth engine of the U.S. economy?

A major reason is that higher interest rates are throttling capex (investment spending is one of the most interest-rate-sensitive economic activities). Another is that U.S. consumption seems to be slowing (companies won’t invest if demand isn’t growing – hence why US factory activity shrank faster in May with output stagnating and orders dropping the most in nearly two years).

But I still believe the biggest issue facing U.S. manufacturing is the glut of Chinese goods flooding all over the world (I wrote more about this here in case you missed it).

Thus, the fading U.S. manufacturing sector may be yet another canary in the coal mine for the economy.

I will continue to monitor.

2. OPEC+ Gives Up On $100 Oil Target - Who’s Surprised?

• After relentlessly chasing $100-a-barrel oil, the OPEC+ oil cartel has essentially thrown in the towel.
  
• OPEC+ members will be able to start adding more barrels to the market from October, with significant increases expected next year..

What you need to know: Based on the path published³ by Saudi officials, OPEC+ (the cartel of oil producers led by Saudi Arabia and Russia) will see oil output be more than 500,000 barrels a day higher by December than it is now, and about 1.8 million barrels higher by mid-2025. That’s a significant increase, making it hard to spin the deal as a bullish surprise. Generally, more oil production means lower prices, not the opposite.

OPEC+ stated that output increases would be conditional on the market's health, But the mere fact the group is telegraphing its eagerness to pump more is telling.

Why it matters: After years of deliberately curbing supply to try and lift the price of oil, OPEC+ is now throwing in the towel and beginning to add barrels into the world economy. This will add extra supply at a time when demand seems fickle amid slowing growth expectations – potentially leading to a “race to the bottom” for oil producers (similar to when Saudi Arabia tried to flush out U.S. shale frackers back in 2015-16⁴).

Now the Dunham Deep Dive: Well, this shouldn’t come as a surprise.

Back in December 2023, I wrote to you in the article – “The Perpetual Game: Saudi Arabia, OPEC, and Oil Markets are Stuck in a Prisoner’s Dilemma” – that contrary to public opinion, the OPEC+ oil cuts were doomed to fail. And that instead, the oil price had more potential downside than upside once the inevitable towel was thrown in and countries began over-pumping to regain lost ground.

The article I linked above goes into all this. Still, the gist is: Saudi Arabia had issues controlling other countries from overproducing from their designated quotas (which meant they were “cheating”). Meanwhile, countries – like the U.S., Brazil, Guyana, etc- all took advantage of the higher oil prices courtesy of OPEC+ supply cuts, thus they ramped up output to soak up those margins.

This essentially nullified what OPEC+ was trying to do in the first place. Actually, it even hurt them as they lost market share.

• Which is exactly what happened. According to a Barrons⁵ piece from March 2024, “OPEC and its allies, altogether known as OPEC+, have shrunk their market share to the lowest level ever as they hold back production to prop up prices.”

The shift toward higher production is now underway, and with it, lower oil prices.

This will create more tension potentially with Saudi Arabia and OPEC nations as this would negatively affect U.S. shale frackers (albeit the U.S. consumer and businesses would feel good about cheaper oil).

It appears like the world is going to be dealing with “gluts” over the next year – from China’s excess manufacturing exports (specifically EVs and solar panels and iron) to OPEC+ pumping more and more oil.

Let’s see how it goes

3. Some Relief for Price-Weary Consumers as Inflation Comes Down? The Good, Bad, and Ugly

• May consumer price index shows a decline in prices for both necessities and discretionary items
  
• The CPI, a broad gauge of inflation, remained unchanged, marking the tamest level since the summer of 2022.

What you need to know: U.S. consumers, who have been battered by inflation of the last few years, breathed a sigh of relief last month as many necessities — from groceries to gasoline to car insurance — became cheaper⁶. Even the core-CPI measure - which excludes volatile items like food and fuel - rose by the less-than-projected 0.2% - a welcome break after a series of larger increases this year. The CPI report also revealed that even many discretionary goods and services showed slower price growth or actual declines in May compared to the previous month. 

Why this matters: The core-CPI rose 3.4% year-over-year - cooling to the slowest pace in more than three years and the second straight month coming in below expectations. The figures may indicate the early stages of inflation resuming a downward trend and bolster the case that the Federal Reserve may begin cutting interest rates sooner rather than later – potentially declaring that the inflation wave is done. 

Now the Dunham Deep Dive: As a consumer, I welcome lower prices. And while the data and headlines show encouragement, it’s important to remember two key things:

1. Although inflation is “decelerating”, it’s still positive. This means that inflation is rising now at a slower. Put simply, prices (in general) keep going up but not as aggressively as in previous years.
   
2. Stretched consumers will need much more relief, as many are still burdened by prices that are over 20% higher than at the end of 2020 – which explains the lukewarm consumer sentiment about the economy even as economic growth and labor hold steady.

So, while prices continue rising, there is some good (and interesting) data – such as the declining prices in various essential and discretionary (aka wanted but not necessary) goods and services (see the list below).

This tells me three things -

The Good: While price growth is declining (some goods showing outright deflation, aka a drop in prices), consumers will have leftover money to spend elsewhere, save, or repay debts.

The Bad: Falling prices don’t help corporate margins – so this may be a sign that companies are struggling to move inventory amid declining sales (hence lowering prices to spur sales).

The Ugly: Falling prices are historically an underlying issue where demand can’t keep up with supply (aka too much output relative to buying). Thus, if demand is slowing, prices fall as a consequence. This could lead to layoffs, weaker wage growth, declining business investment, and more negative ripple effects.

Just something to monitor.

Anyways, who knows what will happen? Maybe this is just noisy data.

As usual, just some food for thought.

Have a great rest of your weekend.

Sources:

1. Fed Rate Cuts Latest: Investment Plans Show Pain of Fed Reset - Bloomberg
   
2. US Manufacturing Boom Is About More Than EVs, Chips - Bloomberg
   
3. OPEC+ Says Goodbye to Its $100-a-Barrel Oil Quest - Bloomberg
   
4. OPEC nearly killed this US oil company. Now it's back (cnn.com)
   
5. OPEC Market Share Plunges to New Low. U.S. Producers Benefit. - Barron's (barrons.com)
   
6. US Inflation Report Offers Relief for Consumers as Some Prices Fall - Bloomberg

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