U.S. Leading Indicators: Strong Fundamentals with Mixed Signals

Joe Zaciek

Senior Manager, Research & Industry Analysis 248.430.5960 │ jzaciek@oesa.org

Leading economic indicators have been widely utilized for the monitoring of macro level business conditions, particularly within the automotive industry which not only contributes significantly to the indicators themselves but is strongly correlated with their readings. Data releases from the beginning of 2022 have wavered but have remained at strong fundamental levels. However, the details contained within these releases are far more concerning in comparison to the headline figures and are cause for concern as the automotive supply base continues to struggle with the residual impacts of the COVID-19 pandemic and semiconductor crisis. This article is aimed to enlighten the reader to the risk factors that are growing within the U.S. economy at a consumer, manufacturing, and financial level.

The U.S. consumer is experiencing the most unbalanced market since the great recession. The unemployment rate has reached pre-pandemic lows and initial claims for unemployment insurance has fallen to the lowest level since the Reagan Administration. The incredibly scarce labor market has driven average hourly earnings to the highest level in the series history , $31.73/hour up 6.6% YoY. Due to these circumstances, which in normal times would be a bull case for the automotive industry, inflation has risen to a 40-year high as firms adjust pricing to offset the high cost of labor and materials. Meanwhile, the price of retail gasoline has risen to over $4/gal ., weighing heavily on consumer sentiment which is hovering near great recession lows. Consumers are, on one hand, benefiting greatly from increased wages, low borrowing costs and rich portfolios. However, on the other hand, the price of everything is rising at an even faster rate, and a limited selection of goods available, namely autos, has caused a drastic drop in their confidence.

Headline data from the Board of Governors of the Federal Reserve System , U.S. Census Bureau , and ISM Manufacturing PMI , suggest that both industrial and manufacturing production is growing at a robust rate. In March, industrial and manufacturing production grew at a 5.5% and 5.2% year-overyear rate, respectively. March, new orders and shipments for CAPEX excluding aircraft is up 10.2% and 10.9% year over year, respectively. Additionally, the ISM Manufacturing PMI was 57.1 in March, extending its growth trend to 22 months but slowing slightly from February. However, delving into the details of the ISM report, we see a few areas of concern. Supplier deliveries continue to slow, the backlog of orders continue to grow, and price growth extended its 22-month trend and is accelerating. These observations further exemplify the disruption of manufacturing supply chains. Additionally, the U.S. producer price index for final demand accelerated 0.9 ppts. from February to 11.2% year over year in March. Prices of inputs for stage 3 goods producers , a proxy for input costs at a tier 1 level, rose at a 25% year-over-year rate. These cost increases are easily covered for manufacturers that have autonomy in the price of the goods they are producing, but for automotive suppliers, whose prices were mostly set at period of price stability, the issue of recovery becomes increasingly complicated and, over the near-term, will need to be taken out of firm profitability. The robust demand for manufactured goods remains, for the time being, but the imbalances in supply chain efficiency, timing, cost etc. will eventually need to be corrected.

Financial conditions have also been deteriorating in since the beginning of the year. Major equity indexes are down markedly year to date, and year-over-year gains are hanging on by a thread . Additionally, the Federal Reserve hiked its policy rate in March, its first rate hike since the its

emergency measures of monetary stimulus were implemented at the onset of the pandemic. The Fed has also become increasingly hawkish in its stance on inflation since its March meeting. A Reuters survey of economists shows the expectation of two sequential 50 bps rate hikes at the next two Fed meetings is expected on average . This means that the cost of borrowing will increase for both firms and consumers and poses a substantial threat to new vehicle sales, especially with the product mix skewed to highest priced offerings. Lastly, the pulling ahead of the expected Fed tightening cycle, coupled with the onset of war in the Ukraine, raised the front end of the yield curve sharply, resulting in an inversion of the 10-2 spread on April 1, 2022 . Although an inverted yield curve is not directly linked with the onset of a recession, it has preceded the prior six, and has since caused economists to increase their estimated probability of a recession in the coming 12 months by 10 ppts. to 28% .

The automotive supply base has remained vigilant throughout the pandemic and met its customer demand in the face of countless disruptions. Business leaders must continue to push their teams through these challenges and be prepared for more to come. The U.S. economic fundamentals remain strong, but the imbalances are growing and carry the possibility of further disruption. Thorough monitoring of these leading indicators is paramount, so that business leaders can be prepared for what’s to come.

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To learn more about economic and industry trends, contact Joe Zaciek , Senior Manager, Research and Industry Analysis, at jzaciek@oesa.org.