Patient Prego Pachyderms

It’s no secret that elephants are the world’s largest land mammals. Naturally, they have the longest pregnancies. Asian elephant moms’ shortest wait stretches twice that of humans, to 18 months. Gestations key not just off size, but also intellect.  Elephants are big-time smart with impressive brains to show for it, as in three times the size of us wee homo sapiens with the same multiple applied to their neuron count of 250 billion. The old addage, ‘an elephant never forgets’ is based on fact. Their temporal lobe region, as in the memory engine, is exceptionally developed, with a greater number of folds that store that much more information. The details retained are essential to elephants’ survival – where food and water can be found and the GPS to guide their way. It’s said that the herd’s matriarch can lead those she’s entrusted to protect to waterholes by calling up complex mental maps that cover hundreds of miles.

The Dallas Fed has one-upped Mama Elephant. Through April, the current General Business Activity index in the nation’s second-largest factory state and biggest exporter remained in contraction for a 24th consecutive month (lilac line). Without a definitive move toward breakeven, the only descriptive harkens the ‘R’-word. Notably, for the two-decade-old survey, the only longer span of negativity ran 27 months from September 2007 to November 2009, bookending the entirety of the Great Recession, and then some (lilac line). Since the headline gauge first dipped into negative territory in May 2022, Core Goods CPI has more than halved to a 5.7% six-month annualized rate from the September 2021 post-pandemic peak of 13.2% (aqua line).

Forward guidance for finished goods prices via Texas factories provides a check against the persistent pummeling in Lone Star state business conditions. As core goods prices moved to deflation late last year, there was a sympathetic move higher in selling price expectations at factory gates. At 27.0, that impulse crested in December (teal line) and has since cooled through March and April, both of which printed at 17.3. Despite the positivity, the last two months’ level is slightly below the long-run average of 20.8. The upshot: The current six-month run for core goods deflation is more likely to extend than end in coming months.

Granted, the outlook for Texas manufacturing output continued to climb at the start of the second quarter. The future production index advanced to 34.8 in April, up from the first quarter average of 25.5 (blue line). This marked the most optimistic District executives have been since 2022’s first quarter. Not to be party poopers, but there’s a sense that prospects might be more aspirational than reality.

Exhibit A is the relative improvement in demand versus supply. At 0.5, current April New Orders less current Inventories barely rose above the waterline at 0.5 (yellow line). Moreover, the uptick had more to do with a drop in supply than a gain in demand. Inventories dropped more than 10 points to -5.8, while New Orders registered another contraction at -5.3, which was a decided improvement vis-à-vis March’s -11.8.

Exhibit B – at 0.6, the green shoot that was a modest expansion in Backlogs in 2024’s first quarter relapsed as winter turned to spring. April reversed course to -3.2, nearly matching 2023’s fourth-quarter average of -3.4. This tentatively extended the period of retrenchment to eight of the last nine quarters. What tends to follow weak Backlogs are labor pains (pun intended).

Outright declines in the Dallas Fed manufacturing current employment index are the preserve of recession, whether of the whole economy or industrial variety. April’s -0.1 print followed the first quarter’s -0.8 average (purple line). The kindest spin to put on the current employment picture is “stall speed.” However, when the forward-looking workweek is woven into the narrative, our favorite ‘hours before bodies’ mantra shows through. In four of the last five quarters and the last three in a row, the current workweek has flagged shorter production schedules (-2.3 thus far in Q2 from -8.9 prior, orange line). Taken together, there’s clear downside risk for manufacturing aggregate hours worked in Friday’s U.S. employment report.

Interestingly, the weakening in jobs and hours occurred as factory wage pressures rose with current wages piercing the 30 threshold. Precedent dictates a labor squeeze in the making. This, of course, assumes workers remain gainfully employed, which brings us to the Dallas Fed’s special April questions focused on Artificial Intelligence (AI). One question jumped off the page: “On net, how has the use of AI affected employment at your firm, or how do you expect it to?” For the 192 firms responding, who either use or plan to use AI, the net effect was negative as 11% saw a decreased need for workers, while 3% foresaw the opposite.

Acting as an offset to Lone Star State angst is optimism in the Golden State’s purchasing managers’ index. Accelerating first and second-quarter New Orders (fuchsia line) counter April contractions in the Fed Districts of New York, Richmond, Kansas City and Dallas. Should ISM April New Orders surprise anew to the upside, it could be a California story. A caveat on this caveat is the strong start to China’s exports in 2024 reverting to losses in March. The dumping of cheap exports to mitigate domestic weakness culminated in a 3.5% year-over-year decline in industrial profits. The likeliest outcome is California joining Texas’ waiting game.


Posted in Daily Feather.