Before their current starring roles on Apple TV’s Widow’s Bay and Netflix’s The Diplomat, real-life spouses Matthew Rhys and Keri Russell played a married couple on FX’s The Americans. (In our estimation, one of the all-time great modern TV shows that remains criminally underrated). The Americans is set in the D.C. suburbs in the 1980s, against the backdrop of the Cold War. By day, Phillip and Elizabeth Jennings are travel agents raising two young kids. By night, they’re cold-blooded KGB operatives—donning disguises, stealing classified information, and killing whoever gets in their way. Complicating things for the duo is the fact that their neighbor and good friend Stan is an FBI agent who is hot on their trail. Watching the series had us morally conflicted, as we found ourselves rooting for the couple to succeed on their missions despite their working for the Soviet Union. The show was developed by former CIA officer Joe Weisberg and inspired in part by the story of the “Illegals Program,” which saw ten undercover Russian sleeper agents arrested in 2010.
It may be a little while longer until the U.S. factory sector goes back to sleep, at least, if the Philadelphia Fed has anything to say about the matter. Its latest Manufacturing Survey for June saw an uptick in the headline from -0.4 to 10.3, besting the 9.8 consensus. If you’ll recall, in last Tuesday’s Feather, we wrote about the New York Fed’s Empire Mfg data flagging 1) a fading restock impulse and demand pull-ahead and 2) rising cost pass-through behavior. While the Philly Fed release lends further credence to #2, it suggests the potential for a rekindling in the restock narrative upstream, given the Fed’s Third District is the nation’s chemical hub and thus a leader for the overall supply chain. Per the report, “More than 61 percent of firms expect an increase in activity over the next six months, 11 percent expect a decrease, and 16 percent expect no change. The future new orders index rose 7 points to 60.8, and the future shipments index jumped 15 points to 60.3; both indexes are at five-year highs (bolding ours).”
The first chart in today’s missive is a replica of the first chart in the June 16th Feather, comparing the ‘Current’ and ‘Future’ sub-indices of the Philly Fed release but normalized using z-scores (pink and aqua bars). Future New Orders were an above-trend 1.22 vs. the Current 1.11, while Future Shipments registered a 1.38 vs. their Current counterpart of just 0.14. Current Inventories have shown signs of a drawdown (-0.3), but there’s expectations for a future rebuild (0.84). Additionally, the labor gauges, Employment and Workweek, are signaling future anticipated strength, particularly for the latter as firms seek to maximize the productivity of their existing employees.
In addition to Future New Orders and Shipments hitting five-year highs, Future Capex rose to its highest levels since June 2021. When converted to a z-score, June rose from 1.08 to 1.98 (red line). A look-back to history shows that, besides the aftermath of the pandemic, the current level has precedents only in the mid-1970s (Yom Kippur War and resulting Oil Crisis), early 1984, and late 2017. Following those precedents, the above-trend levels proved unsustainable and quickly retreated, which gives us pause as to the longevity of the current above-trend levels.
Future capital investments will also be hamstrung should upstream manufacturers continue to face margin pressures that require them to pass those costs downstream. The spread between Current Prices Received and Current Prices Paid gives us a margin proxy (blue line), and June saw a notable decline from May’s -21.6 to -32.9. This marks an eight-month low that is roughly double the -17.3 average going back to 1968. In fact, the current squeeze is historically tight, with reads this negative only occurring 7% of the time. Clearly, upstream proprietors feel they have no choice but to pass higher costs through. Future Prices Received rose nearly seven points to 67.2, their highest since August 2021 (orange line). Outside of the pandemic’s aftermath when global supply chains were squeezed, current levels only harken back to the stagflationary 1970s.
Thankfully, we have data from the Logistics Manager’s Index (LMI) to give more color on how upstream and downstream players are navigating the current war-impacted environment. Its latest report from May noted that current aggregate logistics costs (Inventory Costs + Warehousing Prices + Transportation Prices) clocked in at 250.9, the highest total since March 2022. Additionally, the spread between Inventory Costs and Inventory Levels was a record-high 29.2 points, besting November 2021’s post-pandemic peak of 28.8. The report cautioned: “The logistics industry crashed soon after this previous peak due to a combination of too much inventory and high inflation. Inventories have been lower in the run-up to this peak, so the chance of a crash may be softened in this case. However, like 2021-2022, inflation is present in 2026… it will be important to keep an eye on these metrics moving forward.”
Looking to the future, the LMI data validates the downstream pass-through signal from the Philly Fed data. Upstream firms are signaling higher expectations for Transportation, Warehousing, and Inventory Costs vs. Downstream ones (green and purple bars), totaling 263.3 vs. 233.8. Lucky for those Upstream producers, pass-through may be easier given Downstream firms are “Russian” to restock their shelves. Downstream Future Inventory Levels currently sit at an expansionary 68.8, whereas the same gauge for Upstream is a flat 50.0 (no growth predicted). As noted in the report: “Taken together, it seems that Upstream firms will be dealing with more limited capacity and higher costs, making it more difficult—and expensive—for them to build inventories quickly. Downstream firms seem less concerned with increasing costs and may therefore be more comfortable increasing Inventory Levels.” Should that Downstream restock impulse change, however, pass-through of higher costs from Upstream will prove more difficult than the double life lived by Phillip and Elizabeth on The Americans.