When baseball was in its infancy in the late 19th century, American teams’ names captured their look. There were the Blues in Hartford and the Grays in Louisville. Chicago and Boston had the White Stockings and Red Stockings, respectively. By the turn of the 20th century, unofficial nicknames defined a team’s branding. Punchy sports writers couldn’t help but change Stockings to “Sox.” But why the ‘x’? Simplified wording dates back to Noah Webster, who campaigned passionately for American English to be distinguished from its British predecessor. Webster’s philosophy: The spelling ought to be more rational and sensical. Joining him in spirit was Joseph Medill, the 19th century publisher of the Chicago Tribune. His paper popularized the “Sox” spelling. Chicago’s American League club adopted White Sox as its official team name in 1903. Boston officially became the Red Sox in 1908.
Ninety years on, another SOX was born. In 1993, the Philadelphia Stock Exchange created the PHLX Semiconductor Sector (ticker SOX), a capitalization-weighted index composed of the 30 largest U.S. companies primarily involved in the design, distribution, manufacture, and sale of semiconductors.
In case you missed the regular season, the SOX posted a -29.2% year-over-year (YoY) drop in September, its weakest showing since the Great Recession (purple line). The chips these companies produce are a flagship upstream indicator in the global industrial supply chain, much like steel, aluminum, copper, and basic chemicals. Notably, the latest SOX step-back took out the cyclical episodes in the 2010s, the European recession in 2012-13, the industrial recession in 2015-16 and the U.S./China trade war in 2018-19. (WHEW!)
That brings us to yesterday’s data dump of global purchasing managers’ indices (PMIs). The first business day of the month has dictated the inflationary narrative script since the trade war first broke out followed by the pandemic. Since October 2020, of the 37 countries reporting an input price index, each one has flagged rising prices paid. And then came August and September, two months during which Taiwan (orange line) and China (blue line) reported Input Prices held below the 50-line that demarks expansions from contractions.
We don’t need to remind you that Taiwan is the most important semiconductor producer in the world; China is in the top five. The chip shortage story that made the rounds last year and generated inflation concerns, especially for the production of motor vehicles, has reversed. The U.S. Treasury yield curve ratified the deflationary impulse, closing September at a negative 39 basis points between the two-year and ten-year tenors (magenta line). Yesterday’s September Institute for Supply Management (ISM) Manufacturing Report on Business validated the emerging deflationary theme reflected in the yield curve: “Many Business Survey Committee panelists’ companies are now managing head counts through hiring freezes and attrition to lower levels, with medium- and long-term demand more uncertain.”
The downside ISM disappointment was most evident in New Orders, which tumbled to 47.1 last month from 51.3 in August. Employment also fell into the red, to 48.7 from 54.2 (turquoise line). Disclaimer: New Orders did not scream recession as they didn’t slam into the lower 40s. That said, the comments we bolded above imply that a more challenging period for industrial activity lies ahead, echoing recently released CEO and CFO surveys.
To that end, the ISM Manufacturing Employment index has been in factory labor cost-cutting mode (below 50) in four of the last five months. We would expect that today’s Job Openings and Labor Turnover Survey (JOLTS) displays a (terribly lagged) continued downdraft in manufacturing job openings for a fourth straight month through August. The YoY trend has been contracting since May and registered an -11.6% decline in July (green line). Burning Glass’s manufacturing job postings also have been waning on a monthly basis since peaking in February.
A broader signal about the jobless picture also is pointing higher. The current and future view with respect to unemployment’s trajectory via upper-income households has turned bearish. The top-third of the income distribution encompasses both the management ranks responsible for staffing levels and business owners who make hiring and firing decisions. Friday’s September University of Michigan consumer survey revealed that current bad news heard by this cohort regarding unemployment rose to 24% respondents (light blue line), an eight-month high that wiped clean the post-pandemic low of 16% reached in April. Moreover, higher unemployment expectations (yellow line) persisted at an above-average reading of 36%, three times’ July 2021’s cycle low of 12%. The risk for Friday’s consensus unemployment rate, expected to remain at 3.7%, is to the upside.
Getting back to American English over-simplifications, you can add M&A to the long list. The promised ‘synergies’ consultants and investment bankers promise to deliver is a polite term to presage redundancies that will add to the higher unemployment narrative in the year following the rush to the corporate altar. One case in point comes is M&T Bank. It laid off 325 employees in Connecticut stemming from its acquisition of People’s United Bank. And the job is not complete; M&T is planning to eliminate another 333 positions. You can bet what’s left of your bottom dollar that manufacturing and finance won’t be the only sectors to come under the knife as the evolving macro-outlook becomes more challenging. Federal Reserve Chair Jerome Powell is in a veritable footrace with the hands of time.