QUICK QUILL — The Philly Fed flagged a continuation in high input costs that has factory players in the Chemicals hub keen to pass through higher prices. The red flag raised, however, is that historical spikes of today’s magnitude have been followed by nasty bouts of payback. Indeed, a margin squeeze proxy has sunk so deep into negativity, it sits in the 93^rd percentile of history to 1968. The latest Logistics Manager’s Index corroborates the unsustainability of the current environment as aggregate logistics costs have risen to the highest since March 2022. Upstream firms plan to ratchet back inventories, which are sporting prohibitively high holding costs, in the hopes that Downstream sees demand rise sufficiently to restock and absorb the higher prices they’ve had to bear. While the transportation sector will continue to benefit, the risks of a pullback grow with every margin point that’s bled from U.S. firms’ bottom lines.

TAKEAWAYS

1. On a z-score basis, Philly Fed Mfg Future Capex rose from 1.08 to 1.98 in June, a level with precedents only in the 1970s, 1984, and 2017; past prints near the +2 level quickly subsided, suggesting that the longevity of the current optimism may be short-lived
2. The Philly Fed Mfg margin proxy sank to -32.9, a deeply negative print worse than 93% of months since 1968; Philly’s status as a chemicals hub suggests upstream producers anticipate passing through higher costs, as Future Prices Received rose to a five-year high of 67.2
3. The sum of Future Transportation Prices, Warehouse Prices, and Inventory Costs was 263.3 for Upstream vs. 233.8 for Downstream in May, per the LMI; luckily for Upstream producers, the Downstream Future Inventory Levels gauge sits at an expansionary 68.8