By Brad Stevens, Principal and Founder, SRM
As 2020 comes to an end, here are a couple of items to consider within the economy that might be important.
Let’s start with the oil industry. Just a slight jump in oil prices and the U.S. drilling industry roars back to life. The U.S. drill rig count increased by 10 in three days. The refiners pushed out more production last week increasing virtually all levels of final product. This also pulled crude oil supplies on hand down. Not to worry though as crude supplies are expected to rebound in the next two weeks due to both U.S. and OPEC production levels. The news of a COVID-19 vaccine has markets optimistic over a return to a travel normal, that might be very premature. It is unlikely that the new normal will approach the old demand levels for some time. Another key bit of news was on Thursday, Dec. 3, OPEC PLUS (those countries that are not part of OPEC but also are strong oil producers) gave a nice big hug to the U.S. oil industry. The group approved a 500,000 barrel a day increase in production that will replace a 2 million barrel a day sunset production level. This allows for an actual decrease in overall production that will allow prices to rise a bit to support the U.S. industry that cannot compete with oil prices in the low $40 level.
The Markit Manufacturing PMI Report showed a nice increase in November rising to 57.7. The improvement indicates that manufacturing is stabilizing at a healthy level. Continuation of the growth is something to keep an eye on. While there is no sign of any government action to curtail manufacturing, it would not take much for firms here or there to be shut down or for production to cut back if a spread through a plant occurred. The main issues remain in the supply chain, where a key inventory item becomes short in supply causing other dominos to fall, resulting in a short-term closing or production interruption.
The November ISM Manufacturing report showed a flat report from October, moving slightly down from 59.3 to 57.5. This number is still very strong and indicates that manufacturing continues to grow at a healthy pace. Within the report, the sub-categories were all showing that the future should be good to stable. New orders and inventory levels were shown as rising at the pace near the October levels. Areas that have slowed slightly in growth include production. Based on the report this appears related to the level of employment which seems to have stalled. Manufacturing firms indicate it is getting hard to find new staff, qualified for the positions or who wish to work. That is a throwback to prior to the COVID-19 pandemic. Within the report there are indications that inflation is now starting to be a concern. There are more commodities in short supply and of the commodities tracked, all but one is increasing in price. A key early indicator of coming good economic times is corrugated boxes used for shipping. This commodity is in short supply.
There are some early signs that December will be a down month. First, the Richmond Fed economic numbers for late November dropped by half. This could be due to COVID-19 spread issues that are causing problems, or it might have been a signal that late October numbers were too aggressive and pulled some production into the earlier period. The October number was the highest in over a year. The second indication of a soft December was the non-manufacturing ISM. That number dropped from 61 to 58. While still reflecting growth, that growth is slowing. Embedded in the report were forward indicators that were also softening. This again is likely due to the restrictions that many local and state governments are requiring that are curtailing business because of the spread of COVID-19.
Brad Stevens is the principal and founder of SRM. For more information visit www.srmallc.net.
