Physicians' Guide to Wealth

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US Economic Engine Chugs On

Dec 6, 2022

Despite all the challenges going on around the world, the US economic engine continues to chug forward. The Group of 7 Nations (referred to as G7 nations, which were formerly G8 until Russia was expelled in 2014) references the intergovernmental association of countries representing the world's biggest developing economies. The G7 nations are the US, Canada, the United Kingdom, France, Italy, Germany, and Japan. Among the G7 nations, the US economy appears to have the least number of economic trials and a head start reducing inflation due to the prompt actions of the Federal Reserve being the earliest of all central bankers to implement interest rate hikes.
Yesterday, the US Department of Commerce released its monthly report on US factory orders with more good news. Econoday provided this summary of the report:
 
“New orders for US manufactured goods rose by 1 percent in October of 2022, following a 0.3 percent increase in the prior month and above market expectations of a 0.7 percent gain. Orders for durable goods rose by 0.4 percent (vs. 0.3 percent in September), largely due to increased orders for transportation equipment (0.4 percent vs. 1.2 percent), machinery (1.4 percent vs. 0.3 percent), and computers and electronic products (0.4 percent vs. 0.6 percent). Also, demand for non-durable goods advanced by 1 percent, up from a 0.3 percent increase. Excluding transportation, factory orders went up 0.8 percent (vs. 0.1 percent)….”
 
“Econoday's Consensus Divergence Index has been hovering back-and-forth around the zero line, but after this report along with the strong ISM services result, the index is now moving visibly higher, too plus 11 to indicate that economists, on the net, are under-estimating, at least to a degree, the strength of the US economy.”
 
Excluding two months of very small monthly decreases since 2020, manufacturers appear to have quickly recovered from the massive impact of work stoppage in 2020 and have experienced steady monthly gains in new orders and output since.

This is also one of the longest consecutive growth cycles of rising factory orders since 1992, when these reports began being published.

As mentioned in previous Weekly Briefs, for the past 20 years, many US companies have been relocating their manufacturing plants back into the US to limit the risk of supply chain disruptions and theft of intellectual property (IP). The biggest financial risk to contracting with foreign manufacturers, whether iPhones or bicycles, is the risk of providing foreign manufacturers with patented blueprints so they can make the products. If these blueprints are somehow released to the competition, the market share is compromised. Samsung was ordered to pay Apple $1.05 billion in 2015 for their infringement of several Apple-designed iPhone features, including bounce back scrolling feature and zoom text with finger tap that Samsung somehow obtained and incorporated into their own phones.

Yesterday was also the release of the US ISM Manufacturing Report, which is based on a survey among purchasing managers. This report was not so rosy. The ISM index dropped below 50 to 49.0, which forecasts a contraction for the industry. Trading Economics offered this summary:

“The ISM Manufacturing PMI declined to 49 in November of 2022 from 50.2 in October and more than market forecasts of 49.8, pointing to the first contraction in factory activity since May 2020. New orders (47.2 vs. 49.2), supplier deliveries (47.2 vs. 46.8), and a backlog of orders (40 vs. 45.3) contracted faster. Also, employment declined (48.4 vs. 50), with companies confirming that they are continuing to manage headcounts through a combination of hiring freezes, employee attrition, and now layoffs. At the same time, slower growth was reported for both production (51.5 vs. 52.3) and inventories (50.9 vs 52.5). On a positive note, price pressures eased again (43 vs. 46.6).”

Timothy Fiore, Chair of the ISM Manufacturing Business Committee, stated in the report:

“Managing head counts and total supply chain inventories remain primary goals. Order backlogs, prices, and now lead times are declining rapidly, which should bring buyers and sellers back to the table to refill order books based on 2023 business plans.”

The growth of domestic factory orders is a trailing indicator of actual recent growth, while the ISM Purchasing Manager Index is a forecaster of the future. Factory orders continue to rise as managers are citing concerns orders may decline in 2023. It will remain to be seen if the less-than-rosy ISM forecasts come to fruition.

What Does This Mean to Me?

There are many facets of the US economy, and rarely are all components functioning at peak performance. It is important to focus on key aspects of the US economy to determine its overall health and potential for continued growth. We often focus on consumer sentiment, confidence, and spending because consumers represent 66% of the overall economic activity. If factory orders are increasing, then supply chain issues are diminishing and smoothing out the product delivery that has challenged businesses since the start of the pandemic. However, the consensus among the purchasing managers is slower growth in 2023 over concerns of rising interest rates and prices that may slow product sales and new orders. No doubt, business leaders are taking notice of rising interest rates and prices and implementing precautions should the US economy slow faster than projected. All this to say, the most anticipated recession forecasted for 2023 indicates a low bar of expectations for next year that may result in pleasant surprises should conditions not be as dire as analysts' projects.

We maintain over overall favorable rating on the US economy and the prospects of the stock market recovering. There has been no time in history the US economy has not recovered from recessions and the stock market has not rebounded to new highs. No doubt, business leaders are taking notice of rising interest rates and prices and implementing precautions should the US economy slow faster than projected. All this to say, the most anticipated 2023 recession for this century indicates a low bar of expectations for next year that may result in pleasant surprises should conditions not be as dire as analysts' projects.

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