Eyes on the Economy: Manufacturing May Be Out of Its Recession

Manufacturing May Be Out of Its Recession

Business activity in manufacturing was mostly in contraction for more than a year, leading experts to consider the sector in a recession. However, the sector entered an expansion mode again in the first two months of 2024. The S&P U.S. Manufacturing Purchasing Managers’ Index increased to 52.2, beating forecasts of 51.5 and January’s figure of 50.7. A reading above 50 indicates expansion while a reading below 50 points to contraction.

February’s upturn was driven by a renewed increase in production and faster rise in demand. Strengthened demand and higher new orders drove up sales and job creation in the sector. Meanwhile, improved raw material availability and supplier performance eased cost burdens, leading to a slower rate of increase in input prices. Unfortunately, the easing of cost burdens was not passed on to buyers, as selling prices rose at the steepest pace since April 2023.

Consumer Sentiment Slips

The University of Michigan Consumer Sentiment Index slipped to 76.9 in February after a big jump in January. While the sentiment declined from the previous month, it’s still much higher than a year ago, when the reading was 66.9. Nonetheless, the current reading fell short of the pre-COVID range, which mostly ran between 85 and 100.

Consumer expectations for year-ahead inflation edged up from 2.9% in January to 3% in February. Meanwhile, long-run inflation expectations remained at 2.9%. The subindex for current economic conditions slipped to 79.4, lower than January’s 79 but much higher than a year ago. The subindex, however, remained far below pre-COVID levels, which ran mostly above 100. Overall, it appears the latest disappointing inflation data impacted consumer sentiment after January’s big improvement.

Fed’s Preferred Inflation Gauge Increases as Expected

The Personal Consumption Expenditure Index (PCE) increased 0.3% in January from the previous month as markets expected. On a year-over-year basis, PCE posted a 2.4% increase. The monthly increase was driven by a rise in prices of services, which offset the decline in goods prices. Core PCE—excluding food and energy—rose 0.4%, the fastest month-over-month rate since February 2023. When measured year-over-year, Core PCE slowed slightly to 2.8% from 2.9%. Note that after inflation has run high for more than a year, year-over-year measures become less insightful as the high base from the previous year leads to a smaller rate change. For this reason, month-over-month measures become more useful in understanding how fast prices change.

All other inflation gauges—from wholesale inflation to Consumer Price Index—suggest that progress in disinflation might have stalled in January. The current PCE release confirms this narrative. All three releases have shifted market expectations for the first rate cut from March to June. Federal Reserve officials have also stated they are not rushing to cut rates as they see the risk of premature rate cuts to be larger than the risk of triggering a recession.

Disinflation Is More Erratic Month-over-Month

_{^{Source: Trading Economics.}}