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U.S. manufacturing cycle likely peaked in third quarter

U.S. economic output rose at an annualised rate of 2.6% in the three months from July to September, according to advanced estimates published by the Bureau of Economic Analysis (BEA) on Thursday.

The resumption of growth comes after economic output contracted by 0.6% in the second quarter and 1.6% in the first (“National income and product accounts”, BEA, Oct. 27).

Beneath the headlines, however, the details in the report confirm the economy is losing momentum, with the slowdown concentrated in manufacturing, freight and merchandise.

In the third quarter, headline growth in real gross domestic product was boosted by positive contributions from faster exports (+1.6 percentage points), slower imports (+1.1 points) and more government spending (+0.4 points).

Inventory changes continued to make a negative contribution (-0.7 points) to gross domestic product for the second quarter in a row.

But exports, imports, government spending and inventories all exhibit significant volatility from one quarter to the next.

Underlying momentum is better captured by data for real final sales to private domestic purchasers, which includes personal consumption expenditures and fixed investment.

Real final sales to private domestic purchasers (FSPDP) increased at an annualised rate of just 0.1% in the three months from July to September, the slowest rate since 2009 and before that 2002.

FSPDP have decelerated for four quarters running from 2.6% in the fourth quarter of 2021 to 2.1% in the first quarter of 2022 and 0.5% in the second quarter of 2022.

Personal consumption expenditures on merchandise fell at an annualised rate of 1.2% between July and September after growing by 2.3% at the end of 2021.

Services spending was stronger, advancing at an annualised rate of 2.8%, but this was down from 3.5% in the final three months of last year.

Fixed investment spending contracted at an annualised rate of 4.9% between July and September, after contracting at a rate of 5.0% between April and June.

The downturn in merchandise consumption and fixed investment is consistent with decelerating manufacturing activity and new orders shown in the surveys conducted by the Institute for Supply Management.

The ISM manufacturing index slipped to 50.9 in September (36th percentile for all months since 1980) from 53.0 in June (52nd percentile), 57.1 in March (82nd percentile) and 58.8 in December 2021 (90th percentile).

It is also consistent with reports of an abrupt fall in spending on computers and other electronic equipment which has hit semiconductor manufacturers hard.

The ensemble of statistics show the merchandise-manufacturing-freight side of the economy likely hit a temporary peak in the third quarter as spending was squeezed by rapid inflation.

The much larger service sector was still expanding relatively briskly but deceleration is likely to spill over from merchandise in the next few quarters.

The exceptionally strong cyclical upswing following the first wave of the pandemic in 2020 has faded in the face of rapid inflation, higher interest rates and heightened uncertainty.

The depth and duration of the ensuing cyclical downturn remains uncertain and it is unclear whether it will be a mid-cycle “soft patch” or a cycle-ending “recession”.

But slower growth will eventually take some strain out of global supply chains and relieve pressure on energy and commodity markets in 2023.
Source: Reuters (Editing by Kirsten Donovan)

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