Three Big Themes

We are starting to see some evidence of the long hoped-for supply response to pandemic price increases in this month’s monitor. One long-running shortage ended, leaving only three 2+ year long shortages remaining from the pandemic disruption. After a correction earlier in the year, industrial production is beginning to firm up just as the producer price index begins to soften while imports moderate across the board. Exactly what a soft landing fan would like to see.

Recession? Not So Fast

• Overall, IP is moving back towards tilting nose-up, where last month it had solidly been in nose-down territory. Specific categories made major breakthroughs while others fell at a surprisingly steady rate, with audio and video equipment manufacturing leading the charge downward, having fallen around 25% over the last six months.
• Compositionally, the industrial production data backs up the stories told by a number of other measures: inventories depleted by the pandemic are solidly being rebuilt, and production is tapering off in response.
• The areas of continued strength in Producer Prices are generally in sectors either facing ongoing disruption, as in the case of food, beverage and tobacco, or ongoing demand that is being filled partly by domestic production and partly by imports, as in the case of Machinery and Capital Goods.
• Overall, the report is looking broadly consistent with what we would expect in a soft landing scenario. Sectors which had accelerated in response to pandemic demand shifts are tailing off, while sectors that faced substantial supply chain disruption are seeing production recover slowly — or fall more slowly than other sectors.

Cost-Push Inflation Running Out Of Push

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