U.S. Factory Inventories Rose With Shipments

Factory inventories increased 0.5% in May after little change during the prior month. As a result of recent moderation, the three-month growth rate eased further to 5.9% (AR), which was half the growth rates of this past Winter.

The picture of more moderate rates of inventory accumulation was widespread. Automobile inventories, in fact, fell at a 34.3% rate during the last three months. Less the transportation sector altogether, inventories rose 0.5% in May but three-month growth fell to 4.4% from a double-digit rate of accumulation earlier this year.

Inventory accumulation in the machinery sector also eased to a 5.2% growth rate, which was half the earlier rate. Accumulation in the computer & electronics areas also eased, but just slightly to an 8.4% rate of growth. In the nondurables area inventories rose 0.6% in May but three-month growth of 2.4% was down considerably versus the double digit growth rate earlier this year.

Factory shipments nudged up 0.1% after to 2.7% March surge. Shipments of petroleum surged again, in May by 4.0% (39.0% y/y). Less petroleum shipments fell 0.6% (+0.4% y/y). Growth of 5-7% had been the norm back from 2004-2006.

Total factory orders rose an expected 0.6% again reflecting stronger petroleum orders (which equal shipments). Less petroleum, shipments rose 0.1% and three-month growth was a moderate 2.6% (AR). Durable orders overall were unchanged, which was little different than reported in the advance report, after a 1.0% April decline.

Overall unfilled orders rose 0.9% in May and the three-month growth rate remained firm at 12.3%. Higher backlogs of civilian aircraft, which have been rising at a 25.3% rate, boosted the figure. Excluding the transportation sector altogether unfilled orders still rose 0.5% in May and at a 10.1% rate during the last three months. Accelerated growth in backlogs of machinery still account for much of that strength.

Why Are Goods So Cheap in Some Countries? from the Federal Reserve Bank of Philadelphia is available here.

Job cut announcements fell 21.0% last month and reversed all of their rise during May, according to the Challenger, Grey & Christmas survey. The three-month rise in layoffs surged, however, to its highest level since early 2006.

A rise in the three-month average of job cut announcements in the financial, automotive, transportation and telecommunication sectors led the recent strength.

During the last ten years there has been a 76% (inverse) correlation between the three-month moving average of announced job cuts and the three-month change payroll employment.

Job cut announcements differ from layoffs. Many are achieved through attrition, early retirement or just never occur.

Challenger also reported that announced hiring plans again fell sharply (-63.7% y/y).

The Evolution of World Income Distribution from the Federal Reserve Bank of Philadelphia can be found here.

The ADP National Employment Report, from the payroll processor, reported that private nonfarm payrolls fell 79,000 last month after a revised 25,000 increase during May. Declines in payrolls reported for earlier months this year were revised to show modest increases.

The June EMU MFG PMI moved below 50 for the first time since June of 2005. This signals EMU-wide MFG contraction. The dip comes ahead of a meeting of the ECB when it is expected to hike rates. EMU member finance ministers have been warning the ECB of the potential for a rate hike to turn growth negative in the e-Zone. Meanwhile, in the interest rate and exchange rate sensitive MFG sector it already has happened- at least by one measure.

Of the three largest EMU economies, two are registering contraction in MFG by the Market PMI measures: Italy and France. The Euro-Area’s strongest and largest economy, Germany remains in positive territory – but is easing.

The Euro Area plus Italy and France show that the economy is losing momentum at a rapid pace. Germany, on the other hand, has rebounded from its weakest reading and is losing momentum at a slower pace.

Still, the negative reading for the Euro Area's overall MFG PMI does not make it easier for the ECB to do what it seems already to have decided to do - that is to hike rates. Since the ECB began considering a rate hike more seriously, inflation has overrun the ECB ceiling by an even larger amount. Headline inflation is now is at more that twice the pace that the ceiling allows, leaving the ECB chasing after its own credibility. This is a race that the ECB is determined to win.

The charts show that trends in the PPI are still working their way higher. The table shows that energy and manufacturing sector inflation trends as well as the total excluding construction embody accelerating trends. Headline inflation is accelerating in Germany, Italy, France and the UK. Core inflation is accelerating steadily in those countries too, except for France and Germany. In Germany core inflation accelerated over 6-mo compared to 12 months then leveled off at 4%. In France Inflation accelerated to 4.2% over six months from 3.5% over 12-months then backed off to 4% over three-months. So countries where the core is not accelerating are not showing much in the way of hopeful trends either.

None of these inflation rates is acceptable to the ECB. For the PPI even core inflation rates are running DOUBLE the ceiling that has been set for headline HICP inflation rate. No wonder the ECB is widely believed to be readying a rate hike.