To The Moon

This week, the Nasdaq and S&P 500 have successively reached record highs. In addition to AI and corporate earnings expectations, the resilience of the US economy itself is also an important backdrop supporting the risk appetite of US stocks. Today, we attempt to provide a perspective on the state of US manufacturing from the newly released Richmond Fed manufacturing data.

The Richmond Fed Manufacturing Composite Index rose from 3 in April to 13 in May, significantly higher than market expectations. More importantly, the three core sub-indices rebounded in tandem: new orders rose from 8 to 17, shipments from -2 to 16, and employment from 0 to 3.

It should be noted that the Richmond Fed covers the Fifth Federal Reserve District of the US, including Washington, D.C., Maryland, North Carolina, South Carolina, Virginia, and most of West Virginia. Therefore, it is regional data, not national data. We are observing the current situation of the US economy, especially the manufacturing industry, from the perspective of this regional data, but it is not advisable to overinterpret it.

Demand side: Orders improved, and the US economy did not cool down rapidly

First, we can see that the new orders index increased from 8 to 17. This reflects that there are no signs of a slowdown in consumer end-demand. Combined with the S&P Global Manufacturing PMI rising to 55.3 in May, it all indicates that the short-term demand in the US manufacturing industry remains solid.

Of course, we should not be overly optimistic, because the data of this order includes some "front-loaded demand" generated by some manufacturers' advance stockpiling.

On the one hand, the demand of US end consumers remains stable; on the other hand, geopolitical conflicts continue, and energy prices and supply chain conditions face great uncertainty. In such a situation, manufacturers choose to produce and stock up in advance to ensure that they can still stably provide sales supply once the external supply chain environment changes. Reuters reported that corporate inventory investment has risen to a nearly 11-month high.

Production side: Shipments turned from negative to positive, rebounding significantly, and enterprises' actual production activities resumed

Data on the production side is even stronger than that on the demand side. The shipment index increased from -2 to 16, improving by 18 points in a single month.

A negative number here indicates that there are more enterprises reporting a decrease in shipments than those reporting an increase. The index turning from negative to positive indicates a shift from more enterprises reducing shipments to increasing production and expanding shipments.

The difference between order data and shipment data is that order data reflects the future, and its data changes are largely driven by expectations. In contrast, shipment data is a real reflection of a company's production activities.

Another piece of evidence that the production side is in good condition is that data from the Federal Reserve shows that in April, US industrial output increased by 0.7% month-on-month, following a 0.3% decline in March; among them, manufacturing output increased by 0.6% month-on-month, and manufacturing output excluding motor vehicles and parts increased by 0.3%. Total industrial output was 102.5% of the 2017 average, 1.4% higher year-on-year.

Enterprises increasing production indicates that the current production chain of the manufacturing industry is still operating well and confidence is relatively strong.

Employment: Minor improvement currently, with significant growth expected in the future

Compared with the data from the demand and production sides, changes in the employment side have been very restrained. Rising from 0 in April to 3 in May indicates a slight improvement in enterprises' employment situation, without turning into contraction.

On the other hand, the future employment expectations index rose from 7 to 23, indicating that enterprises expect to create more jobs in the future.

Of course, in another set of S&P Global data for May, overall private sector employment was dragged down by the service industry, falling to a 21-month low. Although the employment situation in the manufacturing sector currently appears to be still good, it does not indicate that overall employment in the US is stable.

Provides "narrative"-level support for US stocks, but local improvement does not mean a full recovery of the US manufacturing industry

U.S. stocks have continuously hit new highs in the past two decades, with a major support being the underlying narrative of "the resilience of the U.S. economy." People believe that the U.S. represents advanced production levels and technologies, and even when faced with difficulties, it can still operate in a relatively good manner. The Richmond Fed Manufacturing Composite Index for May, which shows simultaneous improvement in demand, production, and employment, will of course continue to give investors confidence.

However, out of caution, we should still exercise restraint in interpreting regional data. The improvement in Richmond Fed data does not mean that the US manufacturing industry has fully recovered. The Philadelphia Fed Manufacturing Index, released a few days ago, dropped from 26.7 to -0.4, and new orders also weakened, indicating that manufacturing performance varies across different regions.

To be precise, the US manufacturing industry has shown certain signs of recovery, but it is not synchronized across different regions and industries and remains in the stage of partial repair.

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