Tag Archives: demand

Pent-up demand, shortages fuel U.S. inflation

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. consumer prices surged in April, with a measure of underlying inflation blowing past the Federal Reserve’s 2% target and posting its largest annual gain since 1992, because of pent-up demand and supply constraints as the economy reopens.

The strong inflation readings reported by the Commerce Department on Friday had been widely anticipated as the pandemic’s grip eases, thanks to vaccinations, and will have no impact on monetary policy. Fed Chair Jerome Powell has repeatedly stated that higher inflation will be transitory.

The U.S. central bank slashed its benchmark overnight interest rate to near zero last year and is pumping money into the economy through monthly bond purchases. It has signaled it could tolerate higher inflation for some time to offset years in which inflation was lodged below its target, a flexible average.

The supply constraints largely reflect a shift in demand towards goods and away from services during the pandemic. A reversal is underway, with Americans flying to vacation destinations and staying at hotels among other activities. Year-on-year inflation is also accelerating as last spring’s weak readings drop from the calculation.

“Many goods are in short supply amid very strong demand and supply chain disruptions, and some services prices are up sharply as consumers start to go out again,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania. “Shortages of labor in some industries are also contributing to higher prices. But many of these factors will prove transitory, and inflation will slow in the second half of 2021.”

Consumer prices as measured by the personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, increased 0.7% last month amid strong gains in both goods and services. That was the biggest rise in the so-called core PCE price index since October 2001 and followed a 0.4% gain in March.

In the 12 months through April, the core PCE price index vaulted 3.1%, the most since July 1992, after rising 1.9% in March. Economists polled by Reuters had forecast the core PCE price index rising 0.6% in April and surging 2.9% year-on-year.

The core PCE price index is the Fed’s preferred inflation gauge.

Stocks on Wall Street were trading higher, though gains were capped by the rising price pressures. The dollar rose against a basket of currencies. U.S. Treasury prices were higher.

“Inflation is up, but real yields are still low,” said Jamie Cox, managing partner at Harris Financial Group in Richmond, Virginia. “This is basically the transitory sweet spot.”

INCOME PLUNGES

Some economists are not convinced that higher inflation will be temporary.

A survey from the University of Michigan on Friday showed consumers’ one-year inflation expectations shot up to 4.6% in May from 3.4% in April, hurting household sentiment. Their five-year inflation expectations rose to 3.0% from 2.7% last month.

“Concerns about the future can cause households to become more conservative in their spending,” said Joel Naroff, chief economist at Naroff Economics in Holland, Pennsylvania. “The Fed is guessing that the rise in inflation will be temporary, and it better be correct.”

Though consumer spending moderated last month as the boost to incomes from stimulus checks faded, households have accumulated at least $2.3 trillion in excess savings during the pandemic, which should underpin demand. Wages are also rising as companies seek to attract labor to increase production.

Generous unemployment benefits funded by the government, problems with child care and fears of contracting the virus, even with vaccines widely accessible, as well as pandemic-related retirements have left companies scrambling for labor.

That is despite nearly 10 million Americans being officially unemployed. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.5% last month. Data for March was revised higher to show spending surging 4.7% instead of 4.2% as previously reported.

The rise in spending was in line with expectations. Spending was held back by a 0.6% drop in outlays on goods. Though purchases of long-lasting goods such as motor vehicles rose 0.5%, spending on nondurable goods tumbled 1.3%. Outlays on services increased 1.1%, led by spending on recreation, hotel accommodation and at restaurants.

When adjusted for inflation, consumer spending slipped 0.1% after jumping 4.1% in March. Despite last month’s dip in the so-called real consumer spending, March’s solid increase put consumption on a higher growth trajectory in the second quarter.

Personal income plunged 13.1% after surging 20.9% in March. With spending exceeding income, the saving rate dropped to a still-high 14.9% from 27.7% in March. Wages increased 1.0% for a second straight month.

Consumer spending powered ahead at a 11.3% annualized rate in the first quarter, contributing to the economy’s 6.4% growth pace. Most economists expect double-digit growth this quarter, which would position the economy to achieve growth of at least 7% this year, which would be the fastest since 1984. The economy contracted 3.5% in 2020, its worst performance in 74 years.

Growth prospects for the second quarter were bolstered by another report from the Commerce Department showing the goods trade deficit narrowed 7.3% to $85.2 billion in April, with exports rising and imports declining.

But inventory at retailers fell 1.6%, pulled down by a 7.0% plunge in automobile stocks as the sector struggles with a global semiconductor shortage.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci and Chizu Nomiyama)

On the front lines: Trade war sinks North Dakota soybean farmers

Paul and Vanessa Kummer check the soybeans on their farm near Colfax, North Dakota, U.S., August 6, 2019. REUTERS/Dan Koeck

By Karl Plume

COLFAX, North Dakota (Reuters) – North Dakota bet bigger on Chinese soybean demand than any other U.S. state.

The industry here – on the far northwestern edge of the U.S. farm belt, close to Pacific ports – spent millions on grain storage and rail-loading infrastructure while boosting plantings by five-fold in 20 years.

Now, as the world’s top soybean importer shuns the U.S. market for a second growing season, Dakota farmers are reeling from the loss of the customer they spent two decades cultivating.

The state’s experience underscores the uneven impact of the U.S.-China trade war across the United States. Although China’s tariffs target many heartland states that, like North Dakota, supported President Donald Trump’s 2016 election, those further south and east are better able to shift surplus soybeans to other markets such as Mexico and Europe. They also have more processing plants to produce soymeal, along with larger livestock and poultry industries to consume it.

For North Dakota, losing China – the buyer of about 70% of the state’s soybeans – has destroyed a staple source of income. Agriculture is North Dakota’s largest industry, surpassing energy and representing about 25% of its economy.

“North Dakota has probably taken a bigger hit than anybody else from the trade situation with China,” said Jim Sutter, CEO of the U.S. Soybean Export Council.

In its second-quarter agricultural credit conditions survey this month, the Federal Reserve Bank of Minneapolis said 74% of respondents in North Dakota reported lower net farm income.

China shut the door to all U.S. agricultural purchases on Aug. 5 after Trump intensified the conflict with threats to impose additional tariffs on $300 billion in Chinese imports, some as soon as Sept. 1.

Some farmers were relying on the Trump administration’s $28 billion in farm aid payments to compensate them for trade war losses, only to be disappointed with new payment rates for counties in North Dakota.

The rates are below those for some southern states that rely much less on exports to China. The U.S. Department of Agriculture determined other states had a higher “level of exposure” to tariffs than North Dakota because they also grow other crops, such as cotton and sorghum, that were hit by Chinese tariffs, according to a brief written statement from the USDA in response to questions from Reuters.

With record soy supplies still in storage and another crop to be harvested soon, farmers in the U.S. soybean state with the best access to ports serving China are unable to sell their crops at a profit.

Rail shippers would normally send more than 90 percent of the North Dakota soybeans they buy to Pacific Northwest export terminals. Now they are trying unsuccessfully to make up the shortfall by hauling corn, wheat and other crops with limited demand. Some are moving soybeans south and east to domestic users, a costlier endeavor that ultimately thins margins for both shippers and farmers.

LOST DEMAND

Soy farmers who planted this spring – when the White House was talking up a nearly finished trade deal with China – watched as those trade talks collapsed in May, sending prices well below their costs of production.

Vanessa Kummer checks the quality of their 2018 soybean crops on the family farm near Colfax, North Dakota, U.S., August 6, 2019. REUTERS/Dan Koeck

Vanessa Kummer checks the quality of their 2018 soybean crops on the family farm near Colfax, North Dakota, U.S., August 6, 2019. REUTERS/Dan KoeckVanessa Kummer’s farm in Colfax, North Dakota, has yet to sell a single soybean from the fall harvest because of the low prices. Normally, the farm would have forward-sold 50% to 75% of the upcoming harvest.

 

Vanessa Kummer’s farm in Colfax, North Dakota, has yet to sell a single soybean from the fall harvest because of the low prices. Normally, the farm would have forward-sold 50% to 75% of the upcoming harvest

She fears the U.S.-China soy trade is now “permanently damaged” as China shifts its purchases to Brazil, uses less soy in animal feed and consumes less pork as African swine fever kills of millions of the nation’s pigs.

“It will take years to get back to any semblance of what we had over in China,” Kummer said, standing in a sparse field of ankle-high soy plants, where two weeks earlier she hosted a delegation of soy importers from Ecuador and Peru.

Though it is the No. 4 soy state overall, North Dakota is home to two of the top three U.S. soy producing counties in the nation.

Options for North Dakota farmers are limited. U.S. wheat has been losing export market share for years. Demand for specialty crops such as peas and lentils, which grow well in the northern U.S., has been dampened by retaliatory tariffs imposed by India, a major importer of both products.

ROOTS OF DEPENDENCE

North Dakota’s farmers never set out to become so dependent on a single buyer of one crop. But with wheat profits shrinking and Chinese demand for soy growing, soybeans increasingly seemed like the obvious choice.

Companies including Berkshire Hathaway’s BNSF expanded rail capacity to open up a West Coast shipping corridor, and Pacific Northwest seaports expanded to handle more exports to China. Seed companies offered North Dakota farmers new varieties that allowed soybeans to thrive in the state’s colder climate and shorter growing season.

A $200 million crop two decades ago blossomed into a $2 billion crop, topping the value of wheat, once North Dakota’s top crop.

The number of high-speed shuttle train loading terminals in North Dakota tripled from about 20 in 2007 to more than 60 currently, according to industry data, with investments totaling at least $800 million.

But one of those facilities, CHS Dakota Plains Ag elevator in Kindred, North Dakota, has gone three or four months without loading a soybean train this year, said Doug Lingen, a grain merchant there. Normally the elevator would load at least one train a month with beans bound for the Pacific Northwest.

LIMPING ALONG

The drop in demand has soybean prices in North Dakota trading at a historic discount to U.S. futures prices, and farmers are putting investments on hold.

Justin Sherlock, who grows corn, soybeans and other crops near Dazey, North Dakota, had been planning to buy a used grain drier this year for around $100,000 to $150,000, passing on a new one that would be at least $350,000.

But an uncertain future has now shelved those plans, even with the latest promise for government aid. According to rates published last month, farmers in Sherlock’s county can apply for aid of $55 per acre, well below the maximum $150 rate offered in 22 counties nationwide.

Sherlock called the latest announcement “disappointing.”

“I’m just going to defer all my investment,” he said, “and try to limp along for a few years.”

(Reporting by Karl Plume in Chicago, additional reporting by P.J. Huffstutter; Editing by Caroline Stauffer and Brian Thevenot)

Why Caterpillar can’t keep up with a boom in demand

A worker pours molten iron into molds to form parts for Caterpillar Inc. and other industrial customers at Kirsh Foundry Inc. in Beaver Dam, Wisconsin, U.S., April 12, 2018. REUTERS/Timothy Aeppel

By Timothy Aeppel and Rajesh Kumar Singh

EAST PEORIA, Ill. (Reuters) – Orders for the mining machines and construction bulldozers made at this sprawling Caterpillar Inc. factory in central Illinois have jumped, in general, three-fold over the past year.

But meeting that boom in demand at the world’s largest heavy equipment manufacturer is a challenge, in part because of Caterpillar suppliers like Steve Kirsh.

Years of watching Caterpillar and other big manufacturers cut inventories, close plants and axe workers in the last downturn has embedded caution in Kirsh’s ambition to expand after the surge in orders, reflecting a more fundamental shift in how many industrial businesses view expansions, according to interviews with Caterpillar executives, more than a half-dozen Caterpillar suppliers and U.S. economic data.

“I just wasn’t sure it was real,” said Kirsh, speaking from a windowless office at the front of Kirsh Foundry Inc., in Beaver Dam, Wisconsin, which makes metal parts for Caterpillar and other customers.

Even with a surplus in demand for its product, Caterpillar CEO Jim Umpleby told investors last month the company will not invest in factory capacity. Instead, it plans to spend more on new technologies, expanding its parts business and selling more rental and used equipment.

The company’s big East Peoria assembly plant runs just one shift and operates only four days a week, while its own parts-making facilities are running three shifts, five days a week to provide it enough components to assemble, according to the company officials. Outside suppliers are similarly scrambling to catch up to the surge in orders.

This has extended the lead-time to deliver final products to dealers. For instance, it takes more than eight months to get one model of its large engines into a customer’s hands.

The Trump administration’s efforts to rewrite trade relations with key partners, especially China, only add to the uncertainty. The latest move to step back from a confrontation with China is good news for many domestic producers, who worry that a trade war could quickly puncture the global expansion, going on nine years, which is feeding the U.S. factory boom, manufacturing executives told Reuters.

The result is a drag on the economic expansion that President Trump and Republicans hoped for coming off U.S. corporate tax reform last year. The idea behind Trump’s tax reform was that companies could pour more money into expansions, hire more workers and lift wages.

There has been an upswing in plans for capital spending, but much of it is concentrated in the technology and energy sectors. Spending plans by industrial companies are up only slightly.

For those companies that do want to expand, from car companies to railroads and engine makers, they often can’t find the workers to expand fast enough.

The contraction of their supply chain in the last downturn thrust many players big and small into a “just in time delivery” business model, creating order backlogs, which has led to soaring prices for raw materials in the recent upswing. For a graphic, click https://tmsnrt.rs/2rY3iZp

A worker checks parts he has cut into final shapes at Wolfe and Swickard Machine Company Inc. in Indianapolis, Indiana, U.S., April 10, 2018. REUTERS/Timothy Aeppel

A worker checks parts he has cut into final shapes at Wolfe and Swickard Machine Company Inc. in Indianapolis, Indiana, U.S., April 10, 2018. REUTERS/Timothy Aeppel

TURNING THE SWITCH BACK ON

The hesitation to expand Caterpillar’s supply chain is rooted in the last bust, notable as the longest downturn in its history – worse than the Great Depression – from 2012 to 2016, when sales dropped more than 40 percent.

Chastised by that slump, the Deerfield, Ill.-based company embarked on a restructuring strategy that aims to squeeze more production from its factories and buy more of what it needs from outside suppliers on a just-in-time basis.

Caterpillar has closed or restructured more than 25 factories and its full-time workforce is smaller now than it was at the end of 2012. And cuts continue. Caterpillar plans to close two more facilities this year and is considering shuttering an engine plant, which would eliminate 880 jobs.

Caterpillar executives said the new strategy is boosting profitability by allowing it to get the best use out of its existing factories. They blame the backlogs on its suppliers’ inability to keep up with the surge in orders.

Timing is part of the problem. Caterpillar and a host of other industrial companies all ramped up orders at the same time. “That switch got turned on after being turned off for several years – all at the same time,” said Amy Campbell, director of investor relations.

Campbell, however, said the supply situation is improving. The central Illinois plant will go back to the normal five-day shift beginning in June.

Caterpillar’s investors love this approach, since it helps deliver strong margins in the good times and minimizes pain in bad times.

The company recently boosted profit projections for 2018 by about 25 percent, and in the latest quarter, every segment posted better results compared to a year ago. But its stock price took a hit when the company’s CFO warned higher prices for raw materials like steel are going to start squeezing margins even as growth continues.

Supply chain bottlenecks, meanwhile, are hitting companies across the industrial heartland.

The Institute for Supply Management’s index for order backlogs, one of the best U.S. metrics for how quickly manufacturers are meeting demand, now stands at its highest level in 14 years. And many companies remain tight fisted. The Commerce Department recently reported that orders for capital goods, a key measure of business investment, fell in March, the third decline in four months. These numbers show that companies are holding back on spending, even as their order books swell.

“We’re in a period of significant disruption where everyone is scrambling — but it’s the way supply chains work today,” said John Layden, a consultant in Indianapolis who helps companies design and manage supply networks.

Finished castings coming off the production line at Kirsh Foundry Inc. in Beaver Dam, Wisconsin, U.S., April 12, 2018. REUTERS/Timothy Aeppel

Finished castings coming off the production line at Kirsh Foundry Inc. in Beaver Dam, Wisconsin, U.S., April 12, 2018. REUTERS/Timothy Aeppel

WHERE ARE THE WORKERS?

Finding employees is another drag on the U.S. manufacturing supply chain.

When Kirsh decided to add people early last year at his foundry – which melts iron and forms it into the rough shapes that will be refined for Caterpillar and others – he could not find them. Wisconsin’s jobless rate has hit an all-time low of 2.8 percent.

So Kirsh tried something new, hiring a Minnesota staffing company that specializes in parachuting industrial workers into factories that can’t find them locally.

He eventually got about 10 of these workers, who he calls “mercenaries,” who helped get his backlog under control. One came from as far as away as Detroit. But it was a costly fix. Between paying the staffing company, hotels and a per diem for the workers, he estimates they cost about three times more than local labor.

Industrial companies have always struggled with big swings in demand, but the problem of shortages emerges much quicker in today’s super-lean economy.

In the past, manufacturers from Kirsh to Caterpillar often kept more goods on warehouse shelves, creating a built-in buffer that could be absorbed as signals went out to suppliers that the latest upturn is going to continue. That gave more time for everyone to gear up.

It is a luxury that does not exist anymore, said Joe Williams, president of privately-held Wolfe and Swickard Machine Company Inc. in Indianapolis, which buys forged parts from Kirsh and over 20 other foundries that his 85-worker shop shapes and polishes into final machine parts.

Early last year, Williams saw orders from Caterpillar surge 80 percent, a stunning increase that left him scrambling.

“When we get an order, we have to order from a foundry, which has to communicate with the people supplying them metal, so there’s always a lag,” he said.

This time, however, it was particularly difficult. Some foundries simply refused his business because they were swamped with orders from other customers.

Like Kirsh, Williams has had trouble hiring workers and said he still needs at least 15 more machinists. Caterpillar has told him to expect orders to go up another 20 percent this year.

Stephen Volkmann, a machinery industry analyst at Jefferies, said Caterpillar was slow to ramp up production – which frustrated dealers clamoring for machines they could sell.

But he said Caterpillar and its suppliers are smart to be cautious.

“They all know that (business) could be down again next year,” he said, and so over expanding now “would be an expensive mistake.”

(Reporting by Timothy Aeppel and Rajesh Kumar Singh; editing by Joe White and Edward Tobin)

U.S. housing starts tumble, flooding in the South blamed

Roofers work on new homes at a residential construction site in the west side of the Las Vegas Valley in Las Vegas, Nevada

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. housing starts fell more than expected in August likely as bad weather disrupted building activity in the South, but a solid increase in permits for single-family dwellings suggested demand for housing remained intact.

Tuesday’s weak housing report came as officials from the Federal Reserve were due to gather for a two-day meeting to assess the economy and deliberate on monetary policy.

It joined a stream of recent soft economic data such as retail sales, nonfarm payrolls and industrial production, which, together with low inflation are expected to encourage the U.S. central bank to leave interest rates unchanged on Wednesday.

Groundbreaking decreased 5.8 percent to a seasonally adjusted annual pace of 1.14 million units after two straight months of strong gains, the Commerce Department said.

Single-family housing starts in the South, which accounts for the bulk of home building, tumbled 13.1 percent to their lowest level since May 2015. Economists said flooding in Texas and Louisiana was probably behind the drop in starts last month.

“We believe that the slowdown in August starts likely owes to a temporary weather effect rather than a substantive shift in the underlying trend,” said Rob Martin, an economist at Barclays in New York. “Excluding the South, housing starts increased a robust 4.2 percent.”

Permits for future construction slipped 0.4 percent to a 1.14 million-unit rate last month as approvals for the volatile multi-family homes segment tumbled 7.2 percent to a 402,000 unit-rate. Permits for single-family homes, the largest segment of the market, surged 3.7 percent to a 737,000-unit pace.

Economists polled by Reuters had forecast housing starts falling to a 1.19 million-unit pace last month and building permits rising to a 1.17 million-unit rate.

U.S. financial markets were little moved by the data as investors awaited Wednesday’s outcome of the Fed’s meeting. The broader PHLX housing index, which includes builders, building products and mortgage companies, fell 0.76 percent.

STRONG HOUSING FUNDAMENTALS

Last month’s decline in starts was largely anticipated as groundbreaking activity has been running well ahead of permits approvals over the past several months, especially in the single-family housing segment.

The drop left starts just below their second-quarter average, suggesting little or no contribution from residential construction to economic growth in the third quarter.

Spending on home building was a small drag on output in the April-June period. Following the report, the Atlanta Fed trimmed its third-quarter gross domestic product estimate by one-tenth of a percentage point to a 2.9 percent annual rate. The economy grew at a 1.1 percent rate in the second quarter.

Demand for housing is being driven by a tightening labor market, which is lifting wages. A survey of homebuilders published on Monday showed confidence hitting an 11-month high in September, with builders bullish about current sales now and over the next six months, as well as prospective buyer traffic.

Housing market strength boosted Lennar Corp’s profits in the third quarter. Lennar, the second-largest U.S. homebuilder, said it sold 6,779 homes in the three months ended Aug. 31, up 7.3 percent from a year earlier, while its average sales price rose more than 3 percent.

“Conditions seem well aligned for strong new home building. Borrowing costs remain low, the inventory of homes for sale, both new and existing, are relatively low and failing to make meaningful progress,” said Kristin Reynolds, a U.S. economist at IHS Global Insight in Lexington, Massachusetts.

Groundbreaking on single-family homes dropped 6.0 percent to a 722,000-unit pace in August, the lowest level since last October. But with permits for the construction of single-family homes rising last month, single-family home building could rebound in the months ahead.

The single-family housing market is being supported by a dearth of previously owned homes available for sale.

Housing starts for the volatile multi-family segment fell 5.4 percent to a 420,000-unit pace. The multi-family segment of the market has been buoyed by strong demand for rental accommodation as some Americans shun homeownership in the aftermath of the housing market collapse.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)