LONDON- US manufacturers reported another decline in activity in July 2023, but industrial electricity and especially diesel consumption have declined less than expected in recent months, explaining why prices remain relatively firm.
The Institute for Supply Management’s purchasing managers index increased slightly to 46.4 (13th percentile for all months since 1980) in July from 46.0 (11th percentile) in June but down from 52.8 (51st percentile) a year ago.
Despite the improvement, the manufacturing index has been below the 50-point threshold dividing expanding activity from a contraction for nine months since November 2022.
If the slowdown proves to be a “soft landing”, it is already the second longest mid-cycle slowdown after the Second World War, exceeded in duration only by the slowdown in 1995/96, which lasted a total of 10 months.
The forward-looking new orders component remained weak, indicating the downturn is likely to last for several months more, which is likely to make it the longest on record.
The new orders index was stuck at 47.3 (13th percentile) in July up from 45.6 (9th percentile) in June but still down from 48.0 (16th percentile) a year earlier.
Industrial electricity use and distillate fuel oil consumption are both correlated with the manufacturing and freight cycle and therefore with the purchasing managers index.
But both have fallen much less than expected given the length and apparent depth of the downturn in industrial activity, especially in the case of diesel and other distillate fuel oils.
Based on the most recent data available, industrial electricity consumption was down by only -1.3 percent in the three months from February to April compared with the same period a year earlier.
The change in electricity use was in the 19th percentile for all overlapping three-month periods since 1980 (“Monthly energy review”, US Energy Information Administration, July 26, 2023).
Distillate fuel oil consumption actually rose by almost +0.8 percent in the three months from March to May compared with a year earlier.
The change in apparent distillate consumption was in the 44th percentile for all three-month periods since 1980 which is not consistent with an industrial recession.
The strength of domestic distillate consumption helps explain why fuel oil inventories have remained well below the prior ten-year seasonal average.
