U.S. Manufacturers Face Setback in Diesel Demand: Kemp By Reuters

By John Kemp

LONDON (Reuters) – U.S. manufacturers reported a surprisingly broad decline in business activity for October, delaying the sector’s anticipated recovery from the prolonged downturn that began in late 2022.

While industrial energy consumption had seemed stable over the summer, the expected rebound is now delayed until 2024.

The Institute for Supply Management’s manufacturing purchasing managers index dropped to 46.7 in October, down from 49.0 in September. This represents the largest decline since June 2022, coming after three consecutive months of increases that had fueled hopes for an end to the downturn.

The index remains below the critical 50-point mark that distinguishes between expansion and contraction, having been under this threshold for 12 consecutive months since November 2022. The new orders component, which reflects future activity, suggests that the downturn may persist for several more months, as it fell to 45.5 in October from 49.2 in September.

The current downturn mirrors more of a recession than a typical mid-cycle slowdown. Historically, recessions have lasted 11 months or more, whereas mid-cycle slowdowns are usually shorter, spanning eight months or less. If this downturn is deemed a mid-cycle slowdown, it has already exceeded the duration of previous slowdowns since World War II. Notably, this decline has also been relatively shallow, occurring alongside minimal slowdown—if any—within the much larger services sector.

NOT JUST AUTO STRIKES

A portion of the decline in manufacturing can likely be attributed to industrial actions at the three largest automakers. Strikes at automotive plants tend to have significant ripple effects across the manufacturing sector due to extensive supply chains. Nevertheless, these strikes alone cannot fully account for the scale and breadth of the sharp downturn observed in October.

Thirteen different industrial sectors, including printing, textiles, electrical equipment, machinery, fabricated metals, wood products, computers, furniture, paper, primary metals, and chemicals, reported contractions last month. Only two sectors—food and beverage, and plastics and rubber—experienced growth.

EXPANSION POSTPONED?

The unexpected weakness in manufacturing follows a period where activity appeared to be approaching a cyclical low in the third quarter, after sustained declines in the first and second quarters. Industrial energy consumption showed signs of stabilization during the third quarter, indicating the worst may have passed.

The volume of diesel and other distillate fuel oils supplied to the domestic market saw a slight increase from June to August compared to the same timeframe the previous year. Over three-quarters of all distillates supplied are utilized in freight transport and manufacturing, making distillate usage a reliable indicator of the industrial cycle. This increase marked the first rise since the three months from September to November 2022.

While electricity sales to industrial customers continued to decline from May to July, the rate of decline was among the slowest since the previous fall. The stabilization of diesel and industrial electricity sales during the summer aligned with expectations for manufacturing activity to stabilize prior to a potential expansion.

Due to the prolonged yet mild nature of the downturn, distillate inventories remain below the long-term seasonal averages. A return to expansion would likely lead to rapid depletion of diesel stocks and increase pressure on industrial prices.

Tight energy supplies have contributed significantly to inflationary risks and have influenced expectations among interest rate traders that central banks will maintain elevated overnight rates for an extended period. However, the renewed weakness in manufacturing evident in October is expected to further delay both the anticipated recovery and the resurgence of inflation.