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July 2022 Economic Update Executive Summary
OUTPUT AT U.S. FACTORIES FELL 0.1% IN MAY, the latest sign of cooling economic activity. Still, production at auto plants rose 0.7%. Mining production increased 1.3%. Utilities output climbed 1.0%. The solid gains in mining and utilities offset the dip in manufacturing and raised total industrial production 0.2%. Other May data showed: Factory orders rose 1.6%. Durable goods orders advanced 0.7%, lifted by a 0.8% gain in orders for transportation equipment. Motor vehicle orders climbed 0.5%. The U.S. trade deficit dropped 1.3% to $85.5 bn. Imports of goods and services rose 0.6%, which was offset by a 1.2% increase in exports to a record high. Import prices were up 0.6% and 11.7% over the 12 months to May. Producer prices rose 0.8%, with a 1.4% jump in the prices of goods accounting for nearly two-thirds of the rise in the PPI. Goods prices were driven by rising costs for energy products. Consumer prices were 8.6% higher than a year earlier, the highest inflation rate in more than four decades. Retail sales fell 0.3% as auto purchases declined 3.5% amid model shortages and record high gasoline prices. Existing home sales slid for a fourth straight month. Nonfarm employment increased by 372,000 jobs in June, and the unemployment rate remained unchanged at 3.6%. Consumer confidence fell sharply, reaching its lowest point in a decade. The Federal Reserve, faced with the highest inflation in more than 40 years, took its most aggressive step yet in the attempt to curb inflation and raised the target range for the federal funds rate from 1.0 to 1.75. Further rate hikes look inevitable.
CHINA’S RETAIL SALES DECLINED FOR A THIRD CONSECUTIVE MONTH IN MAY, falling 6.7% YOY as lockdowns and mass testing campaigns under the zero-COVID strategy curtailed growth. Russian exports to China accelerated in May, surging 80% YOY to $10.27bn, as Beijing continues to offer support to Moscow. European steel-consuming manufacturers say Brussels is adding to the supply chain crisis by rejecting requests for a big increase in the amount of steel they can import without paying punitive 25% tariffs. The war in Ukraine has triggered an inflation crisis that is affecting people all over the world, especially in Europe.
Steel Industry Updates
U.S. STEEL WILL END STEEL PRODUCTION AT ITS GRANITE CITY MILL and use the plant to produce pig iron. Pig iron is ore reduced to molten iron in a coal-heated blast furnace and mixed with scrap and melted into new steel in electric furnaces. The stainless steel market saw the first major price decline since 2020 as the falling nickel price lowered the surcharge. The June surcharge for grade 304 flat-rolled coil dropped about $0.18/lb as LME nickel fell from $15.12/lb in the April calculation period to $13.50/lb in May.
Metals & Commodities
PRICES FOR ALUMINUM INGOT ON THE LME FELL BELOW $2,500/TONNE IN JUNE compared to $4,000 in early March, while the Midwest premium has declined to an average of 33 cents/lb from 40 cents in early May. Iron ore prices slumped 8% on June 19 to a six-month low of $111.35/tonne, following reports of steel mills in China cutting production.
U.S. AUTO SALES SLUMPED IN THE 2ND QTR as chip shortages continued to choke car supplies and rising sticker prices put new vehicles out of reach for a wider swath of prospective buyers. GM reported a 15% drop in sales. Toyota’s sales fell 23%. General Motors, Ford, Toyota and Stellantis urged Congress to lift a cap on the $7,500 electric vehicle tax credit, citing higher costs to produce zero-emission vehicles. The CEOs of the automakers said in a joint letter that they have pledged to invest over $170 billion through 2030 to bolster EVs development, production and sale. The quality of vehicles sold in the U.S. fell to a 36-year low in 2022, as labor shortages and supply snags continued to impact automakers. Owners of battery-electric vehicles (BEV) and plug-in hybrid vehicles (PHEVs) cited more problems when compared to owners of internal combustion engine (ICE) models (per the J.D. Power report).
Energy Sector News
U.S. WHOLESALE ELECTRICITY PRICES THIS SUMMER ARE FORECAST TO SIGNIFICANTLY INCREASE YOY mainly due to surging costs of fuel for generators. The EIA expects electricity prices in the Northeast to exceed $100/MWh in June/August, an increase from $50/MWh a year ago. Russian gas volumes on the Nord Stream 1 pipeline to Germany were cut by 60%, which Moscow blamed on sanctions. Russia has access to alternative supply routes to keep customers supplied, but declined to use them.
MEDICAL DEVICE COMPANIES WILL CURB SPENDING IN THE 2ND HALF as they prepare for a potential recession amid rising inflation and as supply chain and staffing woes continue, according to RBC analysts. Pfizer and BioNTech vaccines modified to target the Omicron variant produced a significantly larger immune response than the companies’ currently available vaccine in a study.
AMAZON’S LONG-PLANNED DRONE-DELIVERY SERVICE WILL MAKE ITS U.S. DEBUT THIS YEAR. Amazon’s drone-delivery program will make its first deliveries to Lockeford, CA, about 100 miles northeast of San Francisco. United Airlines pilots tentatively agreed to a new contract that gives them 14.5% raises, increased overtime pay and other benefits, setting the standard as other major carriers negotiate deals with their aviators at a time of rebounding travel demand.
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