U.S. manufacturers reported business activity declined for the second month running in December and the sector appears to be on the leading edge of a recession. The slowdown in manufacturing and freight has already dampened consumption of diesel and other distillate fuel oils, and consumption is likely to fall if the manufacturing downturn deepens.
The Institute for Supply Management’s manufacturing activity index fell to 48.4 in December (19th percentile for all months since 1980) compared with 49.0 in November (22nd percentile).
The index has fallen in nine of the last 12 months as the business cycle has slowed under the impact of faster inflation, higher interest rates, bloated inventories and a post-pandemic rotation from goods to services spending.
The index averaged 49.2 in the three months between October and December and is nearing levels which have been consistent in the past with the onset of a recession, as defined by the National Bureau of Economic Research.
Since 1980, the three-month centered average in the first unambiguous month of a recession has been 46.7 (February 1980), 45.8 (August 1981), 45.7 (August 1990), 42.4 (April 2000), 49.9 (January 2008) and 47.0 (March 2020).
Based on data from the last 40 years, the slump in the index could also be consistent with the onset of a mid-cycle slowdown or temporary "soft patch". But mid-cycle slowdowns have usually been distinguished from cycle-ending recessions by cuts in interest rates to sustain the expansion.
In this instance, the U.S. central bank has signaled it intends to continue increasing interest rates to bring inflation back under control, which makes a recession more likely than a mid-cycle slowdown. Manufacturing activity is likely to decline even further in the next few months.
The survey's forward-looking new orders component fell to 45.2 in December (8th percentile) from 47.2 in November (12th percentile) and 61.0 a year earlier (79th percentile).
More than four-fifths of distillate fuel oil is consumed by trucking firms (67%), railroads (6%), maritime bunkers (3%), industrial users (3%) and the construction sector (4%).
As a result, consumption is closely correlated with the acceleration and deceleration of the manufacturing and freight cycle.
In the three months between August and October, the most recent data available, the volume of distillate supplied to the domestic market averaged 4.0 million barrels per day, unchanged from the same period in 2021.
In line with manufacturing activity, the growth in distillate supplied has been decelerating progressively since the second quarter of 2021 and has now stalled.
If the manufacturing slowdown deepens over the next six months, as seems likely, distillate consumption is likely to fall.
Reduced distillate consumption would help replenish severely depleted inventories, which at the end of October were equivalent to just 27 days consumption, the lowest for that time of year for over three-quarters of a century.
(Reuters: John Kemp is a Reuters market analyst. The views expressed are his own)