The US Economy is All Right

Jacob Hess

April 17, 2022

• Economy
• Outlook

As we all know, the war in Ukraine has surfaced as the primary threat to global growth in 2022. The already inflammatory issues of inflation and supply chain disruptions are expected to worsen for most of the world if not all of it. With the beginning of the conflict taking place at the end of February, all eyes are on March and April economic data to see the initial impact. A first glimpse suggests the impact may be minimal in the US.

Industrial Production Maintains Strong Monthly Pace in March

Industrial production data for March came out on Friday with a strong monthly print of 0.9% MoM. This was the third straight monthly gain of 0.9-1.0% and the second straight for the manufacturing sector. Total capacity utilization also surfaced above 78% for the first time since January 2019 and exceeded the pre-pandemic reading by 2.0 ppts. US industry seemed to be operating normally in March without any disruptions added from the war. Instead, the expansion of industrial capacity continues at a rapid pace to keep up with excess demand.

The rise in energy prices has been the aftershock of the Russian invasion and sanctions that has shaken the US economy, and the industrial production report does reflect that. Oil and gas drilling production saw a strong 4.8% MoM increase in March following three monthly gains of 4.0% or more. This strength helped boost the mining subindex which grew 1.7% MoM. The good news is oil and gas drilling production is up 53.7% YoY after Q1 2022 which bodes well for the cooling of US gas prices. The strong response from oil and gas firms to higher prices dashes fears that they would be unwilling to ramp up production in the face of fundamental changes within the industry.

Empire State Manufacturing Survey Activity Surges in April

The first of many Fed manufacturing PMIs for April also came out last week describing firms' activity in the New York State, the Empire State Manufacturing Survey. These responses were received in the first week of April, about a month and a week from the beginning of the war in Ukraine. The General Business Conditions index saw a huge bounce from -11.8 to 24.6 boosted by a 36.3 pts jump in the New Orders index and a 41.9 pts jump in the Shipments index. This meant firms in New York reverted from a slight contraction in demand and production in March to a strong pace of growth in April. If the negative March numbers were representative of the effects of the war in Ukraine, they were very temporary.

If manufacturing firms did see an expansion in production and stronger demand, they saw it at with higher input inflation. The Prices Paid index accelerated to its higher reading of all time in April at 86.4. This was a jump of 12.6 pts from an already elevated reading of 73.8 in March. This was likely due to the surge in energy prices reported throughout March, a consequence of the Ukraine-Russia conflict that will continue to be cited. The situation has also lead to a worsening in optimism for the next 6 months. The forward-looking General Business Conditions index fell -21.4 pts but remained in positive territory at 15.2.

It seems that so far the US economy is doing all right. Of course, there is a lot of data to come through to help better describe the consequences of the war across the globe, but the above two reports suggest positive surprises on the way. This trend would be pleasant news for the FOMC board who is planning a path of policy normalization for the rest of the year. Avoiding potential snags in the next few months could mean the difference between slow growth and a full on recession as the Fed funds rate rises.