FDI August 2022

Key Points:

FDI rebounds back to growth. The seasonally adjusted August FDI (52.6) returned to growth territory after briefly dipping <50 last month (46.1). The sales index was the main driver of the improvement, as only 28% of respondents indicated sales were below seasonal expectations compared to 46% last month. Pricing was consistent with last month’s readings and remains at elevated levels, but recently moderating commodity prices (steel) and container/freight costs could suggest some normalizing ahead, in our view, which could lead the index to decline. At least one respondent noted they were already seeing raw material prices normalize. Overall, we believe August’s FDI reading was indicative of a growing but slowing market.

FLI suggests another dip expected next month. Despite the solid August FDI, the seasonally adjusted FLI suggests the recovery may be short lived, with the index coming in at just 47.4. Relative to last month, employment levels softened, customer inventories crept up into “too-high” territory, and the six-month outlook was less positive. Regarding the outlook, the percentage of respondents expecting higher activity levels six months from now compared to today was just 28% — down significantly from last month’s 50%. Another 28% expect lower activity levels vs. an average of just ~13% over the past two years. Lastly, 45% expect similar trends. Commentary from participants that focused on the outlook indicated customers are pushing out deliveries, while certain sectors (industrial) are seeing significant slowing.

FDI employment index ticks down. The FDI employment index came in at 53.4 for August, decreasing from 62.5 in July. The vast majority of participants indicated they were at levels of employment that is seasonally normal/appropriate (72%), with just 10% saying employment levels were too low (compared to a post-COVID high of 26% in September 2021). The broader economy saw a similar deceleration in August, adding +315,000 jobs vs. the consensus expectation for +318,000 and compared to the +526,000 added in July. Average hourly earnings rose +0.3% m/m and +5.2% y/y in August as firms continue to compete for workers in the current inflationary backdrop.

Outlook deteriorated vs. last month. Forward-looking commentary this month skewed more bearish than recent months amid continued macro uncertainty and recession fears. Participants pointed to customers requesting to delay deliveries and preserving cash: “Continued slowdown and customers asking to delay shipments. In addition, A/R now starting to age further out as customers attempt to preserve their cash.” The industrial sector was also called out by one participant as seeing significant slowing in demand: “Our automotive tier sector remains busy, but inconsistent in terms of scheduling due to supply chain issues. Industrial sector has slowed because of consumers tightening their spending habits. This has affected inventories across the board–everybody has too much. Supplier deliveries and lead times remain long but at least they seem to have peaked.” Lastly, raw material pricing moderating could be another signal of demand waning: “Raw material pricing is beginning to soften, however; it is still much higher than a year ago.” Even for those participants not yet seeing slowing, to some it feels inevitable: “Many of the industry economic sources predict slower growth so figuring a slowdown is in the near future though have not seen it yet. Numbers still at elevated levels.”