U.S. manufacturers are trying to recover from a prolonged but mild downturn, with lower interest rates delayed by service sector inflation. The slowdown in industrial and freight activities has reduced diesel use, delayed fuel inventory depletion, and lowered refining margins.
In February, the Institute for Supply Management (ISM) purchasing index fell to 47.8 (18th percentile for all months since 1980) from 49.1 (25th percentile).
Since November 2022, the index has been below the 50-point level separating expansion from contraction for 16 months. The manufacturing downturn is the longest since 2000-2002 and 1981-1983.
Both recessions were cycle-ending, unlike mid-cycle slowdowns, which had a far deeper activity contraction. The U.S. Federal Reserve reports that industrial production has fallen less than 2% in the current slowdown.
The worst of the downturn ended in the second and third quarters of 2023, but manufacturers have failed to recover. The ISM production sub-index fell to 48.4 (14th percentile) in February from 50.4 (22nd percentile) in January and was unchanged from July 2023. The February new orders sub-index declined to 49.2 (20th percentile) from 52.5 (34th percentile) in January and was no better than September 2023. After a mid-cycle "soft patch" manufacturers struggle to recover, leading the central bank to lower interest rates.
Service strength has delayed rate reductions in this case. Persistent inflation in the larger, labor-intensive services sector restricts manufacturer assistance. Car, furniture, and computer manufacturers need lower interest rates to boost family and company spending and borrowing.
Policymakers can only provide so much stimulus because service sector prices are rising twice as fast as the central bank's flexible average inflation target. In a two-speed economy, the central bank cannot help manufacturing without overheating services.
U.S. diesel and distillate fuel oil consumption has declined with the shallow but extended manufacturing and freight slump. Since mid-2022, distillate consumption has stagnated as manufacturing has struggled. Because biodiesel and renewable diesel have a limited but growing market share, petroleum-derived diesel use has dropped. Petroleum-derived distillate fuel oil supplied to the domestic market (a proxy for consumption) dropped to 3.6 million b/d in December 2023. U.S. Energy Information Administration data shows the volume fell from 3.8 million b/d in December 2022 to 4.0 million in December 2021.
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