Morning Brief: A 'peak' in economic activity sounds scarier than it really is

Myles Udland breaks down Tuesday’s Morning Brief, which details that the debate over the economy reaching peak growth doesn’t give us the complete picture as manufacturing growth potential is still very limited by a number of factors such as supply shortages, short-term shutdowns, and worker absenteeism.

Video transcript

BRIAN SOZZI: Signs of peaking economic growth are starting to pop up everywhere. This is something Myles Udland dove into in this morning's Morning Brief newsletter. Myles, the floor is yours.

MYLES UDLAND: Yeah. I mean, look, peaking economic growth just means that economic data series don't get better. And that doesn't really say all that much about the state of the economic recovery. And we look at yesterday's economic data we got out, manufacturing PMIs from both ISM and IHS Markit-- now, they told somewhat conflicting stories. ISM is the more widely followed metric. But ISM's Manufacturing Index came in at 59.5 last month. All that means is that the economy is growing at a somewhat slower pace than we've seen over the prior months. And in his typically colorful way, Neil Dutta flagging to us. He said, the ISM manufacturing was actually very solid underneath that headline number. And as only Neal can say, anyone that says anything to the contrary does not know what they are doing.

But the basic point that Neil's making, and I think you can see in the data when you look through, Sozzi, the 11 subindices within the report, is you continue to see demand outpacing supply throughout the economy. And a main tell for this within yesterday's data-- employment within the manufacturing sector improved last month. That's after a contraction in June. And we also saw customer inventories continue to decline. So the manufacturing report talks to suppliers.

Then it asks those suppliers what level of inventory are their customers holding. And the amount of inventory their customers are holding continues to decline. And what that says is those customers are selling product. Those customers are going to need product to get backfilled, but manufacturers cannot supply the product fast enough. That's because we have supply chain problems. We have some amount of pricing pressure. You see commentary in here on absenteeism from workers. They can't staff up fast enough.

All of this is saying that the economy is continuing to ask for more-- ask for more from corporates, ask for more from suppliers, ask for more from producers. And we can't get to where folks want to be. And so OK, maybe growth is peaking. Maybe this is the fastest growth rate that we are going to see. But in no way does it suggest that the economy is weakening. And I think that those two ideas-- peaking ends up getting too close to weakening, and that's really not what we're talking about.

BRIAN SOZZI: What do you think folks or investors should be paying attention more to? Is it these headline numbers out of the ISM, or do they need to start really locking in on the prices paid, the inflation components? We talked about Clorox earlier on. The inflation some of these companies are starting to see is major. But now is crunch time to see whether inflation is, in fact, transitory, as the Fed has suggested.

MYLES UDLAND: So it's interesting. You mentioned prices paid. The Prices Paid Index-- obviously, it's historically elevated. It's at 85.7 within this subindex. But it's down 7% from-- seven percentage points, let's say, so more than 7%-- from last month. So those pressures, the acuteness of those pressures are starting to decline. I think for investors-- and this is what you see in the markets continuing to hold in. "The Wall Street Journal" had a great story on this that was out, I think, Sunday morning about the way that margins are actually continuing to grow at big companies.

So we see the results from Clorox, from Kimberly-Clark, from PG. Why do those stocks get crushed? Those stocks are getting killed because most companies, most megacorps within the S&P 500, are defending if not expanding their margin profile. So when you come out and you say, oh, our earnings were down 24%, organic sales fell 9%, everyone's like, what's going on? That's against the market.

And so I think what we continue to see is big companies are able to absorb those prices. They're able to pass some of them along. But the Street is saying the margin profile. Think about our conversation with Hugh Johnson at Pepsi. They're going from single-digit to double-digit margins the next four years. That's not all price being passed along. That's them also being able to optimize and control their costs, even with these near-term headwinds.

BRIAN SOZZI: That's a lot of good points. That's why you're in charge of the Morning Newsletter. That's just really great stuff every morning. That's why I'm a subscriber.

BRIAN SOZZI: There you go.

BRIAN SOZZI: All right.

MYLES UDLAND: It's free, so that's why you're a subscriber.

BRIAN SOZZI: It's free. Well, that too.