As the U.S. manufacturing sector endeavors to recover from a persistent downturn, high service sector inflation hinders the potential for interest rate cuts, complicating the path to resurgence.
Manufacturing’s Stagnant Recovery
The U.S. manufacturing industry is facing an uphill battle to rebound from a protracted and mild recession. The absence of interest rate cuts, due to persistent inflation within the service sector, is delaying any potential acceleration in the sector’s recovery. This has led to a subdued demand for diesel, impacting fuel inventories and refining margins.
The Institute for Supply Management (ISM) reported a decline in its purchasing index to 47.8 in February, indicating a contraction in manufacturing activity for the 16th consecutive month since November 2022. This downturn is notably less severe than previous recessions, with manufacturing output decreasing by less than 2%, as per Federal Reserve data.
Despite the worst of the downturn passing in mid-2023, manufacturers have struggled to regain momentum. Key sub-indexes for production and new orders have seen declines, reflecting the challenges in revitalizing the sector.
Interest Rate Dilemma
Typically, a mid-cycle slowdown would prompt the Federal Reserve to stimulate the economy through interest rate reductions. However, the current situation is complicated by the robust service sector, where inflation rates exceed the central bank’s targets, limiting the ability to provide relief to manufacturers without risking an overheating of the service sector.
Diesel Consumption and Fuel Inventory Impacts
The manufacturing slowdown has mirrored in the U.S. diesel consumption patterns, with no significant growth since mid-2022. The shift towards biodiesel and renewable diesel has also contributed to a decrease in petroleum-derived diesel consumption.
Despite the tepid demand, distillate stocks remain below average, with unexpected disruptions, such as the BP refinery incident in Indiana, exacerbating diesel shortages. As manufacturing and freight activity remain sluggish, the anticipated inventory depletion and subsequent fuel price increases are now projected to occur later into 2024.
