Demand for goods continues to rise rapidly, forcing manufacturers to struggle to keep pace. True, the total order balance overstates how much demand increased in November, as it is not seasonally adjusted and almost always drops in October, before rebounding in November.
Nonetheless, our seasonally adjusted version of the total order balance rose 11 points in November to reach its highest level since the record started in 1977. Unfortunately, the relationship between the total order balance and the official measure of manufacturing output is quite low, as manufacturers are asked to compare orders to “normal levels”, and at this time, manufacturers cannot fulfill all orders.
Even so, manufacturing output likely still has a chance to increase further in the fourth quarter, as former employees on leave are recalled and manufacturers invest to improve productivity. Even if orders weaken next year, perhaps as resupply demand wanes, production will be supported by the large backlogs that have built up this year.
At the same time, the resilience of demand allows almost all producers to increase their selling prices. Indeed, the balance of producer price expectations rose to +67, its highest level since May 1977, against +59 in October, which corresponds to an increase in producer prices to nearly 8.0%. in January, against 6.5% in October. As a result, core commodity CPI inflation looks set to rise further over the next six months, helping to push the headline rate above 5% in the spring.