The Federal Reserve Bank of Kansas City said many consumers are responding to weakness in manufacturing by pulling back from purchases, which a market analyst said could have bearish implications for meat purchases.
While the consumer activity currently is concentrated in manufacturing-heavy states, it could spill over into other states and sectors if trade tensions persist and buying interest continues to soften, the bank said.
In fact, the Federal Reserve Bank said its survey results may understate the full response of consumption growth, as bank economists only included data through 2018, and the decline in manufacturing has since intensified, and the Institute for Supply Management index has recently moved into contractionary territory.
CURRENT RESPONSE DIFFERENT
The US has faced two downturns in manufacturing in recent years, the Federal Reserve Bank said. One was from 2014 to 2015, and one has been ongoing since 2018, and that the corresponding decline in consumer spending in manufacturing states is the opposite of what happened in the 2014-2015 downturn.
After reaching a near-term high in August 2018, the ISM index has fallen steadily to a level below 50, indicating contraction, the bank said. Over the period, manufacturing job growth fell to essentially none from about 20,000 a month.
In their analysis, the Federal Reserve economists said different economic shocks were involved that may explain at least some of the consumer reactions.
OIL PRICES THE LINK
As it turns out, oil prices appeared to be the common link to consumer reactions to the two manufacturing downturns.
The 2014-15 downturn largely was because of a sharp decline in oil prices, which lowered gasoline prices and thereby boosted consumption growth in most states, including manufacturing-heavy states, the bank said. The negative effects of the oil-price decline were concentrated in energy-producing states, like Wyoming and North Dakota, and both states saw their consumption growth fall during the period.
In contrast, oil prices have risen steadily throughout the 2018 downturn, leaving consumers with less money for other purchases, the bank said.
The market analyst said choice- or prime-graded beef may be targeted for consumption cuts by consumers if the manufacturing decline continues because shoppers have shown a propensity in the past to downgrade the quality of their beef purchases before they cut back or make a few switches to other meats.
Federal Reserve Bank economists also speculated that trade tensions may be discouraging consumption, particularly in manufacturing-heavy regions with a greater share of export activity. Other economists have estimated that Chinese tariffs cut US real income to fall by almost $1.5 billion in 2018, “a substantial reduction that has likely weighed on consumption growth.”
The market analyst said that getting a trade agreement signed between the US and China was essential to preventing consumers from transitioning to less-expensive cuts of beef and/or switching to other meats. Getting the US-Mexico-Canada Agreement passed through Congress also would help.
CATTLE, BEEF RECAP
Cash cattle trading last week took place at $115 to $116 per cwt on a live basis, steady to up $1 from the previous week. Dressed-basis trading was reported at $182 to $182.50 per cwt, up $0.50 to $1.
The USDA choice cutout Monday was down $1.68 per cwt at $239.12, while select was up $1.26 at $215.59. The choice/select spread narrowed to $23.53 from $26.47 with 93 loads of fabricated product sold into the spot market.
The CME Feeder Cattle index for the seven days ended Friday was $146.69 per cwt, down $0.43 from the previous day. This compares with Monday’s Nov contract settlement of $146.37, up $0.12.