April 20, 2022
As the U.S. Economy contends with higher inflation, supply chain stress, and rising recession risks, one indicator to keep an eye on is what’s going on at the sector level and how U.S. business conditions may help shape the economic outlook.
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Welcome to Thoughts on the Market. I'm Robert Rosener, Senior U.S. Economist for Morgan Stanley Research. Along with my colleagues bringing you a variety of perspectives, I'll be sharing a read on how industries across the U.S. may be viewing the current economic environment. It's Tuesday, April 19th at noon in New York.
As we move through the economic recovery and expansion that has been uneven, it's increasingly important to track what's going on at the sector level. And collaboratively with our equity analysts we do exactly that with our Morgan Stanley Business Conditions Index; a monthly survey to track what's going on across industries. With the MSBCI we try to put all of those stories together into one coherent macro signal, from 0 to 100, where 50 is the even mark, above 50 is expansion and below 50 is contraction.
It incorporates a variety of data points on hiring plans, capex plans, advance bookings and how those factors are evolving. Now, amid a more challenging and uncertain economic backdrop with higher inflation, supply chain stress and concerns about rising recession risks, I'd like to dive into a few key findings from our most recent survey to give listeners a picture of how U.S. businesses might be seeing the current environment.
First, in our April survey the headline measure for the MSBCI fell to a two year low of 44. We saw that decline in the index as driven by a deterioration in sentiment, because it coincided with a sharp pullback in business conditions expectations - so how analysts are seeing the forward trajectory for activity. And that decline in sentiment was particularly concentrated in the manufacturing sector, where we had a sharp decline in the MSBCI manufacturing component, while service sector activity appeared to bounce a little bit but remained at low levels.
When we look at the underlying details, the fundamental components of the survey were more mixed this month. So downside in our survey was led by business conditions expectations, as well as advance bookings and more strikingly, credit conditions. Now some of this can be noise, and we need to look very carefully through the data to see if we can identify a clear trend. Advance bookings, the decline there may have been more noise, but we are monitoring credit conditions very closely as the Fed tries to tighten financial conditions with its monetary policy stance.
We also got a bit of insight into supply chain conditions in this report. Responses from analysts in our survey indicated some stalling in the improvement in April, and a pickup in the share of analysts who reported that conditions remained unchanged. Which is broadly consistent with what we've seen in other indicators. Nevertheless, analysts generally expect improvement in supply conditions over the next 3 months.
Finally, there was some good news in the survey on business investment plans, what we call capex, as well as hiring plans. There was some moderation, but the two factors remain bright spots in the report, with upside in capex plans, and hiring plans coming back but holding at a fairly solid level.
So what does this all tell us about how businesses see the road ahead? First, there's important momentum in hiring and capex. With respect to inflation, the deterioration we saw in supply conditions during the month does point to some upside risk for prices in the near term, and that was also reflected in strong upward pressure in the MSBCI pricing measures during the month. We can also see that businesses are facing increased uncertainty about the outlook. That's clear looking at the deterioration in sentiment, and that's clear looking at the pullback in business conditions expectations. So firms are watching the pace and trajectory of economic activity carefully. So it will continue to be important to watch these stories to judge what's going on at the sector level and how that's all coming together to shape the economic outlook.
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