The February ISM Manufacturing report for the Manufacturing sector came in much stronger than expected and rose to a level of 60.8 compared to last month’s reading of 59.1 and consensus expectations that were calling for a decline to 58.7. As shown in the chart below, February’s reading was the strongest for the headline index since May 2004. It’s hard not to like that!
While the headline reading was positive, not all the news was good. The table below shows the breakdown of this month’s sub-indices on both a m/m and a y/y basis. One thing that stands out is that breadth in the report was strong. On a m/m basis, all but three components increased, and on a y/y basis Customer Inventories was the only category that showed a decline. That’s the good news. The bad news is that two of the three categories that declined on a m/m basis in February were Production and New Orders. These are two categories that we typically like to see increasing, and February’s drops represent the second straight month of declines for each sub-index. More important than those declines, however, is the fact that Price Paid rose to its highest level since May 2011 (chart below). With the markets already on edge about potential inflation pressures, this was not welcome news.
A look at the commentary in this month’s report stinks even more of inflation and potential price pressures. Of the ten quotes highlighted in the report, seven of them discuss issues like lead times, contraints, tight labor markets, suppliers out of inventory, supplier price increases, etc. The usual way to alleviate these issues is simple- higher prices. Whether and how much they actually translate to higher prices, remains to be seen, but for a market already worried about the potential for upside price pressures, these aren’t welcome comments.