Tuesday, March 1, 2011

More very strong manufacturing reports

The February ISM survey of manufacturers was strong across the board, exceeding expectations. This first chart of employment is almost "off the chart" strong, since it is by far the strongest reading since 1973: almost two-thirds of firms surveyed reported plans to increase hiring.

As this next chart shows, more firms are seeing increased demand from abroad. The weak dollar is undoubtedly contributing to the general strength in exports that we've see for awhile, but this also reflects the fact that global growth is strong, and that provides a healthy backdrop for just about everything.

The prices paid component of the ISM survey moved higher, as 82% of the firms surveyed reported paying higher prices. This could simply reflect the rising cost of energy, as the chart above suggests, but it more likely reflects broad-based rises in most commodity prices as well. Those who look for inflation at the consumer level to remain subdued, in the face of an avalanche of price hikes at the producer level, believe that firms will simply absorb higher input costs into their profit margins and not pass along price hikes to their customers. I don't know about you, but yesterday I received a notice from my health insurance carrier and from my phone/internet/TV provider that they are raising the price for their services. I expect to see more such notices over the course of the year.

Add it all up and you get a very strong ISM index. As this chart suggests, the strength of the manufacturing sector is consistent with overall GDP growth well in excess of what we have seen in recent quarters. I would be very surprised if Q1 and Q2 growth were not at least 4%, based on this chart and the growing number of indicators reflecting improvement (e.g., truck tonnage, plus my two dozen bullish charts).


brodero said...

Best New Orders minus Inventories
number since June 2009....

Benjamin Cole said...


Health insurers have been raising prices for decades. Get used to it. Cable companies operate with limited competition, in regulated (i.e., rigged) markets. They raise rates whenever they can.

In competitive markets, productivity has been rising, and unit labor costs falling. Unit labor costs fell in 2009 and 2001, by 1.6 percent and then 1.5 percent.

To be sure, some commodities have increased in price, especially oil. Worth noting that the price of oil is partially set by an organized cartel, OPEC, and speculators on the NYMEX. That's an interesting combination--add to it that the bulk of oil production comes from thug states, such as Libya. In all, an unhealthy market.

Still, there are no signs of general inflation, nor should we worry much until the CPI gets to 3 percent to 4 percent. We need several years of moderate inflation to improve banks' balance sheets, and deleverage.

Unknown said...

another bullish chart - trade in Asia +8% mom in Jan