ISM - When inflation doesn’t matter
Oh to be an investor trying to navigate the jungle of the U.S. economy! Signs from some areas of the economy show that the economy continues to spring back from its harsh winter, yet others, such as Monday’s manufacturing survey, look less impressive. Analysts had the market prepped for expansion at a faster 55.2 pace before the report, which in the event showed manufacturing activity was slightly less brisk than during April. Instead the index eased by 1.7-points to 53.2 and 0.6-points slower than the six-month average.
Of the two standout component pieces, employment and prices paid, the setback for the labor index probably speaks greater volume than does the measure of inflation. Why? Because the economy is used to dealing with volatile commodity input costs, which tend to get smoothed out during the production process.
The real enemy of the state, however, tends to occur when wage gains take hold at the start of a wage-inflation spiral. And in the absence of a really robust employment market and with few signs of anything other than a stagnant period for wage growth, it is hard to be worried about the onset of inflation from that angle. The employment series ticked down in May to 51.9 from 54.7 and below its six-month average reading of 53.0. For its part, the widely-watched prices paid gauge rose above its 6-month average to 60.0 from 56.5, yet is most likely to remain hindered by an economy muddling through.
Chart shows prices paid and employment
Elsewhere in the May ISM manufacturing report, the production gauge continued to show a healthy expansion, easing only slightly to 55.2. The new orders component eased to 53.3 from 55.5 while manufacturers’ inventory readings continued to build at about the same pace last month. One positive sign was that customers’ inventories shrank at a faster pace, which could be positive for future orders. Export orders continue to accelerate, yet at a slightly less brisk pace with the index easing to 56.5 from 57.0. The import index, however, fell to 54.5 from 58.0 and back in-line with its March level, which is now below its six-month reading. Mixed at best, is how we might term the May ISM report, but perhaps there is less to worry about from an inflation perspective than the ISM is possibly showing.