Today’s US ISM Manufacturing report showed better-than-expected numbers. E0conomic activity in manufacturing retains the strength exhibited year to date, with little impact from trade, point out analysts at Wells Frago. They also see that there are many signals that supply chain bottlenecks are limiting production and raising prices.
Key Quotes:
“June’s ISM manufacturing index came in solid at 60.2 after an index of 58.7 in May. Production and employment on the production side both came in solid, supporting current economic growth at 4 percent plus for the second quarter.”
“The three-month moving average for the ISM is consistent with the strength for industrial production (May at 5.2 percent) and illustrates the recovery since early 2016 in both series.”
“As for tariffs, consider the comments of the fabricated metal respondents – “The Section 232 steel tariffs are now impacting domestic steel prices and capacity.” Comments on the impact of tariffs were also cited by electrical equipment, paper products and miscellaneous machinery respondents.”
“The ISM prices paid measure has been and continues to signal rising input price pressures for manufacturing firms.”
“The ISM prices paid index came in at 76.8 in June, exactly the same as the six-month average, intimating sustained input price pressures for manufacturing firms. Our estimate for final demand inflation for producer prices stands at 2.9 percent for 2018 compared to 2.3 percent for 2017 and just 0.4 percent for 2016. This pickup of input inflation will put upward pressure on consumer prices and/or downward pressure on corporate profits. What if inflation starts to accelerate? Our bet is that the FOMC will also pick up the pace on the Fed funds rate with increases in September and December as well as twice in 2019.”
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