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Manufacturing remains robust even as price pressures intensify

March 02, 2021

Graph depicting the ISM supplier delivery index

Source: Institute for Supply Management

The ISM manufacturing index came in ahead of consensus expectations for February, equaling its best reading since 2004 at 60.8. Details were even stronger than the headline, as the inventory component fell back into contraction territory while new orders, production, and employment all moved solidly higher. Moreover, the leading indicators continued to point decidedly upward, with the order backlog index jumping to a 16-year high and the customer inventory metric tying an all-time low. This is clearly not an economy that is buckling – or is soon to buckle – under the weight of higher long-term interest rates.

The most blaring signal from this morning’s report, however, was the clear and present risk of a temporary spike in inflation. The ISM’s prices paid and supplier delivery metrics both shot higher last month and the anecdotal comments from survey respondents, which typically touch on a wide variety of topics, were universal in sounding the alarm on shortages, supply constraints, and building price pressures (“Things are now out of control” was one representative, if atypically blunt, assessment). At the same time, there continues to be a thread running through these responses underscoring that the emerging stresses are largely pandemic-related and thus should be expected to be short-lived. This is the normal pattern when the economy is hit by a supply shock; inflationary pressures often spike sharply in the wake of these events, but then tend to recede just as quickly (the Arab Oil Embargo, which sent the prices paid and supplier delivery indices to record highs in late 1973 before both fell precipitously in 1974, is the prime example). The inflationary impact of this shock appears to be drawing close, but it remains unlikely to have much staying power given that its underlying driver is already on the wane.

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