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Supply chain dislocations evident throughout ISM report

May 04, 2021

chart depicting consecutive month streaks in which ISM manufacturing index has remained above 60.0Source: Institute for Supply Management

The ISM manufacturing index recorded its largest decline in a year in April, falling to 60.7 from a prior 64.7. Each of the five components moved lower last month, although all but the inventory metric remained solidly in expansion territory. Moreover, some pullback was to be expected given the robust run of late; the ISM is a mean-reverting index and in recent decades has rarely sustained readings north of 60.0 for long (note that the index went 15 years, from the late 1980s to the early 2000s, without a single print in the 60s).

The big story here, though, is the continued impact of COVID-related supply chain dislocations on both output and prices. The supplier delivery component came in at a lofty 75.0 while the prices paid metric shot up to a 13-year high 89.6, as a stunning 80.1 percent of respondents reported an increase on the month. Two dozen commodities were said to be in short supply and many of the anecdotal comments warned that these pressures were intensifying and unlikely to abate soon (these echo the tone on many of the earnings calls this quarter and have also been reflected in commodity prices, shipping delays, and transportation costs).

The upshot is that there are growing near-term risks to both consumer prices and profit margins. Pricing power has become increasingly limited by globalization and technological advancement over time (note that the spread between the core PPI and core CPI inflation rates, which was sharply negative in the 1980s and 1990s, flattened out in the 2000s and turned positive in the 2010s), but these issues have reached enough of an extreme that it is reasonable to expect some transmission through both channels
The more important consideration, however, revolves around the sustainability of these risks. It is telling that equities have continued their ascent and Treasury yields have flattened out even as supply chain disruptions and wholesale price pressures have become more acute. There is a corollary here to the early stages of the pandemic just over a year ago. Risk assets began a robust rally last March even as the virus was just beginning to spread rapidly and the prospect for vaccine approval and distribution was still highly uncertain (one widely read opinion piece published last April suggested that, based on a typical timeline, a COVID vaccine would be ready by 2033). Aggressive monetary stimulus was a big driver, of course, but the markets also correctly viewed the pandemic as an exogenous shock, one that would eventually run its course without permanently altering the underlying fundamentals. That is likely to prove true in this case, as well, even if these dislocations are slow to dissipate

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