ISM Improves But Spectre Of Inflation Looms

The March Manufacturing ISM report was better than expected, indicating that the economy is expanding whether job creation is occurring or not. The figures may support the theory that production in the US has improved so much that businesses are experiencing new sales without adding workers. Productivity at the end of 2009 was up 7.9%.

The ISM index was at 59.6% compared an expected 57.5% consensus estimate. A PMI in excess of 42% usually indicates the overall economy is expanding.The figure was the best monthly report in six years. But, the report shows that inflation may have begun to creep into the general economy, something that the Fed has assured the public was unlikely.

Seventeen of the 18 manufacturing sectors covered by the survey expanded.  The chief of the Institute of Supply Management, Norbert J. Ore, said, “The manufacturing sector grew for the eighth consecutive month during March. The rate of growth as indicated by the PMI is the fastest since July 2004. Both new orders and production rose above 60 percent this month, closing the first quarter with significant momentum going forward.”

The greatest strengths in the report were increases in new orders–up 2%, supplier deliveries–up 3.8%, and production–up 2.7%.

But, the indications of inflation were unmistakable. The ISM data showed prices across the sectors surveyed were up 8%. Nineteen of the 20 commodities followed were up in their cost to manufacturers, including most metals–aluminum, copper, and ore, and diesel fuel. The price increases may be mitigated in future reports because economists found no shortages of any commodities.

Fed monetary policy, which is set to keep interest rates at .25% and often less, is supposed to keep the ability of the economy to expand as high as the agency can make it. However, the ease with which money can flow into the system at such low interest rates has raised ongoing concerns, even among some Fed Governors, that demand for goods and services may rise to fast fueling inflation. The March PMI figures give that theory some support.

Douglas A. McIntyre