ISM: Growth Story in Place However Price Increases Remain

Broad-based expansion signals for orders, production, employment and delivery times remain a plus for gains in industrial production and the economy. Price increases remain a signal of input pressures. 

Continued Expansion for the Manufacturing Sector

While a shade weaker than expected at 56.6, the ISM survey still provides evidence of a continued expansion in the U.S. manufacturing sector and supports the case for continued overall economic growth (top graph). Our outlook is for 4 percent-plus growth in industrial production for the second half of this year and the first half of 2015.

Production came in stronger at 64.6, with gains in 15 industries. This was the seventh-consecutive month of expansion signals from the production index, which reinforces the view of sustained growth in the manufacturing sector. The production index is now just a tenth of a point from its cycle high reached in January 2010. 

The employment index came in at 54.6 marking the 15th consecutive month of expansion, with 11 of 18 industries reporting improvement. These industries include fabricated metals, machinery, chemicals and computers & electronics. We expect another positive print for manufacturing employment when nonfarm payrolls are released Friday. 

New Orders: Signal of Continued Growth Ahead

New orders (middle graph) slowed to 60.0 from the recovery-to-date high of 66.7 last month, and have remained in expansion territory for 16 straight months. Gains were seen in 12 of 14 industries, with expansion in chemicals, transportation equipment, paper and fabricated metals. Gains in the new orders index indicate forward momentum in the economy. This indication is reinforced by the increase in the new export orders index and the backlogs index as well. Given the lack of conviction in business spending earlier this year, this is a welcome development. This report signals a bigger contribution from equipment outlays than the more modest growth environment we have been expecting.

Prices Paid: Continued Signal of Rising Input Pressures

Amid renewed attention to inflation, the prices-paid measure from the ISM takes on a greater level of significance. We learned today that the prices-paid index registered 59.5 and has been near this high level for the past five  months, which is consistent with rising prices (bottom graph). Moreover, the prices-paid measure has been above its 12-month moving average for the past seven months. 

This price dynamic presents a challenge to corporate profits. Of the  18 manufacturing industries followed in the ISM report, 13 of them reported paying increased prices. This prices-paid indicator corroborates other signs of rising inflation pressures in the U.S. economy and strikes us as more than noise. Commodities in short supply included metals such as aluminum and stainless steel.