Summary
Earlier today, the Institute for Supply Management released both its manufacturing and service-sector indices covering activity in those respective sectors during March. Results for the service-sector were released early (original due date was 4/5), which I hope does not represent an overt attempt to soothe the roiled financial markets! The manufacturing index was basically flat, but its price component registered a large increase, thereby indicating that price pressures of past months not only persisted, they got materially worse.
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Manufacturing-Sector Results
The Institute for Supply Management reported today that its index measuring the economy's March manufacturing activity ("PMI") came in at a reading of 55.2, down just a little from February's 55.3. The March result was slightly better than a consensus forecast that was looking for something around 55.0.
This index is configured such that readings above 50.0 indicate sector expansion. Readings below this value are consistent with contraction.
March's slight drop was sufficient to result in the fourth consecutive month of declines in the PMI. And while March's 55.2 reading denoted decent strength in the manufacturing sector, it was well below the index's most recent peak -- 62.8 in January of 2004.
The PMI's price component rose a sharp 7.5 points in March, to 73.0. As in the overall index, values above 50.0 indicate expansion, and March's 73.0 reading remained high by historical standards. Moreover, February represented the 37th consecutive month in which this measure showed rising prices. In May of 2003, the recent trough, the price component stood at a much lower 51.5.
If firms are passing these higher prices along, it is contributing to inflationary pressures. And if they are not able to pass them along, rising prices are contributing to a squeeze on profit margins.
Over recent months, there is growing indication that companies are gaining pricing power, so the situation at present may actually represent the worst of two worlds: (1) Higher prices passed along at a growing pace, adding to inflationary pressures, but (2) the inability to pass along all price increases, thereby creating margin pressures.
ISM announced that 51% of its survey respondents reported higher prices during March, while 5% reported lower ones. This marked deterioration from February's results, which were 38% and 7%, respectively. However, the overall shift in skew from the trough during the summer of 2003 remained intact. For instance, in August 2003, these numbers were 19%/13%.
To illustrate how the numbers have been trending, the following table examines overall and price data over the last 27 months. The section following the table breaks out specific commodities that were up and down in price or were in short supply during March, as reported to ISM by its survey respondents.
(NOTE: December and prior data have been revised to reflect new US Department of Commerce seasonal-adjustment factors used by ISM. In its manufacturing index, ISM does not seasonally adjust the price component.)
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INSTITUTE FOR SUPPLY MANAGEMENT PMI INDEX
-- TOTAL INDEX AND PRICE COMPONENT
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Respondents Reporting
Higher, Lower, or
Unchanged Prices
Month/ Overall Price ---------------------
Year Index Index Higher Lower Unch.
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03/05 55.2 73.0 51% 5% 44%
02/05 55.3 65.5 38% 7% 55%
01/05 56.4 69.0 45% 7% 48%
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12/04 57.3 72.0 52% 8% 40%
11/04 57.6 74.0 55% 7% 38%
10/04 57.5 78.5 61% 4% 35%
09/04 59.1 76.0 55% 3% 42%
08/04 59.6 81.5 67% 4% 29%
07/04 61.6 77.0 58% 4% 38%
06/04 61.2 81.0 66% 4% 30%
05/04 62.6 86.0 74% 2% 24%
04/04 62.3 88.0 77% 1% 22%
03/04 62.3 86.0 73% 1% 26%
02/04 62.1 81.5 65% 2% 33%
01/04 62.8 75.5 54% 3% 43%
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12/03 62.1 66.0 37% 5% 58%
11/03 61.3 64.0 33% 5% 62%
10/03 57.7 58.5 26% 9% 65%
09/03 55.1 56.0 21% 9% 70%
08/03 55.6 53.0 19% 13% 68%
07/03 52.5 53.0 21% 15% 64%
06/03 50.4 56.5 26% 13% 61%
05/03 49.8 51.5 21% 18% 61%
04/03 46.1 63.5 37% 10% 53%
03/03 46.4 70.0 47% 7% 46%
02/03 49.9 65.5 <------ NA ------>
01/03 52.8 57.5 <------ NA ------>
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Commodities Reported in Short Supply During March:
(NOTE: The number of consecutive months the commodity is listed is indicated after each item.)
Caustic Soda (2); Steel (15); and Steel Products (various forms).
[b/]Commodities Reported Up in Price During March:
ABS Plastic; Aluminum (17); Caustic Soda (11); Chemicals (14); Copper (6); Corrugated Containers (14); Diesel Fuel (7); Energy (2); Freight (13); Fuel (2); Fuel Oil; Gasoline (2); HDPE; Machined Components; MRO Items; Natural Gas (32); Oil (2); Oil-Based Products; Paper (13); Petroleum-Based Products; Plastic Products (various forms) (14); Plastic Resin (2); Plastics (8); Polyethylene; Polypropylene; Propylene; Resins (8); Solvents; Stainless Steel (7); Steel* (18); Titanium; and Wood.
Commodities Reported Down in Price During March:
Steel*.
*Reported as both up and down in price.
Service-Sector Results
ISM was due to report its service-sector index on Tuesday (4/5), but released it today instead. I smell a potential rat here, which I will discuss in greater detail when I publish a more extensive review of today's numbers.
In the meantime, ISM's service-sector index for March came in at a reading of 63.1, up from February's 59.8
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