Summary
Monday and yesterday, the Institute for Supply Management released respective April results for its manufacturing and service-sector indexes. Both measures came in above consensus expectations, but each also showed a major increase in its price component, which already were high by historical standards. Both reports also may have shown a nascent whiff of a phenomenon that in past business cycles was associated with self-reinforcing inflation.
_____
Foreword
The frequent and growing lack of sensibility associated with much of the critical economic data coming out of various government agencies places increased importance on sound numbers from private-sector sources. In this regard, John Williams and I view the monthly data generated by the Institute for Supply Management (formerly known as the National Association of Purchasing Management) on the economy's manufacturing and service-sector activity as a very important analytical resource.
ISM's sound long-term record and reputation, coupled with the very broad spectrum of economic activity covered by its two monthly releases, account for why I spend as much time as I do each month examining these reports.
The above said, ISM employs seasonal-adjustment factors developed each year by the Commerce Department. There have been times when it appeared to me like these seasonals created possible distortions, ones also showing up in other series in which the same Commerce Department factors were used (GDP, for instance).
I will have a look at these values soon, because it is possible that in combination with a warmer-than-normal winter in many areas, in January in particular, these distortions may have and may still be overstating economic activity. If this is the case, these seasonal-adjustment factors should reverse and head in the other direction as the year progresses. Unless the Commerce Department arbitrarily changes its statistical criteria. Commerce shouldn't do this, of course, but it is an election year and at the moment, the President's popularity is in the toilet!
_____
General Observations
* On Monday (5/1), the Institute for Supply Management reported that its index designed to measure the economy's manufacturing activity ("PMI") rose in April, to 57.3. This compared with a March reading of 55.2. The April result was roughly two points better than the consensus forecast.
* Yesterday, (5/3), ISM released results for its April service-sector index. The index came in at a reading of 63.0, compared with March's 60.5. The April result was approximately 3.5 points better than the consensus forecast.
(NOTE: Overall index and sub-index readings above 50.0 indicate expansion; readings below 50.0 indicate contraction.)
As mentioned earlier, each year, commencing with its January data releases, ISM begins employing new seasonal-adjustment factors. These are formulated by the government, in this case, by the US Department of Commerce, and they possibly represent a weak link regarding the ISM's data.
April ISM Manufacturing Data
* ISM's April PMI came in at 57.3, versus March's reading of 55.2.
* In April of 2005, the PMI stood at 53.8, 3.5 points or 6.1% below April 2006.
* The April 2006 result was 2.0+ points above a consensus estimate had been looking for something around 55.0.
* The prices-paid component registered a sizable 5.0-point, 7.5% increase during April, to 71.5. This represented a level decidedly high by historical standards. Moreover, over the last two months, the price component was up 9.0 points or 14.4%. As of April, it stood 23.0 points or a very substantial 47.4% above its recent low, which was 48.5 and was set last July.
* The April performance of selected components:
Change Direction ROC@
------ ----------- ----
Prices Paid 5.0 to 71.5 Increasing F
Supplier Deliveries 4.6 to 57.7 Slowing F
Employment 3.3 to 55.8 Growing F
Production 2.9 to 60.4 Growing F
Inventories 2.6 to 51.3 Growing #
New Orders -0.8 to 57.6 Growing S
Backlog of Orders -2.5 to 57.0 Growing S
@Rate of change: S = slower, F = faster.
#This series had been contraction.
------------------------------------------------------
* The inventory sector registered sizable increases during April in both ISM releases, +2.6 points above, and +5.0 points to a reading of 59.0 in the service-sector report. I wonder if the sharp rise in commodity prices is now setting off an attempt by the business sector to run ahead of price increases? If so, it represents a phenomenon that in past business cycles was responsible for inflationary pressures becoming self-reinforcing.
* Per ISM, following were the eight best performing industries during April (in order):
(1) Miscellaneous; (2) Primary Metals; (3) Transportation & Equipment; (4) Electronic Components & Equipment; (5) Fabricated Metals; (6) Industrial & Commercial Equipment & Computers; (7) Wood & Wood Products; (8) Glass, Stone & Aggregate.
* Some comments from ISM's "What Respondents Are Saying" section of Monday's report:
- "Gasoline and diesel price hikes in the Northeast continue to cause concern as freight costs escalate" (Chemicals).
- "We continue to stay busy, but there's great concern about [auto] plant closing" (Fabricated Metals).
- "Seasonal ramp-up is starting 45 to 60 days earlier than prior years" (Electronic Components & Equipment).
- "New orders for Q1 2006 were stronger than expected" (Printing & Publishing).
- "It is difficult to find experienced people at all levels for employment" (Glass, Stone & Aggregate).
* Over the 12-month period ended April, the overall PMI registered a high of 58.1 (October 2005). Its low of 51.8 was set last May. The 12-month average came in at 55.7, 1.6 points or 2.8% below April's result. The highest reading since January 2003 was 63.1 (occurring in December of 2003), 5.8 points or 10.1% above April's reading.
--------------------------------------------
INSTITUTE FOR SUPPLY MANAGEMENT PMI INDEX
-- TOTAL INDEX AND PRICE COMPONENT
--------------------------------------------
Respondents Reporting
Higher, Lower, or
Unchanged Prices
Month/ Overall Price ---------------------
Year Index Index Higher Lower Unch.
--------------------------------------------
04/06 57.3 71.5 53% 10% 37%
03/06 55.2 66.5 42% 9% 49%
02/06 56.7 62.5 36% 11% 53%
01/06 54.8 65.0 38% 8% 54%
==========================================
12/05 55.6 63.0 37% 11% 52%
11/05 57.3 74.0 53% 5% 42%
10/05 58.1 84.0 70% 2% 28%
09/05 58.0 78.0 60% 4% 36%
08/05 53.5 62.5 36% 11% 53%
07/05 56.4 48.5 24% 27% 49%
06/05 54.0 50.5 22% 21% 57%
05/05 51.8 58.0 32% 16% 52%
------------------------------------------
04/05 53.8 71.0 52% 10% 38%
------------------------------------------
03/05 55.3 73.0 51% 5% 44%
02/05 55.6 65.5 38% 7% 55%
01/05 56.3 69.0 45% 7% 48%
==========================================
12/04 58.6 72.0 52% 8% 40%
11/04 56.9 74.0 55% 7% 38%
10/04 56.8 78.5 61% 4% 35%
09/04 58.0 76.0 55% 3% 42%
08/04 59.6 81.5 67% 4% 29%
07/04 61.5 77.0 58% 4% 38%
06/04 61.5 81.0 66% 4% 30%
05/04 62.9 86.0 74% 2% 24%
04/04 63.0 88.0 77% 1% 22%
03/04 62.3 86.0 73% 1% 26%
02/04 62.2 81.5 65% 2% 33%
01/04 62.9 75.5 54% 3% 43%
==========================================
12/03 63.1 66.0 37% 5% 58%
11/03 60.6 64.0 33% 5% 62%
10/03 57.2 58.5 26% 9% 65%
09/03 54.4 56.0 21% 9% 70%
08/03 55.5 53.0 19% 13% 68%
07/03 52.3 53.0 21% 15% 64%
06/03 50.5 56.5 26% 13% 61%
05/03 50.0 51.5 21% 18% 61%
04/03 46.5 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 ------>
--------------------------------------------
Commodities Reported in Short Supply During April:
(NOTE: The number of consecutive months the commodity is listed is indicated after each item.)
Steel is the only commodity reported in short supply.
Commodities Reported Up in Price During April:
Aluminum (9); Aluminum Products (5); Brass; Chemicals; Copper (11); Copper Products (5); Corrugated Containers (6); Crude Oil; Diesel Fuel; Electronic Components (2); Energy; Flour (2); Freight (2); Gasoline; Natural Gas*; Nickel; Paper (4); Particle Board (2); Petroleum Products; Plastics; Plastic Resins; Resins; Silver; Steel (2); Titanium; and Zinc.
Commodities Reported Down in Price During April:
Caustic Soda (2); High Density Polyethylene Resins; and Natural Gas* (4).
*Reported up and down in price.
__________
April ISM Non-Manufacturing Data
* Yesterday (5/3), ISM reported that its index designed to measure the economy's service-sector activity came in at 63.0, versus March's reading of 60.5.
* In April of 2005, this index stood at 60.4, 2.6 points or 4.1% below April 2006.
* The consensus estimate was looking for a April 2006 result of around 59.5. Thus, the number actually reported exceeded expectations by a decent margin.
* The April performance of selected components:
Change Direction ROC@
------ ----------- ----
Prices Paid 10.0 to 70.5 Increasing F
Inventories 5.0 to 59.0 Increasing F
Backlog of Orders 3.5 to 54.0 Increasing F
New Orders 2.5 to 63.0 Increasing F
Employment 1.9 to 56.5 Increasing F
Supplier Deliveries 0.5 to 54.5 Slowing F
@Rate of change: S = slower, F = faster.
------------------------------------------------------
(NOTE: Overall index and sub-index readings above 50.0 indicate expansion; readings below 50.0 indicate contraction.)
* The index's price component rose a sharp 10.0 points or 16.5% in April, to 70.5. The September 2005 reading of 78.4 was this component's highest reading in the history of the overall service-sector index (inception in July of 1997). Therefore, April's 70.5 remained a high number in both relative and absolute terms, and continued to indicate price expansion. In fact, it marked the 49th consecutive month of rising prices.
* For the 12 months ended April, the service-sector index's high was 64.8 (August 2005); its low was 53.7 (September 2005). The 12-month average through April was 59.9, 3.1 points or 4.9% points below the April result.
* To some degree, the back-to-back strongest/weakest readings in August and September reflected the influence of Hurricane Katrina on the overall results.
* The service-sector index's most recent high was 65.9, occurring in April of 2004. This was 2.9 points or 4.6% above April 2006's result.
--------------------------------------------
INSTITUTE FOR SUPPLY MANAGEMENT
NON-MANUFACTURING INDEX -- TOTAL
INDEX AND PRICE COMPONENT
--------------------------------------------
Respondents Reporting
Higher, Lower, or
Unchanged Prices
Month/ Overall Price ---------------------
Year Index Index Higher Lower Unch.
--------------------------------------------
04/06 63.0 70.5 54% 2% 44%
03/06 60.5 60.5 36% 6% 58%
02/06 60.1 64.8 39% 4% 57%
01/06 56.8 67.2 37% 4% 59%
==========================================
12/05 61.0 67.2 33% 7% 60%
11/05 59.3 70.8 44% 8% 48%
10/05 59.2 74.1 54% 5% 41%
09/05 53.7 78.4* 58% 2% 40%
08/05 64.8 67.2 36% 6% 58%
07/05 60.4 69.5 39% 3% 58%
06/05 61.1 61.6 27% 5% 68%
05/05 59.2 62.4 27% 5% 68%
------------------------------------------
04/05 60.4 64.1 41% 2% 57%
------------------------------------------
03/05 61.8 65.9 43% 1% 56%
02/05 60.4 67.0 43% 3% 54%
01/05 60.3 66.8 37% 4% 59%
==========================================
12/04 65.5 71.6 38% 5% 57%
11/04 62.8 70.2 38% 4% 58%
10/04 60.6 70.9 44% 3% 53%
09/04 58.7 66.5 35% 3% 53%
08/04 59.3 70.3 40% 4% 56%
07/04 63.1 71.6 45% 5% 50%
06/04 59.9 74.8 52% 3% 45%
05/04 64.3 77.2 55% 3% 42%
04/04 65.9 68.5 53% 3% 44%
03/04 62.7 64.8 43% 3% 54%
02/04 61.3 58.1 31% 9% 60%
01/04 65.6 60.9 26% 4% 70%
--------------------------------------------
*Highest reading in the series' history.
--------------------------------------------
* Per ISM, following were the eight best performing industries during April (in order):
(1) Real Estate; (2) Entertainment; (3) Mining; (4) Other Services; (5) Utilities; (6) Construction; (7) Retail Trade; (8) Public Admin.
(NOTE: The one industry reporting decreased activity from March to April was Transportation.)
* Following are some comments from the "What Respondents Are Saying" section of yesterday's service-sector report:
- "Raw materials continue to escalate in cost, driving the raw materials costs to our suppliers up and in turn our costs" (Communication).
- "Business activity is good and growing" (Insurance).
- "High energy costs could affect savings rates and balances" (Finance & Banking).
- "Continued business growth slowed by material delays" (Utilities).
- "Demand for coal remains high. Our sales of mine supplies is at the highest level." (Mining)
- "Conditions are less than rosy as material costs continue to be impacted by fuel and transportation costs. Rising mineral costs and diminishing supply are also rippling through" (Retail Trade).
Commodities Reported in Short Supply During April:
(NOTE: The number of consecutive months the commodity is listed is indicated after each item.)
Asphalt/Asphalt Products; Asphalt Oils/Raw Materials; Copper; Roofing Shingles/Materials (4); Skilled Labor (2); Steel/Steel Products (3); Tires; Valves; and Wallboard (3).
Commodities Reported Up in Price During April:
Air Fares (2); Aluminum (5); Asphalt; Asphalt Oils; Asphalt Products; Asphalt Raw Materials; Cable; Cardboard; Chemicals; Construction Labor; Contractors - Construction and General; Copper (32); Copper Products (various) (6); Copy Paper (3); Corrugated (6); #1 Diesel Fuel (2); #2 Diesel Fuel (16); Electricity; Energy (2); Envelopes; Freight/Shipping/
Transportation Costs (2); Fuel (29); Fuel Surcharges; Gasoline (29); #2 Heating Oil; Insulation; Lettuce; Metals; Natural Gas*; Office/Computer Supplies; Paper (27); Paper (cut size) (2); Paper Products (3); Petroleum/Petroleum Based Products (4); PVC*; Roofing Materials; Rubber Based or Related Products (2); Steel (3); Steel Plate; Tires; Unleaded Gasoline; Utility Vehicles; Wallboard; and Wire.
Commodities Reported Down in Price During April:
Computer Memory; Natural Gas*; Lumber - Pine, Spruce and Treated; PVC*; and PVC Conduit and Pipe.
*Reported as both up and down in price.
_____
|
