Inflation Is Running Rampant

The ISM and Markit manufacturing PMIs went in opposite directions this month. The ISM PMI fell modestly. Keep in mind, this is a diffusion metric. It measures sentiment versus the prior month. It’s very difficult for more businesses to say business is better than the prior month when the prior month had strong results. Anything above 50 would have been impressive based on the very strong comp in March. The manufacturing sector is still strong, but it couldn’t get stronger in rate of change terms (at least in the ISM reading). The biggest increase in cyclical stocks is likely over, but this PMI doesn’t mean they will necessarily fall.

As you can see from the chart above, the ISM PMI was down from 64.7 to 60.7 which is still a very good reading. In fact, this is the 3rd highest reading in the past year. It’s consistent with a 5% increase in GDP which is normally very good. 2021 is expected to see 7% GDP growth due to the reopening and the multiple stimulus programs. The new orders, production, and employment indexes were all down modestly. They fell 3.7, 5.6, and 4.5 points to 64.3, 62.5, and 55.1. Inventories were in contraction territory which makes sense because there is a shortage of a bunch of raw materials such as lumber.

The economy is running hot. Specifically, the inventories index fell 4.3 points to 46.5 and the customer inventories index fell 1.5 points to 28.4 which is extremely low. Electrical components and corrugated boxes have been in short supply for 7 months and 6 months respectively. The prices index was up 4 points to 89.6 which is the highest reading since July 2008. That was when oil was well above $100 per barrel. Outside of July 2008, this is the highest reading since 1979.

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