January Purchasing Managers’ Report

The Institute for Supply Management said the manufacturing side of our economy grew at a 58.4 point clip, the sixth consecutive month above the 50-point breakeven level.  New orders have increased in each of the past four month, setting a blistering pace of improvement on the back of a substantial jump in demand for products we export.  This extremely positive report will likely have far-reaching ramifications, including an impetus for both renewed hiring and higher wages, leading to a possible pickup in retail sales.  All of that can start to feed back on its self, resulting in what economists refer to as a “virtuous cycle” where positive growth in one area sparks the same in others which, in turn, boost the original catalyst even higher, and so forth.  Further impetus for such  a cycle may seen in the sharp jump order backlogs posted, rising to 56, and possibly beginning to eat into the productivity gap which still remains to be filled as much machinery sits idle.  This potential for increased capacity utilization should boost corporate profits and hopefully will provide some support for equity prices.  On the other hand, while prices paid at the wholesale level are skyrocketing, there is no definitive sign these costs at the raw and intermediate goods level are being pushed through to you and me at retail stores.  If that can’t happen, then this promise of future profits will get squeezed.  Inventories still came in below the 50 point level so destocking remains the order of the day, one major factor that continues to work against the manifestation of a self-sustaining virtuous cycle.  Employment rose to 53.3, but until we begin to see both an increase in inventories and capacity utilization, it will not likely show robust improvement.  The non-manufacturing ISM index, which was detailed in a subsequent report and has been swinging back and forth between a positive and negative reading for some time now, showed a slight 0.7 point gain, bringing it back above the neutral zone to 50.5.  New orders rose strongly here as well, gaining well over 2 points to hit 54.7, a level higher than any seen in more than two years.  Orders rose, business activity continued to increase, although at a softer pace, but employment, which did gain one point, continued to contract, posting 44.6 for the month.  Inventories fell substantially while prices paid continued moving up aggressively.  This strong increase in costs seen within both halves of the report is worrisome.  If it continues, look for interest rates to move up a bit to counter-balance the inflationary expectations that will no doubt result.