The drop back in the ISM manufacturing index, to 60.7 in April from 64.7, appears to reflect intense and widespread supply constraints rather than a moderation in demand, a view which is underlined by the further surge in the prices paid index last month.
Shortages putting massive upward pressure on prices
- The drop back in the ISM manufacturing index, to 60.7 in April from 64.7, appears to reflect intense and widespread supply constraints rather than a moderation in demand, a view which is underlined by the further surge in the prices paid index last month.
- The fall in the headline index reflected a moderation across all the key sub-components but, at 60.7, it is still consistent with GDP growth of close to 6% annualised, so is hardly a sign that the recovery is at risk. Instead, what really stands out in the April report is just how broad the squeeze in supply of key commodities and intermediate inputs has become, with respondents’ comments suggesting supply shortages are affecting almost every industry. What started out as a shortage of semiconductors affecting mostly the auto industry is now a shortage of basically everything, including lumber, metals and plastics.
- That is reflected in the supplier deliveries time index which, though it fell to 75.0 last month from 76.6, remains unusually elevated. The backlog of orders component, already at an all-time high last month based on records stretching back to 1993, rose further to 68.2, from 67.5. Those supply constraints are feeding through to a big pick up in price pressures, with the prices paid index rising to 89.6 from 85.6. On past form, that is consistent with CPI inflation almost doubling from 2.6% in March to 5% in the coming months. (See Chart 1.)
- Elsewhere, the March construction spending figures, also released today, showed a muted 0.2% rebound in construction spending, following an upwardly-revised 0.6% weather-related decline in February. The breakdown showed a strong increase in residential spending was more than offset by continued declines in non-residential and public construction spending. We expect the drag from the latter will be reversed over the coming months given the rapid improvement in state and local government finances and the recent infusion of funds as part of the American Rescue Plan.
Chart 1: ISM Manufacturing Prices Paid & CPI Inflation
Table: ISM Manufacturing Survey
Michael Pearce, Senior US Economist, firstname.lastname@example.org