US ISM Manufacturing: Euphoria hard to square with hard data - Wells Fargo

Today’s ISM print of 60.8 for February offers support to the notion that manufacturing is on an upward trajectory said analysts at Wells Fargo. They added that it is hard to reconcile the reading with consecutive months of soft orders and production data.

Key Quotes: 

“The headline print of 60.8 in the ISM index is the highest since 2004 and the latest affirmation of broadening business confidence. Aside from a slight slowing in the orders and production components (which are both still above 60 and thus signaling continued expansion), all other components moved farther into expansion territory.”

“The biggest move in the components and perhaps the largest takeaway from today’s report is that employment jumped 5.5 notches to 59.7. The prices index climbed another 1.5 points to hit 74.2—that is the highest reading more than six years and the 24th consecutive month in which this category has signaled higher raw material prices. In an economic cycle that has been characterized by sub-2 percent CPI inflation, there are clues in this report that, after accounting for a lag, the manufacturing sector could be adding to inflation pressures later this year.”

“Not all of that price pressure is from domestic sources either. The imports component climbed 2.1 points to 60.5, the highest reading here since 2007. One manufacturer linked some of the pricing pressure to the increased demand from overseas along with changes in the value of the U.S. dollar, saying the “weakening in the U.S. dollar in relationship to the yuan is starting to impact importing cost. We are starting to see more supplier price increases.”

“Today’s ISM report is the latest signal that positive sentiment is giving way to euphoria in the manufacturing sector, yet this comes amid a run of admittedly lousy hard data. Core capital goods orders have been in retreat for the past two months and, similarly, manufacturing production has flat-lined for two straight months. As we said in the durable goods write-up earlier this week, in times of such pronounced survey strength, the gap between hard and soft data is usually narrowed by business surveys getting reined in, rather than the hard orders data experiencing a marked acceleration.”