The ISM’s (Institute of Manufacturing Management) price has reached 89.6, a level that could lead to increased inflation in the months ahead
At the start of each month, the ISM’s data for the previous 30 days is made public. The ISM index is made up of the top 300 manufacturing firms. Traders typically look at the employment component of both the manufacturing and non-manufacturing releases in an attempt to guess the upcoming Non-Farm Payrolls number.
Analysts surveyed by the Dow Jones and The Wall Street Journal estimated that the ISM index could reach 65%. The ISM Manufacturing for the month of April was released yesterday at 60.7 vs. expectations of 65. While the data was way below what the market expected, it still shows an expanding sector and, more importantly, rising prices.
Manufacturing PMI Cools Down While the Prices Paid Could Increase
When interpreting PMIs (Purchasing Managers’ Index), traders should always keep close watch on the 50 level. This is the level that distinguishes between economic contraction and expansion, so as the prices cross this level, traders can expect price action to take place.
In the case of the US, ISM data is the equivalent of the total PMI releases in other parts of the world, with the services sector usually having more importance placed on it than the manufacturing one.
However during the pandemic, services have dropped off, and the manufacturing sector has made its case for a role in future economic growth. While it disappointed in April, cooling down to 60.7, it remains strong when compared to the 50 level.
New orders fell 3.7 points to 64.3, production declined 5.6 points to 62.5, while employment declined by 4.5 to 55.1. Remember that employment offers a hint for the NFP data in a few days from now, and the decline suggests caution ahead of the labour data due out next Friday.
Yet, it is not the employment sub-component that worries, but the prices paid. They rose to 89.6, a staggering level. Since the 1970s, prices paid were only once above 90, and when that happened, a housing crash started. Because prices paid are a relative measure, it is worth mentioning that the data will remain high only if pressures increase continuously.