ISM manufacturing index is strong, shows rising producer inflation

The ISM Manufacturing Index for January 2018 came out earlier today. The numbers were strong, and the 59.1% reading was above expectations for 58.8%.

Source: Institute for Supply Management

The area highlighted in yellow is the outlier in terms of figures. And it suggests that, at least at the producer level, inflation has ticked up. Much of this is likely due to the rise in commodity prices. At this point, it is unclear whether these inflation figures will feed through to US consumers. Also note the inventory levels are quite low, and this could lead to increased production to build inventories back up.

The survey respondents were quite optimistic about the US economy. ISM highlighted the following comments as indicative of the tone of respondents:

WHAT RESPONDENTS ARE SAYING …

• “Sales nationally and internationally are strong in Q1. We are increasing our CapEx spend by 30 percent to 40 percent over [the] previous year.” (Chemical Products)
• “We have heard reports of additional business due to the recent reduction of tax rates.” (Machinery)
• “Business outlook is positive on all fronts right now with our customers. Budgets are being approved for new projects, and component prices from suppliers have temporarily stabilized.” (Computer & Electronic Products)
• “Our usual winter slowdown has not occurred, and we are very busy with new orders.” (Furniture & Related Products)
• “Slow start to 2018; pricing on metals is heading up and quotes/orders are picking up as well.” (Fabricated Metal Products)
• “Overall, business remains steady. With several key programs to begin ramping up in the industry, outlook looks good for calendar year 2018.” (Transportation Equipment)
• “Employment is very tight in our area.” (Food, Beverage & Tobacco Products)
• “Business continues to strengthen.” (Paper Products)
• “Business is starting the new year strong. Consumer confidence seems to be driving a lot of our customers’ order requirements higher.” (Plastics & Rubber Products)

All of these comments are positive. Overall, this was a strong report. Inflation is the one potential negative, and it could eventually impact the pace of Fed rate increases.