Every month the Institute for Supply Management releases their Manufacturing PMI survey that reviews business conditions in the manufacturing sector. The ISM report is often considered a leading indicator for GDP and employment, and thus is a critical data point for market participants. Every month, my firm monitors the ISM data for adjustments to our economic outlook.
March ISM Figures Remain Bullish
The March ISM PMI figures came in at 57.2 vs. the prior reading of 57.62 seen in February suggesting that growth continued at a slower pace. This report marks the 94th consecutive month of economic growth in the United States. Overall, 17 out of 18 industries reported growth underpinned by a resurgence in optimism due to improving commodity prices and potential infrastructure stimulus.
Growth in new orders and production continued at a slower pace while growth in employment and prices continued to accelerate. This is a testimony to the reflation trade underpinned by stronger than expected commodity prices. Prices increased 2.5% while employment grew 4.7%. This is certainly a welcome sign for equity bulls as the manufacturing sector remained a laggard for much of 2016 due to a depressed commodity price environment.
In my opinion, the change in price action for commodities is bullish, but to a point. Much of the increase in prices is due to speculative activities, particularly in China as evidenced by the copper and steel markets. Furthermore, the rebound in oil prices has stalled out at $50 as US shale has returned with a vengeance. Equity bulls have continued to point to the resurgence of inflation as a welcome sign, but forget to realize that demand pull inflation has yet to show itself.
Everyone Loves a Soft Cookie (Until They Don't)
The March ISM figures bring up another interesting dynamic at play in financial markets, which is divergence between sentiment and hard data.
What Respondents Are Saying
- "Business conditions continue to improve." (Chemical Products)
- "Business outlook is positive." (Computer & Electronic Products)
- "Regional business is strong. Hiring qualified team members has improved." (Fabricated Metal Products)
- "We had a lot of storm orders, so it really pushed our sales up this month." (Miscellaneous Manufacturing)
- "Starting to see some prices creeping up. We are raising our sales prices as well." (Food, Beverage & Tobacco Products)
- "Business up 10-15 percent." (Machinery)
- "Industry outlook is looking relatively flat currently, and the view for calendar year 2017 looks to be flat as well. Job market has been very good in the region, and finding talent has been challenging." (Transportation Equipment)
- "Overall, material inflation is now clearly upon us." (Paper Products)
- "Business is strong and looking up." (Furniture & Related Products)
- "Opportunities for new business seem more abundant now. Orders and RFQs increasing." (Nonmetallic Mineral Products)
Source: March ISM Report
The point is further driven home by the fact that manufacturing production was flat in February. Meanwhile, conditions appeared to have grown in March, but at a slower rate than before. While this is nothing to jump ship over, it comes at a time when (a.) a unified GOP congress failed to pass a pivotal healthcare bill, (b.) price action in commodities has stalled and is in need of another catalyst, and (c.) undertones regarding tightening of global trade are beginning to take shape.
Everyone loves sentiment data, and sometimes sentiment is a strong leading indicator. Unfortunately, throughout this entire 'reflation' trade I have yet to be convinced that growth will return to the levels at which market participants expect simply due to changes in political sentiment. I certainly think that things have improved in commodity markets, but this has thus far been played out and will require new catalysts to push growth into overdrive. The market loves the soft cookie until it doesn't.
Disclaimer: This article contains the opinions of BlackVault Investments and in no way is acting as an offering and/or solicitation of securities or investment advice.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.