Hot PMI Headlines Belie Onset Of Stagflation

Well, if you go by PMIs (a questionable proposition), the US economy continued to press ahead in January, despite an ongoing rise in COVID-19 deaths and the deleterious economic effects of regional containment measures aimed at curtailing the spread of the disease.

The flash read on IHS Markit’s composite PMI for the US came in at 58. That was up from 55.3 in December.

The manufacturing gauge printed 59.1, well ahead of the 56.5 the market expected. The services index came in at 57.5, also better than estimates.

“Private sector businesses in the US indicated a strong start to 2021, as output and new orders rose further,” the color that accompanied the data said. “Rates of expansion in business activity accelerated at manufacturers and service providers, with goods producers registering the sharpest upturn in output since August 2014.”

The key takeaway (or at least one of the key takeaways) is that price pressures are building.

The input price gauge in the services sector rose to 66 this month. That’s the highest reading ever recorded and marked an eighth straight month in expansion territory. Prices charged also rose.

This is more evidence of COVID-19’s inflationary side. Remember: The pandemic was a deflationary supernova on most fronts, but it also posed logistical challenges and created pent-up demand. Some worry that between those issues and the unprecedented stimulus delivered to combat the downturn, price pressures could spiral.

“Supplier delays and shortages pushed input prices higher. The rate of input cost inflation was the fastest on record (since October 2009), as soaring transportation and PPE costs were also noted,” IHS Markit said.

The problem comes in when you have to pass rising input costs along to consumers who, in many cases, are unemployed and thus cost conscious.

“A number of firms were able to partially pass-on greater cost burdens… as the pace of charge inflation quickened to a steep rate,” IHS Markit noted, adding that “the impact was less marked in the service sector as firms sought to boost sales, but manufacturers registered the sharpest rise in selling prices since July 2008.”

Disconcertingly, the report described backlogs of work as “stagnating” and the overall pace of job creation as only “modest.”

Again we see a bifurcated economy, with manufacturers indicating “the quickest increase in employment for two years” while services providers faced “challenging demand conditions… weighing on overall hiring.”

That isn’t tenable in the US. America is a services-driven economy. It isn’t feasible to suggest that robust manufacturing activity and, for example, elevated buying of durable goods, will sustain the country in perpetuity.

Eventually, the conjuncture described above will be conducive to stagflation. Just ask Chris Williamson, Chief Business Economist at IHS Markit, who said this on Friday:

Not only have the last two months seen supply shortages develop at a pace not previously seen in the survey’s history, but prices have also risen due to the imbalance of supply and demand. Input cost inflation consequently also hit a survey high and exerted further upward pressure on average selling prices for goods and services. There was also disappointing news on the labour market, as near-term concerns over the impact of the pandemic, notably on demand for consumer-facing services, and rising costs led to the weakest employment reading since July.

Nothing further.


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2 thoughts on “Hot PMI Headlines Belie Onset Of Stagflation

  1. Under the unusual supply demand situation created by the pandemic, I can’t help but think there are fixed cost issues for manufacturing that are impacting inflation pressure on prices. Is this alleviated once demand picks up in that there is a volume level needed to absorb fixed costs?

  2. Durables and home improvements were bought instead of vacations etc. last year, and so inventories were depleted and are now being replenished – so what?

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