Color Accompanying US PMIs Now Downright Silly

Services activity is robust in the US, the flash read on IHS Markit’s gauge for May suggested.

The index notched a new record at 70.1, up sharply from April and well ahead of the 64.3 the market expected. No economist predicted a print above 66.

The manufacturing gauge hit 61.5, also a record and likewise ahead of expectations. The composite index posted an all-time high as well.

At the risk of oversimplifying, records abound. Composite new orders: Record. Composite input prices: Record. Services prices charged: Record. Services input prices: Record. Manufacturing new orders: Record. Manufacturing purchase stocks: Record.

By the end of 2021, we may all look back at these surveys and chuckle at the extent to which we were duped into mistaking fleeting supply chain problems and temporary demand surges for the beginnings of real, enduring trends. But for right now, the color is unambiguous, even as the mix of ebullience and cautionary inflation banter comes across as confused. This is one case where “unambiguous” and “confused” can co-exist, albeit not peacefully.

“Increasing cost burdens continued to be keenly felt, as the rate of input price inflation soared to a new survey record high, often linked to a further marked worsening of supplier performance,” the survey said, adding that,

Commonly noted were increases in PPE, fuel, metals and freight costs amid significant supplier delays. The steep rise in costs fed through to the sharpest increase in output charges since data collection began in October 2009, with record rates of inflation registered for both goods and services as soaring demand boosted firms’ pricing power.

While services firms are optimistic (presumably because the vaccination push, re-openings and new guidance on masks presage favorable business conditions dead ahead), manufacturers expressed some consternation.

“The pick-up in sentiment largely stemmed from the service sector,” IHS Markit remarked. “Manufacturers expressed concern regarding raw material shortages, which it is feared could extend through 2021, and unsustainable demand conditions.”

Chris Williamson, Chief Business Economist at IHS Markit, marveled at the situation, describing growth in May as a “spectacular acceleration.” Business activity in the US, he said, is “soaring well above anything previously recorded in recent history.”

And it would have been even more spectacular were it not for “businesses being constrained by supply shortages and difficulties filling vacancies.”

Obviously, these assessments are anecdotal, but to the extent this kind of outright, hair-on-fire, dancing-in-the-streets color starts to filter through to the hard data, it will mark some kind of tipping point. There is no sense in which this kind of sentiment is sustainable.