None Of It Was Transitory After All

It was an “in line” kind of day for US data.

Shortly after ADP said private employers added 534,000 jobs last month, matching consensus estimates, a fresh read on manufacturing activity was similarly as-expected.

The headline ISM gauge printed 61.1 for November. Consensus was looking for 61.2. Earlier, the final read on IHS Markit’s factory gauge came in a bit weaker versus the flash reading for last month. At 58.3, the index sits at the lowest since December 2020 (figure below).

Within ISM, prices paid fell to 82.4, down from 85.7 but still elevated (obviously). In the Markit survey, the input prices index hit another record, at 87.6. That was the highest in data back to 2007.

November marked the 15th straight month that ISM prices stood above 60. It’s been above 70 for a year. Is that “transitory”? You’ll have to ask an economist.

“While average selling price inflation eased as firms sought to win customers, the rate of input cost inflation hit a new high, hinting at a squeeze on margins,” Chris Williamson, Chief Business Economist at IHS Markit, remarked.

That’s important. Although consumption in the US is, by almost all accounts, still relatively robust, at a certain point rising prices will lead to demand destruction. That, in turn, means companies will need to absorb a bigger chunk of surging costs or else risk losing customers to competitors with more pricing power, higher capacity to give up a few basis points on the bottom line or both.

Both surveys contained the familiar laundry list of anecdotes about disruptions, shortages and bottlenecks.

ISM’s Tim Fiore described a “demand-driven, supply chain-constrained environment,” defined by record-long lead times for raw materials and equipment, shortages, surging commodity prices, transportation snarls, COVID-related absenteeism and problems filling open positions. (Other than all of that…)

“Broad swathes of US manufacturing remain hamstrung by supply chain bottlenecks and difficulties filling staff vacancies,” Williamson said, noting that while November “brought some signs” of relief, the manufacturing sector is still beset with “widespread shortages of inputs” which served to “severely constrain” growth.

The new orders gauge was the weakest this year in the Markit survey. ISM’s new orders index rose from October. Employment gauges diverged, with Markit’s index falling to the lowest in a year and ISM’s rising to the highest since April.

All in all, respondents seemed optimistic about the outlook, notwithstanding myriad familiar supply chain and labor complaints. The first signs of “push-back” (to quote Williamson) from customers in the Markit survey perhaps suggest some are tiring of persistently elevated prices.

As Jerome Powell noted in Congressional testimony on Tuesday, when Americans hear “transitory” they tend to think “short-term.” Unlike economists, apparently.