There are two ways to look at solid US economic data.
One way is to view it as good news. After all, recession fears are rampant, so any sign of resilience is welcome.
The other way to look at it entails accepting the fact that the Fed is attempting to engineer a slowdown in order to curtail inflation. So, any sign that activity is still running hot is bad news to the extent it argues for more rate hikes.
You can choose your own lens, but ISM manufacturing printed 56.1 for May (figure below), far better than expected and up from April.
Meanwhile, the final read on S&P Global’s gauge for May was lower than the flash print, suggesting activity continued to cool in the back half of the month. “The US manufacturing sector signaled a further improvement in operating conditions during May, but the rate of growth eased to the softest since January as expansions in output, new orders and stocks of purchases waned,” the accompanying color said.
By contrast, ISM’s subindexes suggested production and new orders gathered steam, even as the employment gauge moved into contraction territory, at 49.6. That was the lowest since November of 2020.
“The US manufacturing sector remains in a demand-driven, supply chain-constrained environment,” ISM’s Tim Fiore said, recycling familiar language. “Despite the Employment Index contracting in May, companies improved their progress on addressing moderate-term labor shortages at all tiers of the supply chain,” he added, in a press release. Survey respondents said quit rates were a bit lower versus April, and May marked the second month during which the pace of price increases cooled.
Of course, “cool” is an extremely relative term. The prices gauge came in at 82.2, ahead of estimates. “Material prices continue to rise,” one respondent said, flagging energy and freight costs. Another panelist noted a deliberate shift to “North American sales to avoid ocean vessels” and still another said food costs are rising “faster than can be passed along” to consumers “with no relief in sight.” The rest of the anecdotes were a compendium of inflation woes.
“A cooling in new orders growth was in part linked to customers pushing back on high prices, though also reflected shortages and growing concern about the outlook,” S&P Global’s Chris Williamson remarked, adding that “input cost pressures intensified further” thanks to rising energy prices, soaring labor bills and freight expenses. Williamson called red-hot factory-gate inflation “worrying.”
Taken with Wednesday’s JOLTS data (which suggested the Fed has had little, if any, success in slowing down hiring intentions) PMIs tipping persistent pipeline inflation and still robust manufacturing activity help make the case for aggressive policy tightening. Or at least that’s how the Fed will see it, and that’s all that matters for asset prices.
