Feel free to put your own spin on things, but from where I’m sitting, decelerating economic activity and evidence that price pressures are percolating again seems like a foreboding combination.
Market participants drowning in top-tier data were treated to a below-consensus headline print from America’s marquee manufacturing survey on Wednesday, and it was accompanied by an uptick on a key underlying price index.
At 47.4, ISM manufacturing missed estimates for January. It was the weakest reading since May of 2020 or, more to the point, since the immediate aftermath of the original pandemic lockdowns.
The final read on S&P Global’s factory gauge for the world’s largest economy in January was 46.9, essentially unchanged from the flash print. Both the S&P and ISM headlines have now spent three months in contraction territory.
“Despite rising in January, the PMI remains at one of the lowest levels recorded since the global financial crisis, indicating a worryingly steep rate of decline in the health of the goods producing sector,” S&P Global’s Chris Williamson said Wednesday. “Production has now fallen for three successive months, signaling a sharp fall in output which is now becoming increasingly evident in the official statistics and suggesting that the manufacturing sector has become a major drag on GDP.”
That’s bad news at a time when residential investment is likewise weighing on overall economic growth, at the same time consumption is slowing. Last week’s advance read on Q4 GDP was a superficial beat. Under the surface, all wasn’t well.
ISM new orders dropped to 42.5 in January’s report. The employment gauge managed to remain above the 50 demarcation line.
The anecdotes were mixed, but a few stood out. A respondent in Fabricated Metal Products said demand “has taken a sharp downward turn [as] everyone is bracing for a recession.” Another panelist hinted at margin pressure, noting that “Customers are being quite aggressive in pursuing price decreases, far beyond the price relief we are actually receiving from our suppliers.”
Worryingly (perhaps), the prices index moved higher. ISM prices paid had fallen for nine consecutive months, underscoring the goods deflation narrative.
January’s five-point increase was the first since Russia invaded Ukraine, although it’s important to mention that the gauge remains squarely below 50.
Notably, S&P’s Williamson flagged a similar uptick in survey-implied price pressures. “Improved supply chains and weaker demand should help keep a lid on manufacturing price pressures in the months ahead, though a slight uptick in the survey’s input cost and selling price gauges in January suggests that the road to lower inflation could be bumpier than previously anticipated,” he said.
The last thing markets and policymakers need is for goods prices to stop cooperating in the fight to beat back inflation.
Bottom line: The ISM miss and accompanying blip higher on the prices gauge felt like insult to injury on Wednesday, delivered as they were concurrent with disconcerting US job openings figures.
