The closely-followed ISM Manufacturing Index increased from 60.8 in January to 61.4 in February, its highest reading since May 2004 and the seventh consecutive month that activity has accelerated. A level above 50 suggests manufacturing in the U.S. is expanding.
New orders and production remain at very strong levels (68.0 and 66.3, respectively).
With orders rising and survey respondents continuing to report that customer inventories are too low (falling 5.5 points to 40.0), the outlook in the manufacturing sector is likely to remain very upbeat.
Meanwhile, hiring improved from already robust levels, as the employment index increased by 2.8 points to 64.5, the best reading in almost 40 years according to Bloomberg News.
Inflation building?
About the only cloud on the horizon for goods producers is the high cost of raw materials, as the prices paid component held above 80.. Since commodity prices remain high and demand continues to rise, don’t expect any relief on the pricing front anytime soon.
But there is still plenty of slack in the economy, which limits pricing power (unlike regional survey, the ISM index does not measure prices received), and capacity utilization remains well below levels that would suggest inflation might become an immediate problem.
Moreover, the ThomReuters/Jefferies CRB Index, which is an index that measures the price of 19 commodities, is well off the bottom reached in early 2009 but remains well below the peak hit in July 2008.
(Source: Bloomberg)
Still, if demand remains strong, producers will eventually gain the upper hand and start to pass along higher costs, and retail prices could become an issue that the Fed will have to deal with.
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