Manufacturing remains strong, price pressures squeeze firms

The ISM Manufacturing Index slipped but held above 60 for the fourth-consecutive month, signaling that the manufacturing sector continues to fuel the economic recovery. Price pressures, however, remain a significant problem.

The closely-followed national gauge of goods producers dipped from 61.2 in March to 60.4 in April, topping the Bloomberg forecast of 59.5.  A reading above 50 suggests the sector is expanding.

The rate of growth in new orders and production also decelerated but held above 60 for the fifth-consecutive month.  And employment remained strong, as the Institute for Supply Management noted, “the first four months of 2011 are the highest readings in the last 38 years.”

Manufacturers, however, are now reporting their inventories are at comfortable levels, which could signal a deceleration in the coming months. Nothing worrisome, as a modest slowdown to a more sustainable rate of growth would be a healthy sign.

But surging prices at the early stages of production continue to bedevil manufacturers, as prices paid rose from 85.0 to 85.5.

Anecdotal evidence from the Fed’s Beige Book and comments by several major corporations in their Q1 earnings report reveal that higher input costs are forcing price hikes as pricing power begins to resurface, and core inflation has risen following extremely low levels in the second half of 2010.

The Federal Reserve had fretted in the middle of last year that inflation was hovering at uncomfortably low levels, raising the possibility the economy could slip into a deflationary spiral.

Soaring oil and commodity prices and QE2 have eliminated the outside possibility that falling prices might engulf the economy, and Fed Chief Ben Bernanke hinted at his press conference last week that the odds of another round of bond buys is very low.

Despite the worrisome rise in raw material prices, today’s upbeat report on manufacturing will ease worries that the economy might be slowing too quickly.

Friday’s employment  report

Attention will now turn to Friday’s labor report where economists surveyed by Bloomberg expect nonfarm payrolls to rise of 185,000 in April following a 216,000 increase in March.

Weekly jobless claims have unexpectedly jumped above 400,000 over the past three weeks and a weak payroll number would raise fears about the durability of the recovery, despite today’s upbeat manufacturing number.

But one month does not make a trend, and it seems likely that the slowdown in growth last quarter, as evidenced by the sluggish GDP number, is probably temporary.