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Manufacturing Is Trending Upward, but So Are Prices

Usually when we write about a market report, we start with the most significant numbers on whether things are growing or shrinking, whether the market is up or down. But in the case of this month’s Institute of Supply Management (ISM) “Report On Business,” I think the views of the manufacturing supply managers surveyed are more revealing.

Here's what respondents are saying:

    “Rapidly rising raw material costs putting extreme pressure on profits.” (Food, Beverage & Tobacco Products) “Plastic resin product prices are climbing so fast that [suppliers] are attempting to increase prices on orders already accepted but not [yet] delivered.” (Chemical Products) “Customers are rebuilding safety stock levels of inventory, and also trying to buy ahead of material price increases.” (Plastics & Rubber Products) “Market continues to get stronger month over month. Recovery is faster than anticipated.” (Transportation Equipment) “Pressure from offshore suppliers continues to mount with exchange rate increases and seasonal demand for capacity.” (Miscellaneous Manufacturing)

Overall, the ISM report is positive: Manufacturing is up for the 23rd consecutive month, and new orders, production, employment, and inventories are all growing. The report was issued by Norbert J. Ore, CPSM, C.P.M., chair of the Institute for Supply Management Manufacturing Business Survey Committee, who said:

The recent trend of rapid growth in the manufacturing sector continued in April as the PMI registered above 60 percent for the fourth consecutive month. The New Orders and Production Indexes continue to drive the PMI, as they have both exceeded 60 percent for five consecutive months. Manufacturing employment appears to have developed significant momentum, as the Employment Index readings for the first four months of 2011 are the highest readings in the last 38 years. Inventory growth also took place in April after two months of destocking; however, the inventory restocking would appear to be necessitated by the strong performance in new orders.

While the manufacturing sector is definitely performing above most expectations so far in 2011, manufacturers are experiencing significant cost pressures from commodities and other inputs.

In fact, every single commodity covered by ISM showed an increase in prices — that's everything from corn and cocoa to energy and fuel oil. This situation, backed up by the comments from participants in the survey, has me a little worried.

Electronics manufacturing isn't as price-sensitive as some markets, such as food and consumer items, covered by the ISM. However, if production continues to increase and demand drops off because of high commodity prices, manufacturing will slow down.

The “I” word — inflation — has come up more than once in recent economic discussions, in spite of reassurances by the Fed. So, while the data looks good, what respondents are saying is a bit of a concern.

I'd like to know what you are hearing. Share your views on the message board, or write to us at .

9 comments on “Manufacturing Is Trending Upward, but So Are Prices

  1. Jay_Bond
    May 5, 2011

    I think the largest thing on everybody’s mind right now is the increase in gas prices and how it continues to affect all other market segments. The costs of all commodities are rising and consumers and businesses are feeling it in the pocketbooks. Not only are they paying a large percent of their income to the cost of gasoline, but now the cost of food is rising also. Inflation is always a fear with people that know how inflation affects the economy. For many people out there, inflation is just a word they might hear on the news.

    It's great news that manufacturing has been growing, particularly if it means growth in the job market, but if costs get too far out of control there won't be anybody that can afford to make these purchases.

     

  2. Taimoor Zubar
    May 5, 2011

    I think the rising prices are clearly indicating inflation in the market. Inflation is a symptom which is observed each time the economy is entering into a boom. What I feel is that the rise in prices may not be bad, what matters is by how much and how often they are rising. According to economists, a low and steady rate of inflation is healthy for the economy.

  3. Ariella
    May 5, 2011

    As I recall from learning economics a long time ago, creeping inflation is considered the norm.  But that is a rate of about 2-3%. Inflation rates that hover about 10% are not considered healthy, quite the contrary. Clearly gas and food pricew are now more than 20% higher than they were a year ago, not quite the inflation one would want. In addition, it is possible to have inflation during the recession, as those of us who were around in the 1970scan attest. Another problem of rising prices is the fact that salaries are much lower for many than they were 4 years ago. The combination of lower household income with higher household cost can lead to serious financial troubles.  

  4. Nemos
    May 5, 2011

    What does the commodities to rise up their prices from corn and cocoa to energy and fuel oil?

    Is something temporally due to disaster in Japan and due to the revolutions took place in North Africa or is something deeper?

     

     

  5. Matt Staben
    May 5, 2011

    Commodities are trending upwards due to what many are calling “Peak Oil”.  

    According to GMO Capital's quarterly report, Jeremy Grantham, GMO's Chief Investment Officer, has written a long piece in it discussing how commodity prices, after many decades (since Oil has become our force) of decreasing in cost at an annual rate of 1.2%, the trend is now reversing – indicating a paradigmatic shift.  The odds calculated state, for example, that the chances of Iron Ore continuing its downward cost trend is 2.2 million to one against.

    You can read this report at: http://www.gmo.com/websitecontent/JGLetterALL_1Q11.pdf

    As you read this, think about how nearly every convenience you enjoy in your life today would not be possible without Hydrocarbons – and in fact – would never have ever been conceived of – as Grantham states, we'd have not scientifically advanced past where we were at in 1870!

     

  6. Anand
    May 6, 2011

    @Taimoorz, I totally agree with you that “what matters is by how much and how often they are rising”. I feel everything is being overdone here. We have seen this week how the precious metals and oil have corrected after news that US unemployment claims  jumped to an eight-month high. In my opinion inflation will ease off in coming days.

  7. Anna Young
    May 6, 2011

     I agree with you Jay_Bond that the effects of gas/oil related problems have complicated the current economic situations globally. That is just one factor; there are other various factors which have led to a rise in the price of commodities. For example, exchange rates are currently fluctuating and this does not favour economic planning.
    However, as suggested by the report, the current trend – “rapid growth in the manufacturing sector” is a good thing. This will significantly impact the overall economy positively should this trend continues. Meanwhile, the current level of inflation is not excessive — it is low and steady in my view.

     

  8. SP
    May 6, 2011

    Yes prices have really gone up. Sometimes I wonder how come people in lower income group survive. Manufacturing seems to be a benefircial industry in this time, but raw materials are becoming just too costly, minimum wages have gone up, material cost. I guess even if they have good revenues, the cost going high can reduce profit margin.

  9. Eldredge
    May 6, 2011

    With the rapid increase in fuel prices, it is hard to imagine a situation where inflation would not ensue. Precious metals market only compounds the problem.

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