By Brad Stevens, SRM
THE ISM MANUFACTURING REPORT
The ISM Manufacturing Report for January came in a bit lower than I expected at 58.7. Still a very good number showing manufacturing continues to grow nicely. It appears that firms have been able to transition well in reconfigured facilities to adapt to the Covid reality. Demand for products continues to expand with new orders and a back log of orders remaining strong. Of the 18 reported industries, 16 reported growth, two showed contractions. Highest on the growth list was chemical products with metal and plastic industries on their heels. Printing and petroleum industries were the two that are showing declines.
PRODUCTIVITY RATE
The primary issue in the report is labor. Firms continue to struggle with finding workers that are trained and willing to work. While employment went up, finding new staff is taking longer.
Prices continue to trend higher based on the ISM Report. The only commodity that was down in price is caustic soda. All other commodities are up in price and most are in short supply. An indicator that the improvement will continue is an acute shortage of corrugated boxes.
The Service Sector ISM Report bumped up 1% to 58.7, a very good growth level. As the economy began opening in January as restrictions were loosened, you would expect the growth. Fourteen industries in the report recorded growth in January. Leading the group was real estate, rental and leasing and construction, all relate to the booming housing market. Four industries were shown as contracting, not surprisingly these focused on areas still under some restrictions, Arts, entertainment, education, and retail.
A concern in the United States right now is the productivity rate. For the fourth quarter productivity dropped by 4.8%. This was much worse than expected. In fact, a single quarter drop of this magnitude has not occurred since the second quarter of 1981. The issue appears to be related to the reconfiguration of plants and offices to comply with Covid restrictions. Hopefully, this will be a one and done quarter drop. If not, declining productivity is another sign that inflation is coming. The only question is how high—3%, 4% or higher?
While gasoline and heating oil supplies remain high, that is about to change. Refineries are slowing production despite added crude oil imports to the U.S. The supply of crude oil dipped slightly in the last week as production cuts from OPEC+ are being maintained. No real reason for gas prices to go any higher right now, expect them to stay roughly where they are and move in a narrow range.
Brad Stevens is the principal and founder of SRM. For more information visit www.srmallc.net.