The ISM purchasing managers index came in at 59.3—a moderation, as expected, from February. The indices for production, new orders and employment all dipped. Problems may be brewing in the rise in prices paid.

Moderation Toward Actuals

Headline ISM moderated toward the actual run of production, orders and employment data released in recent months. At 59.3, the index is in-line with end of 2017 levels (top graph). Our outlook remains for subtwo percent growth in the first quarter of 2018 and 2.5 percent to 2.8 percent growth for all of 2018.

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Growth Remains the Headline Story

Seventeen of 18 industries reported growth in March, led by fabricated metals, plastics and computer & electronic products. For production, the index has been above 60 for ten straight months. The ISM report highlights that labor constraints and supply chain disruptions limit production potential. Fourteen industries reported growth in production, led by printing, plastics, computer & electronic products and fabricated metals.

New orders registered 61.9 in March, down from February, and yet fifteen of 18 industries reported growth in new orders (middle graph). These industries include wood, computer & electronic products, paper, transportation and plastics. In the survey, concern was expressed about tariffs, and there was a suggestion of panic buying.

Prices Paid a Warning Sign for Profits—and Trade

The prices index jumped to 78.1 in March from 74.2 in February and the details indicate further concerns (bottom graph). For prices paid, 57 percent of respondents’ reported paying higher prices while seventeen industries reported paying higher prices including apparel, textile mills, furniture and electrical equipment.

To corroborate the price pressures, supplier deliveries remained above 60 for the second consecutive month, indicating slower deliveries to meet orders. Textiles, machinery and fabricated metals industries lead to delays. Commentary from survey respondents highlighted the issue of tariffs impacting the supply chain.

This current expansion has been characterized by sub-two percent CPI inflation, but there are indications here that the upward pressures of inflation are there. Our outlook is for continued increases in the PCE deflator and the employment cost index for 2018.

Moderation in Expectations—Problem with Uncertainty

This latest ISM survey indicates a move in expectations toward trend gains in production and employment. However, the bigger story is the rise in uncertainty on supply chain availability and prices paid for inputs. Precautionary buying appeared in this ISM report, and the prices paid index backs up the verbal concerns of respondents. This higher level of uncertainty will impact economic actions going forward. We remain cautious on the outlook.

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