A Macro View: Commodity Prices Turned the Corner for ISM Reports

The last Macro View post was wonkish in regards to how the headline ISM indexes are calculated. While Mish was discovering some of the nuances of the reports, we also explored the inventory index in depth and showed that on a month-over-month basis, it is fairly random with no discernible trend. One month it added to the headline index and the next it was just as likely to be negative as positive from the last index number.

The PMI index showed strength in the 5 core categories which reversed the trend and reversed the very bad showing in May when all the categories were negative and very significant. This led to the PMI handily beating the consensus of 52% and above the consensus range reported by Econoday of 51 to 55% with a PMI index of 55.3%.

But unfortunately the non-manufacturing index (NMI) did not provide as much positive news about the direction of the economy. The NMI dropped 1.3 to 53.3% which was below the consensus of MarketWatch and Econoday by 0.7 at 54%, but it was within the consensus range of 51.2 to 55%. In contrast to the positive 5 core indexes of the PMI, the NMI was negative across the board except for employment which squeezed out a positive 0.1 increase to 54.1%. It continues its trend upward, but 0.1 is probably just a statistical anomaly. The underlying percentages also show that weakness with those reporting increases in employment went down from 28 to 27%, while those reporting lower employment rose from 9 to 12% last month. The chart below is the employment trend in the non-manufacturing sectors showing the trend line since December 2009 when the down trend was reversed to the upside. The slope of the line has been going down but the significance of the trend has been improving.

The Bend in the Road for Inflation or Not?
Overall concerns about inflation have been subdued in this last report. Both manufacturing and non-manufacturing price indexes dropped significantly by 8.5 and 8.7% respectively while still maintaining above 60 for non-manufacturing (60.9%) and high 60s for manufacturing (68%).

I have been monitoring the commodities reported as being up in price and a category called multi-month commodities since the uptrend started around October 2010. Below are two charts of the two categories for manufacturing and non-manufacturing.

From the manufacturing chart, it is fairly straight forward that the trend has reversed since April of this year for both multi-month and all commodities. But until this months drop off, there did not appear any reversal of the large number of commodities that respondents were reporting as up in price. The percentage of multi-month commodities to all the commodities has trended up recently to last month’s 75%. A few of the commodities with long term higher prices are: Fuel at 18 months: #2 Diesel Fuel at 12; Cotton Products at 10; and #1 Diesel Fuel at 9.

Hopefully, overall sentiment is captured by a respondent from Retail Trade stating that, “Commodities coming down in price, which should help stabilize inflation.”

Conclusion:
The manufacturing report showed a strong reversal in the downward trend with all sub-indexes being positive and significant. Non-manufacturing was a disappointment with weakness across the board with only employment being the outlier at an insignificant gain. Going forward, inflation does not seem to be taking hold in the wholesale/input levels. Hopefully that reversal of the trend will hold especially for fuels.

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