The PMI data for the month of May continued to support the ongoing trend of higher growth and inflation. The ISM Manufacturing PMI increased 0.5 points to 61.2, the second highest level since May 2004. The Markit version has a shorter history and increased to a new record of 62.1. Within the ISM report, new orders increased to 67.0, export orders increased to 55.4, and business backlog increased to a record of 70.6. Supply and inventories continue to be a problem as delivery delays slowed to the lowest level since 1974 and the customer inventory index reached a new low. This is starting to negatively impact some demand indicators as production and employment declined by 4 points.
Similar trends are in place on the services side. The ISM Nonmanufacturing PMI headline number increased 1.3 points to 64.0, which is a new high. The Markit version increased by 5.8 points to 70.4, also a new high. Within the ISM report, business activity increased to 66.2, new orders increased to 63.9, and export orders increased to 60.0. Supply deliveries increased by 4 points to 70.4 and business backlogs increased by a record pace to 61. These supply issues are impacting employment, which declined by 3.5 points to 55.3.
These supply constraints are also continuing to cause prices to rise, as the ISM Manufacturing price index declined to 88.0, which is near the highest level since July 2008. The Markit Manufacturing price index increased to the highest level since July 2008. The ISM Nonmanufacturing price index increased to 80.6, the second highest on record. For the time being, end demand is strong enough to allow producers to pace on these costs, as Markit Manufacturing and Services charge (sales) prices both made a new high.
The nonfarm payroll report came in at 559,000, which was below expectation, but other employment data is trending in a positive direction.
ADP reported a gain of 978,000 with 850,000 coming from the services sector. Nearly 70% of the gains came from small and medium-sized businesses.
Initial jobless claims declined to 385,000 which is the lowest level since March 2020. Total continuing claims dropped to 15.4 million, which is also the lowest level since March 2020.
These numbers will likely continue to decline into the summer as many states are reducing unemployment eligibility and removing the extra payments and extensions from the federal government.
Market activity continues to suggest that inflation will likely not create long-term challenges to economic growth.
The TIPS breakeven curve remains inverted, with two-year rates being the highest.
Oil and equity volatility remain at low levels, high yield credit spreads are near the lowest levels since 2007, and cyclical stocks continue to outperform.
Economic growth and inflation should continue to increase as demand returns and supply remains constrained. If this trend continues for an extended period of time, it could have a negative impact on production and economic activity. The market signals that we are tracking are not indicating that these conditions are currently in place.
Vice President, Research and Strategy
Boyd Watterson Asset Management, LLC
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.