Margin Squeeze Concerns Deepen as Manufacturing Sector Expands

By: • Tue, Feb 1 2011, 10:01 AM

ISM data is important because it's one of the first chances we get to gauge economic activity in the most recent month. It sorta sets the tone for the month ahead. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

From the Release: Economic activity in the manufacturing sector expanded in January for the 18th consecutive month, and the overall economy grew for the 20th consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®

Reuters Quick Recap...

RTRS-ISM REPORT ON U.S. MANUFACTURING SHOWS PMI AT 60.8 IN JANUARY (CONSENSUS 58.0) VS 58.5 IN DEC
RTRS-ISM U.S. MANUFACTURING PRICES PAID INDEX 81.5 IN JANUARY (CONSENSUS 73.5) VS 72.5 IN DEC
RTRS-ISM U.S. MANUFACTURING EMPLOYMENT INDEX 61.7 IN JANUARY VS 58.9 IN DECEMBER
RTRS-ISM U.S. MANUFACTURING NEW ORDERS INDEX 67.8 IN JANUARY VS 62.0 IN DECEMBER
RTRS-TABLE-US ISM index 60.8 in January versus 58.5 in December

WHAT RESPONDENTS ARE SAYING ...

"Continued weakness in the dollar is having a negative effect on the components we purchase overseas and increasing our material costs." (Transportation Equipment)
"Lead times are increasing significantly, and commodity pricing is starting to increase." (Chemical Products)
"January/February sales will be decent, and we see a strong March. We're cautiously optimistic but reluctant to hire." (Fabricated Metal Products)
"Business is still slow with no pick-up in sight." (Furniture & Related Products)
"We continue to see unexpected strength in many non-U.S. markets." (Fabricated Metal Products)

Plain and Simple: The headline PMI number beat expectations and improved. The Employment Index broke into the 60s. Inventories are reportedly too low which implies producers need to buy more raw materials to keep up with demand from emerging economies (EXPORTS EXPORTS EXPORTS!). BUT...once again we're seeing pressure put on profit margins. Check out the prices paid index. Up 24 points since July! Eventually producers are going to try and pass these higher costs along to consumers. GOOD LUCK! With the U.S. jobless rate hovering in the 9% handle and the labor force shrinking (in a discouraging manner)...somethings got to give! Doubtful it will be consumers. There just isn't any wage inflation to support it. The great margin squeeze of 2011 continues...