The ISM manufacturing index for February was 57.7, up 1.7 pt from January and 1.5 pts above the estimate. It’s at the best level since August 2014 and follows the improvements seen in all the regional manufacturing surveys. New orders jumped by 4.7 pts to 65.1 and thus is well above 50. Backlogs spiked by 7.5 pts to 57 and that’s the first time above 50 since June. Exports orders were little changed, up .5 pt to 55 after falling by 1.5 pts last month. Production was up by 1.5 pts. Inventories at the manufacturing level rose 3 pts to back above 50 at 51.5 while customer inventories fell 1 pt to 47.5 and below 50 for the 5th month. Prices paid fell 1 pt off the highest level since June 2011. Lastly, Employment fell 1.9 pts but after rising by 3.3 pts last month. It’s slightly above the 6 month average.
Bottom line, not only was the headline number higher but there was also a big improvement in the number of companies that saw growth. Of the 18 industries surveyed, 17 saw improvement vs just 12 last month. The only industry that saw a decline was ‘furniture and related products.’ The ISM said “Comments from the panel largely indicate strong sales and demand, and reflect a positive view of business conditions with a watchful eye on commodities and the potential for inflation.” Again, as seen for months optimism is rampant in terms of the direction of business improvement but we need to see a more rapid increase in the pace and hopefully we will. Interest rates are at the highs of the day but didn’t move much after the ISM report.
The January PCE inflation deflator rose by .4% m/o/m and 1.9% y/o/y at the headline level, both one tenth less than expected but the core rate up .3% m/o/m and 1.7% y/o/y was right in line. That headline number matches the highest since April 2012 and has basically doubled from last summer mostly due to energy prices. The core rate y/o/y rise holds at the quickest pace since July 2014. Services inflation remained sticky with another .2% rise and food prices went positive for the first time in many months.
Personal spending was up by .2% (nominal rate), one tenth less than expected and which means REAL spending was negative in January by .3% (rounded). The nominal income gain of .4% m/o/m was also fully offset by the rise in inflation. Looking directly at private sector wages/salaries also saw a nominal .4% m/o/m increase and was up 4.8% y/o/y, the most in 4 months. The savings rate was 5.5% vs 5.4% in December but down from 5.7%+ in the prior 18 months.
Bottom line, there was a decline in real spending in January as higher inflation took a greater share of spend. This points to the importance of quicker wage growth which hopefully we soon get even though I’ve been saying that for a while. The Fed will raise rates in two weeks but that will only bring the fed funds rate to just .875% with real interest rates still firmly negative. In my weekend reading, I found a great quote from Jay Leno who must have given it when he was hosting The Tonight Show: “Congress wants to replace the dollar bill with a coin. They’ve already done it: It’s called a nickel.” Of course that comes with the help of the Fed since its inception in 1913.
Is it possible that if this continues, the Fed is going to hike more than 3 times this year? Probably not but the markets may be the decider on that as all the Fed is doing is being reactive. Proactive behavior is not in their DNA.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor. Each day The Boock Report provides summaries and commentary on the macro data and news that matter, with analysis of what it all means and how it fits together.