MNI INTERVIEW: Rising Costs Could Test US Factory Growth-ISM

The U.S. manufacturing sector gained momentum in May, expanding at the fastest pace in four years, though the prospect that rising prices could sap demand muddled the outlook, Institute for Supply Management manufacturing chair Susan Spence told MNI Friday.

"My gut is if this war can come to an end this month, and it would probably take a few months for the prices to start to settle back down, then you really could see growth take off," she said in an interview. "Conversely, I'm worried that a continued conflict not only can sap demand for things like consumer products, but if people aren't feeling good about things, then their paycheck is impacted."

The ISM manufacturing index jumped to the highest level in four years in May, up 1.3 percentage points to 54.0, above market expectations. The principal manufacturing measures were up, with new orders increasing 2.7ppts to 56.8, production rising 0.9ppts to 54.3, and employment up 2.2ppts to 48.6. 

The comments generally suggest that the manufacturing sector is managing higher energy prices reasonably well, Spence said. "My first impression was relief," she said about the May report. "I think that there's momentum in the trajectory." 

INFLATION CONCERNS

The prices index remained sky-high, easing only modestly to 82.1 vs 84.6, indicating that over 80% of all respondents are experiencing rising prices. There were 43 commodities reported up in price versus 0 reported down in price, and 9 commodities were in short supply.

Price volatility is Spence's biggest worry: "Almost 60% of folks are saying it's killing us. We'll see if that chokes off demand. That's my remaining concern."

Spence said the ISM measures show an inflationary picture. (See: MNI INTERVIEW: Fed's Next Rate Move Could Be A Hike-Haslag) 

"The question is either people are going to run out of raw materials because you know of the issues with the Strait in the Middle East, or folks are going to start to see demand drop off because of pricing," she said. 

Front loading by manufacturing firms was evident in rising inventory readings, with the ISM inventories index growing.

NEGATIVE TONE