The discrepancy between the ISM’s Report on Business and Markit’s Manufacturing PMI assessment of the economy widened today.
Both reports agree that cost inflation is rising quickly despite moderation in the price of oil.
The ISM noted 17 out of the 18 industries reported growth in March.
Here’s the statement that caught my eye: “The past relationship between the PMI® and the overall economy indicates that the average PMI® for January through March (57 percent) corresponds to a 4.3 percent increase in real gross domestic product on an annualized basis.”
On an over-under basis, I will take “the under” as in way under.
Markit Key Findings
- Manufacturing growth slows to six-month low in March
- Headline PMI eases to 53.3, down from 54.2 in February
- New orders rise at weakest pace since October 2016
- Input cost inflation hits two-and-a-half year high
Business conditions continued to improve across the manufacturing sector in March, but the latest upturn was the weakest recorded for six months. The loss of momentum reflected softer rates of output and new order growth, alongside a slower rise in payroll numbers. Manufacturers sought to adjust their inventory strategies in response to more subdued sales growth, with stocks of finished goods reduced for the first time in six months
Meanwhile, higher raw material prices resulted in the strongest rate of cost inflation since September 2014. Factory gate charges also increased at the fastest pace for around two-and-a-half years.
New orders expanded at the slowest pace since October 2016, thereby signalling a sustained loss of momentum from the peak seen at the start of the year. Manufacturers cited greater caution among clients, alongside intense competition for new work and subdued export sales.
Comments from Chris Williamson, Markit Chief Business Economist
- “The post-election resurgence of the manufacturing sector seen late last year is showing signs of losing steam. Output growth slowed to a six-month low in March, optimism about the outlook has waned and hiring has slowed accordingly.”
- “While the survey data suggest that the goods producing sector enjoyed a relatively good first quarter on the whole, the loss of momentum seen in February and March bodes ill for the second quarter.”
- “The survey data have acted as a reliable advance guide to official data in the past, and in March indicate a slowing of output growth to an annualized rate of around 2%. The survey’s employment index is meanwhile consistent with official manufacturing payroll numbers falling slightly.”
- “If the activity numbers send a dovish signal to policymakers, the survey’s price indices favor the hawks. Inflationary pressures have risen to a two and a half year high, despite the oil price easing during the month.”
Markit forecasts GDP with its services report, due April 5. The Markit Flash Services PMI on March 24 provides a strong hint.
Chris Williamson commented: “The US economy shifted down a gear in March. A slowing in the pace of growth signaled by the PMI surveys for a second straight month suggests that the economy is struggling to sustain momentum. The survey readings are consistent with annualized GDP growth of 1.7% in the first quarter, down from 1.9% in the final quarter of last year.”
Williamson has had a pretty good read on GDP. He estimated 1.9% for the 4th quarter and the final came in at 2.1%.
Why the Discrepancy?
The ISM numbers have been consistently better than PMI numbers.
Since both are diffusion indices, and both measure the same industries, the numbers should align better than they do.
The one thing the reports agree on is price inflation. A slowing economy and rising prices is a stagflation lite scenario.
- GDPNow April 3: 1.2%
- ISM April 3: 4.3%
- FRBNY Nowcast March 31: 2.9%
- Markit March 24: 1.7%
The “advance” GDP number for the first quarter comes out on April 28.
- April 3: GDPNow Bumps First Quarter GDP Estimate to 1.2% Following ISM Report
- March 31: Discrepancy Between GDPNow and Nowcast is Two Percentage Points Once Again
- March 31: Personal Income Up But Real Consumer Spending Declines Second Month
- March 31: Real GDI, GPDI: Recession Warnings?
- March 27: Two Percent Growth as Good as It Gets?
- March 28: More Signs of a Weakening Economy: Imports and Exports Decline, Treasury Yields Fall
Mike “Mish” Shedlock
“A slowing economy and rising prices is a stagflation lite scenario”
The FED “wanted” price inflation. Another FED success story.
Flattening yield curve and increased LIBOR rates are indicating an end to their hopes and wishes. The Fed missed the boat on interest rate hike 3 years ago. It’s political now… derail the new Administration’s plan is now game on.
Medex Man said:
You are giving the Fed’s control levers way more effectiveness than is warranted. Central economic planning has failed, and there is nothing they can do about it even if “their” candidate had weasled the election.
You are probably right that the bureaucrats don’t want to face reality and are trying (failing) to derail Trump. The problem is that Trump is only a symptom of the disease that Washington DC (including the Fed) created. The Fed can’t stop Trump because their real enemy isn’t Trump, their real enemy is central economic planning… aka themselves.
Medex Man said:
Healthcare costs in the US are now up to 18% of GDP, with Obamacare pushing costs up 30% per year. Anyone who can multiply two numbers together (which rules out a Federal reserve “PhD” economist) can see health costs alone are adding 5.4% inflation. CPI calculations underweight health spending and don’t count the subsidies obamacare transfers from healthy US taxpayers to illegal immigrants.
Properly accounted for, the cost of living is already much higher than CPI suggests — and the US has been flip-flopping between stagnation and stagflation for the past 5 years.
Sooner or later (probably later since Yellen is so useless) — the Fed is going to need another Paul Volcker to purge inflation out of the system. The longer Bernanke / Yellen are allowed to mess things up, the bigger the eventual correction will need to be.
Real GDP hasn’t grown since 2006 (maybe earlier) — everything since then was debt and accounting games. Middle class voters are slowly waking up to inflation being much higher than official reports, even if they don’t have the economics background to explain it. A guy like Trump would never have made it past primaries, never mind the actual election, if the official GDP numbers reflected reality.
Health is 18% of GDP but Obamacare covers 10M or so out of 320M. Also you are incorrect to assume that 100% of premium increases are automatically passed onto health care provider in the form of price increases.
Medex Man said:
everyone’s health premiums skyrocketed, not just the obamacare welfare crowd.
I get it: you think that your employer’s contribution “doesn’t count” because you don’t see it. That doesn’t mean it isn’t there, it just means you don’t look.
Medex Man said:
Also, it doesn’t matter if obamacare premiums (or the premiums paid by your employer) get passed to the hospital or get absorbed into the useless bureaucracy that is Washington DC… the point is it does not go into real consumer spending.
There is no difference between jacking up taxes and paying welfare to useless bits of humanity, versus charging obamacare premiums and paying welfare to useless bits of humanity. Economically, the money is being taken by force from honest taxpayers, and given to parasites.
You take money from taxpayers, you get less of them. You give welfare to parasites, you get more of them. This isn’t complicated boonton.
All of this is captured by overall health spending which grew not by 30% but by 5.8%
But inflation is not about spending more, it is about spending more per unit. We may spend more on cars than last year but there’s no inflation in cars if we are purchasing more cars rather than simply spending more on any given new car. Since our the actual goods and services provided by the health care industry went up both because we have an aging population and new treatments make possible services that didn’t exist previously, the actual level of healthcare inflation would have to be even lower than 5.8%
Medex Man said:
If you multiply 18% … as in healthcare is 18% of GDP
and you multiply that by 30% … as in the amount obamacare increased insurance premiums
18% x 30% = 5.4% … as in the cost increase I stated in my first comment.
You say the actual increase was 5.8%, which is a bit higher than what I wrote. Both 18% and 30% are rounded numbers, which might explain why your 5.8% estimate is higher than the 5.4% I wrote above
Medex Man said:
You claim (without any documentation or evidence at all) that actual inflation is less than 5.8% spending increase.
Are you aware that US healthcare outcomes — despite our advanced MRI and other fancy diagnostic technology — is worse than countries that spend a lot less?
Some of that is lifestyle, but the fact remains that all that expensive technology just costs more — it doesn’t improve outcomes at all.
Ergo, the 5.8% health cost increase is pure inflation caused by obamacare welfare cr-p. More blinking lights and fancy equipment does not mean a quality improvement, it just means over priced fancy equipment. If there was a quality improvement, it should show in actual health outcomes over time… and it does not.
In fact, average US life expectancy recently declined for the first time in 50 years (that is as far back as records go… before that some life insurance actuaries may have had private estimates based on the lifespans of people who could afford to buy life insurance)
1. Obamacare is 10M out of 320M people or about 3.1% of the population. If their healthcare went up 30% that would be 30% * 3.1% * 18% = 0.17%. In other words, if you read inflation was 1.8% and you could somehow magically make the 30% premium increases 0% you would reduce inflation only to 1.63%. Multiplying 30% by 18% does give you a # close to 5% but that’s just a coincidence.
2. “You claim (without any documentation or evidence at all) that actual inflation is less than 5.8% spending increase.”
This works out logically. Suppose I told you last year you spent $10 at McDonalds and this year I tell you spend $12. That alone doesn’t say anything about inflation. Maybe the food costs more. Maybe it costs less but you ate more. Maybe it costs the same and you ate more. Only if you ate exactly the same amount of food can you say inflation is 20%.
But here’s what we do know about health care:
We DIDN’T ‘eat less’. More people will see the doc this year than last year. There are things you can buy this year that you couldn’t buy last year (i.e. new drugs that were just approved, etc.). So AT LEAST some of the 5.8% increase is due to us ‘eating more’ and ‘eating better’. Our current inflation rate is about 1% so ‘health inflation’ must be less than 5.8% and more than 1%.
Medex Man said:
RTFD buddy — you aren’t worth arguing with otherwise
Obamacare is a tax law applying to all citizens, over 300 million. 10 million is half the number of newly insured people since the law went into effect. Another 10 million get “free” coverage (minus whatever deductibles and uncovered costs). The whole population is experiencing the 30% increase in health costs, not just the 10 million newly insured. So, your math is correct but your assumptions are wrong, making your final inflation numbers incorrect.
BTW, all this excess (30%) health care spending is counted as GDP. Thus, the higher Obamacare outrages, the higher GDP. Which is perhaps why Congress likes health care inflation, as besides the crony capitalist aspect it makes the GDP numbers look better even as the people get poorer. Definitely a misallocation of capital away from the productive economy. Health care outcomes should be the true measure of success, not spending. Matters little if new technologies (i.e. new cancer drugs, CAT scans) if the outcomes are the same or worse.
The total increase in health spending in the US is about 5.8%, not 30%. Nice try. See the source I previously cited.
When people buy health insurance through ACA they are paying premiums to an insurance company. So, maybe a family of 4 pays $300 a month for insurance. Insurance companies can’t provide coverage for a premium that small, so the gov’t subsidizes the rest. Rapidly increasing ACA premiums mean Insurance companies want more for coverage, because so many have had pre-existing diseases.
Connect this scenario with the annual budget deficits. Last year’s deficit was supposed to be only about $460 billion. Some were worried we would not have a deficit in the future, Obama has done such a good job. Never fear. Gov’t debt actually went up about $1.4 Trillion last year. So, the deficit was not $460 billion, it was about $1,400 billion. Part of that was probably the subsidies to Insurance companies. A lot more is probably defense spending.
All this excess is off-balance sheet and only shows up when comparing year-to-year gov’t debt.
Now, consider this is likely the peak of recovery. What will deficits be in the next recession?
At some point gov’t will have to deal with the health care monster. It won’t happen during recovery. It will take a scary crisis to get anything done.
Medex Man said:
@droubal49 — “…so the gov’t subsidizes the rest.”
Rubbish. Other premium payers subsidize a lot of it. and then TAXPAYERS subsidize the rest. Government bureaucrats are a net cost, they don’t work for free — and its only the tax revenues left over after paying the criminals and paper pushers that ends up subsidizing the welfare recipients.
Please stop lying and claiming the government pays for anything. That is 100% false.
PS — in the case of Obamacare, the little wanker obama embezzled money from FNMA and FHLMC to pay for his insurance scam. Multiple courts ruled the money transfer illegal, but Obama appealed (he was too busy spying on Americans to obey spending laws). Obama, Pelosi and Susan Rice all belong in prison cells.
Tony Bennett said:
“The one thing the reports agree on is price inflation. A slowing economy and rising prices is a stagflation lite scenario.”
Put me down for any stagflation being on the clock.
The coming Bust will see disinflationary/deflationary winds prevail.
Yup. Same as Japan since 1991.
In and out of deflation, with brief periods of stagflation in between.
one could argue that we’ve BEEN in this very scenario ourselves for 10+ years already…
deflation in the things we desire but cannot afford, inflation in the things we need everyday… yeah, that sounds very familiar.