The Price is Not Right: The ISM Manufacturing Prices Index Shoots for the Moon
Anyone in manufacturing has likely to at least heard of the ISM Manufacturing PMI. Formerly known as just the Purchasing Managers Index (PMI), the Manufacturing PMI can trace earlier iterations to 1948, and since that time, has evolved and tracked manufacturing buying activity and trends across the United States.
Released monthly, it surveys over 400 senior leaders at companies across 19 industries. Reading the PMI is easy. A score that is over 50 indicates growth. A score under 50 indicates contraction. The Manufacturing PMI also reports on multiple sub-indexes that provide insight on more granular areas of the manufacturing economy. These include New Orders, Production, Employment, Supplier Deliveries, Inventories, Customers’ Inventories, Prices, Backlog of new Orders, New Export Orders, and Imports.
January Manufacturing PMI data (on the surface) would seem to be no surprise for those tracking supply and demand. In short, ISM’s data still shows expansion in the economy. The manufacturing PMI hit 57.6% for the month, indicating overall growth (albeit at a slower rate than previous months).
One respondent to the survey, a nonmetallic mineral products company, notes that, “The supply chain crunch may have loosened a bit; however, specific original equipment manufacturer (OEM) parts and equipment now have lead times that we have not experienced before.” While overall numbers and anecdotes remain valuable, the PMI contains more meaningful insights below the surface. One of the underlying indexes referenced above that form the overall Manufacturing PMI is the Prices Index, and here, there’s much to report, both recently and on a trending basis.
The Prices Index focuses on price trends of commodities (only). According to ISM, the Prices Index hit 76.1% on the month. This “represents an increase of 7.9 percentage points compared to the December reading of 68.2 percent, indicating raw materials prices increased for the 20th consecutive month, at a faster rate in January.”
76.1% is comparatively a huge number within the Manufacturing PMI on a trending basis. But while price inflation has gotten the most attention in recent months, as this number increases, ISM suggests we can see consistent commodity price inflation in the Prices Index for well over a year. Specifically, ISM notes that, “this is the 17th month in a row that the index has been above 60 percent.” Throughout 2021, we observed monthly ISM Manufacturing Price Index numbers in the 60s, 70s, 80s and even approaching 90, representing compounding price inflation in commodities.
What commodities have driven price inflation most recently and why? ISM suggests that, “aluminum; corrugated and packaging materials; copper; electrical and electronic components; petroleum products; vegetable oils; lumber; freight; rubber-based products; and steel products continue to remain at elevated prices due to product scarcity amongst high demand.” MetalMiner, a technology platform that provides metals price intelligence, forecasting and cost modeling, suggests there could be better news on steel, however. In a recent research brief, MetalMiner notes that for hot-rolled coil (HRC), we have already “exceeded the percentage definitions of a market correction – closing in on a greater than 20% fall beneath September’s peak.”
Why has steel decoupled from other commodities? In part, new steel capacity has come online alleviating some supply constraints. In addition, imports have also created more supply. Other commodities remain constrained from a supply, not necessarily a demand perspective. Regardless, 2022 promises to continue a rollercoaster ride for commodities overall. And manufacturers should get ahead of the curve by focusing more on sourcing and buying strategies which manage cost, volatility, and risk.