Source: Wells Fargo Securities, LLC Economics Group
First Quarter Growth – Not a Boom
The below consensus ISM reading was disappointing; however, the March
ISM index at 51.3 suggests continued growth but not the boom typical of
the early recoveries of 2004 and 2009 (top graph). Sustained, subpar
economic growth remains the theme for the economy. March’s ISM reading
also indicates little impact on the manufacturing sector of the budget cuts
associated with the federal budget sequester.
In March, industries with expansion readings (over 50) were production,
new orders, and employment, illustrating that the positive report also had
breadth to the gains. As we have indicated before, it is tempting to view
some recent data as an indication that the factory sector is poised to shift
from slow growth into a somewhat faster pace of expansion; we support the
case for growth but are not yet convinced that business spending and
industrial production are poised to take off. Instead, we anticipate
continued moderate growth of 2-2.5 percent for 2013.
New Orders and Export Orders Both Still Positive
In recent months the gain in new orders has been reassuring to our growth
outlook. New orders slowed to 51.4 in March but remain in expansion mode
(middle graph). Twelve industries reported a gain in orders, including
paper, machinery, fabricated metals and electrical equipment for the
second straight month. This also seems to be a manifestation of the sense of
relief in the absence of a fiscal cliff. Businesses are hunkering down and
drawing down inventories, but first quarter orders reflect a greater level of
confidence in future economic growth.
Export orders, meanwhile, rose for the fourth consecutive month to 56.0.
Industries seeing the fastest expansion are: wood products, apparel, leather
& allied, electrical equipment, appliances & components and petroleum &
Input Price Pressures –Temporary Relief for Profits?
The prices paid component moderated in March (bottom graph). Of
18 industries, 10 reported higher input prices thereby suggesting that the
relief in cost pressures is not widespread. Higher input prices were
reported for plastics, electrical equipment and chemical industries.
Many commodity prices have trended higher in recent months. For
example, polypropylene (used in packaging and labeling/textiles) prices
have risen for the past five months. Prices for corrugated boxes (used in
shipping) have been up for the last eight months. These price increases will
put some upward pressure on PPI inflation in the coming months and given
only modest increases in consumer prices, suggest profit pressures for
many companies, although certainly more modest than we would have
projected based on the rise in input prices posted last month.