Today is Friday, September 10, 2021, which marks 20 years since the horrendous 9/11 attack. New York City is holding a memorial. Usually, on this day, market trades a bit higher, which is what the pre-market futures current indicating. Our view is today will be an easy up day, and next week will start to be more tumultuous as investors start to position for Fed's September FOMC meeting.

On today's post, we want to reflect on indicators of the economy, namely the Purchasing Manager's Index, and Producer Price Index for August.

Purchasing Manager's Index for August

The ISM Manufacturing PMI increased to 59.9 in August of 2021 from 59.5 in July, beating forecasts of 58.6. New orders (66.7 vs 64.9 in July), production (60 vs 58.4) and inventories (65.2 vs 48.9) increased and price pressures eased (79.4 vs 85.7, the lowest since December). On the other hand, employment contracted (49 vs 52.9, the lowest since November). "Panelists reported that their companies and suppliers continue to struggle at unprecedented levels to meet increasing demand. All segments of the manufacturing economy are impacted by record-long raw-materials lead times, continued shortages of critical basic materials, rising commodities prices and difficulties in transporting products. However, optimistic panel sentiment remained strong", Timothy Fiore, Chair of the ISM said.

Weighing on the overall result was the sub index measuring manufacturers’ views about the employment situation. Manufacturers are still having trouble getting workers. That might be constraining production. If they can get staff, that would fuel optimism down the road. More labor would mean more production to fill the new orders expected in coming months. Supply chain disruption remained severe during August. This was highlighted by a further marked increase in average vendor lead times, with the extent of the lengthening staying close to June's series record. Companies reported transportation delays and shortages developing for a wide range of inputs and raw materials. With rising demand chasing constrained supply, average purchasing costs rose sharply, which also fed through to a further near-record increase in selling prices

Forecast: Business Confidence in the United States is expected to be 57.00 points by the end of this quarter, according to Trading Economics global macro models and analysts expectations. In the long-term, the United States ISM Purchasing Managers Index (PMI) is projected to trend around 53.40 points in 2022 and 52.40 points in 2023, according to our econometric models.  

Producer Price Index for August

The U.S. Bureau of Labor Statistics (BLS) reported on Friday that the seasonally adjusted Producer Price Index for final demand increased 0.7% in August, above expectations for a 0.6% advance. This follows a 1.0% rise in July.

Over the last 12 months, the PPI has increased 8.3% before seasonal adjustment, edging out expectations for an 8.2% annual advance following a 7.8% rise for the 12-month period ending in July. This was the largest increase since 12-month data was first calculated in November 2010.

Breaking the reading down further, we saw a 0.7% monthly rise in the index for final demand services and a 1.0% monthly rise in final demand goods.

Core PPI -- which represents prices for final demand less foods, energy, and trade services -- advanced 0.3% in August, missing expectations for a 0.6% rise, following a 0.9% increase in July. Additionally, the core index was up 6.3% from the same time last year, matching expectations and coming on the heels of a 6.1% rate of increase in the 12-month period that ended in July.

Digging deeper, the monthly increase seen in the final demand goods index is attributable to a 0.4% increase in final demand energy that was compounded by a 2.9% rise in prices for final demand foods and a 0.6% increase in final demand goods less foods and energy.

As for the final demand services index, a 1.5% increase in margins for final demand trade services was helped by a 2.8% rise in prices for final demand transportation and warehousing and a 0.1% increase in other.

The PPI measures price changes from producers' perspectives, while the Consumer Price Index (CPI) gauges price changes from consumers' viewpoint. The two indexes tend to be correlated, as producers and retailers often pass on cost increases to the consumer. But divergences can occur as the two indexes track slightly different metrics. For instance, CPI includes imports and owners' equivalent rent, two metrics that PPI excludes. Another difference is taxes, which consumers pay on purchases and are included in CPI -- but not PPI, as they are not a part of producer revenue.

All in all, this was a solid reading indicative of an ongoing economic recovery and we believe that the miss on core PPI should serve to keep any fears of a rapid rise in interest rates at bay. While PPI may reflect costs to the producer and is a bit less of a direct read on inflation it does provide some insight into the inflation dynamic as producers will ultimately push costs through to the consumer.