Reading US ISM Data: Price Pressures Still Extraordinarily High

The biggest sequential drop in more than a decade for the prices paid component and shorter wait times for desperately needed supplies were the two primary drivers of the 2.4-point decline in the ISM manufacturing index to 58.7 in December

“The drop in December’s ISM manufacturing index to 58.7 from 61.1 in November masks what we see as a still strong demand environment in the factory sector. Sharp declines in delivery times and prices were key drivers of the decline and signal at least some welcome improvement in terms of diminishing inflationary pressure and incremental strides with supply chain issues”, Wells Fargo Analysts said.

Inflation is still expected to remain stubbornly high and above the Fed’s target rate, but it will at least be slowing on a year-over-year basis.

The biggest message from Tuesday’s report is that the prices paid component plunged 14.2 points in December. Not only was that the largest drop of any sub-component, it also marks the biggest monthly drop in the prices paid measure in over a decade. Make no mistake, at 68.2 prices are still rising, but it is no longer the scorching hot 82.4 reading seen in November.

Even though the primary drivers of the decline were in categories that will likely bring relief to the manufacturing sector, the headline decline was also driven to a much smaller extent by new orders and production, both of which slipped in December.