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Manufacturing index shows continued strength and rising prices




The ISM manufacturing index for May, released today, was down just a tad from April, but remains unusually strong. As the above charts suggests, based on past relationships between this index and the growth of GDP, second quarter GDP growth is likely to be stronger than the 3% registered in the first quarter. Indeed, second quarter growth could be in the range of 4-6% if the past is any guide.


This next chart shows that almost 80% of those surveyed reported paying higher prices. This is further evidence that the market's persistent concerns about deflation are misplaced. There is no weakness overall in the manufacturing sector and there is simply no evidence of deflationary pressures.


Strength in the ISM subindices was widespread, and this third chart shows very strong gains in export orders. This index hasn't been this high since the late 1980s, a period noted for its explosive growth in U.S. exports. Not only does this bode well for our economy, it also strongly suggests that the global economy is very healthy. This latter point is reinforced by the gains in shipping indices that I have been highlighting for quite some time, and the continued strength—albeit with a modest correction of late—in virtually all commodity prices.


Finally, the employment index shows very impressive strength. In the long history of this index, it has only exceeded 60 on a handful of occasions, most of which were way back in the go-go 50s and 60s. The world is growing, boosting demand for U.S. exports, and manufacturers are ramping up production and employment as a result. This is just simply very good news.

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