Early IHS Markit survey data came out today. The IHS group surveys business owners and purchasing managers for manufacturing and service based companies. They compile the results they get and give it a score between 0 and 100. Above 50 indicates that conditions are favorable and that expansion is taking place. Scores below 50 indicate that business is struggling and that the economy is contracting.
Today’s data shows that the economy is continuing to expand. Both the services score (58.2) and the manufacturing score (59.2) are in positive territory. The service index was up over the previous month. It picked up 3.1 points.
The manufacturing index was down from the previous month by 1.1 points.
For those of us that were hopefully for a resurgence of manufacturing coming back to the US will have to cool our expectations. The combination of our reliance on China for goods and the “just-in-time” inventory system that has been utilized by just about everyone has caused a collision course of empty shelves. I’m of the mind that some manufacturing will come back to the US as well as increased onshore inventories. However, the IHS data shows that we might not be there yet.
Chris Williamson, the chief business economist at IHS, put it this way:
“However, while manufacturers also continue to report strong demand, factory production remains plagued by constraints, including record supply chain bottlenecks and labor shortages. Prices paid by factories for raw materials rose at yet another new record pace as a result, in turn feeding through to both higher prices at the factory gate and spilling over into higher service sector prices. Higher wages are also having to be offered to attract or retain staff, adding to the inflationary pressures.”
Manufacturers are trying to catch up to demand but they are running into serious constraints. Inflation is the hot button word here. The transitory story has fallen apart and the Fed has been slow to react. We’ll get the taper started soon but we could be a long ways off from increasing interest rates which is what will ultimately choke off the rampant inflation.
Mr Williamson ends his comments with a stunning admission.
“Thus, while the economy looks set for stronger growth in the fourth quarter, the upward rise in inflationary pressures also shows no signs of abating.”
No signs of abating… That does not sound good. Inflation is here folks. It’s time to get in position. Silver, oil, gold and associated commodity refiners, producers, and miners are set for a resurgence. Gold was having a tremendous morning until Jay Powell commented in his speech that the taper is on schedule.
Michael Lebowitz put out a terrific blog post on why “persistent inflation poses a real threat to stock prices”. Mr. Lebowitz is part of the Real Investment Advice group. I highly recommend reading it over the weekend. He lays out very clearly that the place to be is gold. He analyzes the prior 7 inflationary periods of the last 73 years and shows the cumulative returns for industries and sectors across the economy. He paid very close attention to the two eras that look to represent what we might be looking at, double digit inflation. These eras were 72-74 and 76-80. Both saw tremendous gains for gold.
Alright, go enjoy your weekend!