U.S. Manufacturing Is Accelerating. Will Inflation Do the Same? | Lord Abbett
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Economic Insights

With activity increasing, manufacturers are paying higher prices for inputs. History suggests the impact on inflation will be limited. 

Read time: 2 minutes

On March 18, the U.S. Federal Reserve Bank of Philadelphia reported that its survey of regional manufacturing conditions rose sharply in March, indicating that the recovery in that sector of the economy is picking up steam. The jump implies that restocking of inventories is underway for goods-producing businesses and points towards strength in consumer demand for goods, exports, and business equipment spending.

The level of the index in March was at a near-record high, indicating that improvements are taking place across an unusually broad set of industries. The fact that the level of new orders reported in the survey also jumped suggests some possible forward momentum for the index in coming months.

 

Figure 1. Philadelphia Fed’s Manufacturing Survey for March 2021 Shows Sharp Rise in Activity

Philadelphia Fed manufacturing survey, July 31, 1970–March 18, 2021

Source: U.S. Federal Reserve Bank of Philadelphia. Data compiled March 18, 2021. For illustrative purposes only.

 

An Inflation Pass-Through?

The prices paid component of the report also rose sharply, in line with the acceleration in the prices of a host of industrial commodities and energy products. However, we do not think that this is necessarily inflationary in the way that matters to the U.S. Federal Reserve. Back in the mid-1990s, overall inflation began behaving very differently from past decades, and has remained low and stable ever since. At the same time, commodity prices have continued fluctuating sharply higher and lower, just as they always had.

 

Figure 2. Prices Paid for Manufacturing Inputs Jumped in March 2021

Prices paid component of the Philadelphia Fed manufacturing survey, July 31, 1970–March 18, 2021

Source: U.S. Federal Reserve Bank of Philadelphia. Data compiled March 18, 2021. For illustrative purposes only.

 

Why have rising commodity prices failed to break through into higher inflation for almost three decades? This decoupling could be due to several structural factors. Globalization and technological change may have denied companies the ability to pass through input price increases to end users. The Fed would like to think that its improved monetary policy approach has anchored inflation expectations, and this has resulted in actual inflation fluctuating in a narrow range. This gives rise, in turn, to an unwillingness by companies to raise selling prices for fear of losing customers that are confident prices will come down in the future.

Investment Implications

Whatever the cause, rising commodity process no longer seem to matter for future inflation. But that doesn’t mean investors won’t be disturbed by charts such as Figure 2. Markets likely will struggle to adjust to the implications of the massive shift towards demand stimulus being implemented through fiscal and monetary policy coming into play as the U.S. economy is already moving towards reopening through broader vaccine distribution. That dynamic—an acceleration of economic activity against a backdrop of relatively restrained inflation—should continue to favor credit, in our view, as inoculations increase, and the U.S. economy’s “reopening” continues apace.

 

The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy.

Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

This article may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

Philadelphia Fed Manufacturing Survey: The U.S. Federal Reserve Bank of Philadelphia compiles the Manufacturing Business Outlook Survey, a monthly survey of manufacturers in the Third Federal Reserve District. Participants indicate the direction of change in overall business activity and in the various measures of activity at their plants: employment, working hours, new and unfilled orders, shipments, inventories, delivery times, prices paid, and prices received. The survey has been conducted each month since May 1968.

The information provided herein is not directed at any investor or category of investors and is provided solely as general information about our products and services and to otherwise provide general investment education. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as Lord, Abbett & Co LLC (and its affiliates, “Lord Abbett”) is not undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement investor, contact your financial advisor or other non-Lord Abbett fiduciary about whether any given investment idea, strategy, product, or service described herein may be appropriate for your circumstances.

The opinions in the preceding commentary are as of the date of publication and are subject to change. Additionally, the opinions may not represent the opinions of the firm as a whole. The document is not intended for use as forecast, research, or investment advice concerning any particular investment or the markets in general, and it is not intended to be legal advice or tax advice. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information.

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