ISM Manufacturing Data Stoke Stagflation Concerns

• The BEA’s consumer spending survey unexpectedly contracted.
• ISM’s Manufacturing Index showed employment is slowing while prices rose.
• The combination is stoking Wall Street’s growth fears.

Stagflation anxieties are rising…

Yesterday saw another big test for Wall Street’s economic growth concerns. In Late January, President Donald Trump had announced he would implement 25% tariffs on goods imported from both Mexico and China. The statement came as a surprise to money managers. Trump had suggested the use of a 10% levy while on the campaign trail. But then, after a flurry of last-minute talks, the tariffs were delayed until early March.

Given the earlier delay, Wall Street anticipated a similar outcome to the start of March. Or at the least, a reduced tariff amount. And much like the prior instance, officials from both countries had reached out to the White House in an attempt to remedy the situation. Yet, Trump said he planned to press forward with the 25% tariffs today.

The statement came as a disappointment to investors. Given the on-again/off-again nature of the tariffs, money managers have grown increasingly frustrated. Because, they could be buying stocks in the morning, only to have to sell them in the afternoon. So, yesterday afternoon’s announcement led them to dump stocks once more…

You see fund managers are worried that household nerves are starting to fray. The Conference Board’s consumer confidence index fell sharply in February. For the first time since June of last year, expectations dropped to levels that typically indicate a recession lies ahead. In addition, the U.S. Bureau of Economic Analysis’ consumer spending data for January unexpectedly contracted.

New data from the Institute for Supply Management (“ISM”) confirmed some of those fears. Its Manufacturing Purchasing Manager’s Index showed that prices could be going up just as employment is deteriorating. If we see this trend continue, it could cause more money managers to pull back from putting new money to work, until they get more color from the White House. The change could place more downside pressure on the S&P 500 Index in the near term.

But don’t take my word for it, let’s look at what the data’s telling us…

Each month, ISM surveys purchasing managers across various industries to get a reading on the health of the U.S. manufacturing sector. It sends out questionnaires asking about the levels of activity for items like new orders, production, employment, supplier deliveries, and inventories. It wants to know if the situation has improved, stayed the same, or worsened compared to the month prior. It then combines the numbers into its gauge.

Today, we want to look at the employment and prices paid indexes. Because by looking at those numbers we can get an idea of future economic growth (employment) and the potential direction of inflation (prices).

So, let’s start with the employment data…

The above chart shows us ISM’s employment index result since early 2021. I used that as the starting point since the 2020 numbers were distorted by the COVID shutdowns in 2020. The latest reading is on the far-right side of the chart.

January saw the reading climb back into expansion territory for the first time since May 2024. But this past month’s reading signaled hiring contracted once more. It’s still better than the recent reading we’ve experienced, but it’s a continuation of a steady decline since early 2021. In addition, slowing employment implies less economic potential.

Now, let’s take a look at the prices paid number… ?

Like the employment gauge, we can see the reading was high back in 2021 and early 2022, when interest rates were low, and spending was booming. But then, in early 2022, as the Federal Reserve started to raise interest rates, we can see the prices paid gauge slide. And then, after a brief upturn in early-2024, the index tumbles once more.

That was, until this past month. During February, the reading jumped almost 8 points. In fact, it hit the highest levels since mid-2022, when inflation was a bigger problem. Companies said spot commodity prices are already adjusting for the March tariffs, noting price gains of 20%. In addition, some said customers are pausing new orders due to uncertainty.

Well, for investors worried about the potential for growth fallout, this data isn’t what they want to see. Because, as much as the employment numbers highlight the potential for slowing spending and consumption, the prices paid data point to customers getting charged more for goods. A continuation of these trends would place downward pressure on economic growth.

?Look, it’s still early in the process and one month doesn’t make a trend. But given the consumer sentiment and spending numbers I mentioned previously, the ISM data doesn’t help. So, until Wall Street gets more clarity on what the White House is trying to accomplish the current market environment is unlikely to change. That means the S&P 500 Index may need to test the 200-day moving average at 5,720 before stocks can meaningfully bounce.

Five Stories Moving the Market:

President Donald Trump said the U.S. would go ahead with 25% tariffs on goods from Canada and Mexico effective Tuesday, declaring there was “no room left” for negotiations with America’s neighbors – WSJ. (Why you should care – officials in Canada and Mexico have said they’re unsure of what targets they need to hit)

Australia’s central bank board expressed caution about future policy easing after cutting interest rates for the first time in four years, minutes of its February meeting showed, worrying that rapid moves could jeopardize inflation’s return to the 2.5% midpoint of its target – Bloomberg. (Why you should care – the statement is likely to stoke global growth concerns)

St. Louis Federal Reserve President Alberto Musalem said he expects the U.S. economy to continue to expand this year, but recent weaker-than-expected consumption and housing data and reports from business contacts have raised concerns about possible risks to growth – Reuters. (Why you should care – Musalem, who has been a policy hawk, is sounding like he’s leaning more dovish)

The Federal Deposit Insurance Corp. approved a proposal to rescind a policy that required U.S. bank mergers to face steeper regulatory scrutiny; the proposal will temporarily reinstate the merger policy that was in effect prior to 2024 as FDIC conducts a broader reevaluation of its bank merger review process – Bloomberg. (Why you should care – the rule change is likely to boost investment in small- and mid-cap bank stocks)

U.S. manufacturing was steady in February, but a measure of prices at the factory gate jumped to nearly a three-year high and it took longer for materials to be delivered, suggesting that tariffs on imports could soon undercut production – Reuters. (Why you should care – the data stoked fears that economic growth will slow as prices keep rising)

Economic Calendar:

Earnings - BBY

RBA Meeting Minutes

Japan – Household Confidence for February

BOJ’s Ueda Speaks (9:15 a.m.)

Treasury Auctions $70 Billion in 6-Week Bills (11:30 a.m.)

Treasury Auctions $40 Billion in 12-Day Bills (11:30 a.m.)

Fed’s Williams (New York) Speaks (2:20 p.m.)

U.S. - American Petroleum Institute Crude Oil Inventory Data (4:30 p.m.)