US: ISM manufacturing index continues to fall in January


The ISM manufacturing index fell from 58.7 to 57.6 in January. Manufacturing sector activity remains strong, with some loss of momentum. In particular, the fact that the supply problems, which also affect the price components, are not fully resolved despite the partial relief have an impact on this. On the other hand, oil prices, which fell in December, rose again in January, which has the potential to renew inflationary pressures. In this conjuncture, we can see the effect of the production band’s exposure to price pressures, especially due to the energy costs caused by commodity prices. On the other hand, the fact that the effects of the Omicron variant are very limited is positive in terms of operational strength.


If we look at the sub-items; Current activity weakened after the decrease to 57.8 in the production component, while the decrease in new orders to 57.9 points also indicates a slight decline in demand. Price pressures await, affected by the recent rises in crude oil prices. As a matter of fact, there is a serious rise in the price component towards 76.1. In an environment where partial improvement is observed in the supply chain, it is important in terms of renewing price effects and complicating inflation. However, the following should also be taken into account; The improvement in the supply chain does not remove the partial and high inflationary pressure under these conditions. There are also significant capacity, logistical and workforce challenges beyond the pandemic. There is a slowdown in stock growth to 53.2. The slowdown effect in stocks shows that production cannot accelerate enough in the face of tight demand, so it may have a slowing effect on GDP growth over production. However, it is necessary to look at whether the effect is periodic or not. A numerical slowdown similar to the Chinese PMI, but there are also extra factors there that add to the overall economic slowdown pressure.


In employment trends, positivity continues to support the argument for a tight labor market if this week’s January non-farm payrolls is also confirmed. The employment index increased to 54.5. US firms continued to recruit at a solid clip in January. However, due to labor shortages, personnel costs are rising. On Friday, we can see similar details in non-farm payrolls on the wage axis. The tight labor market and high wage inflation give the Fed strong enough reasons to tighten.


If we move from the employment component to the JOLTS data; The number of vacancies was little changed at 10.9 million in December. Hiring and total layoffs fell to 6.3 million and 5.9 million, respectively. The resignation rate changed little at 2.9%. Layoffs, on the other hand, changed little, at 0.8%. The fact that the resignation rate is higher than the turnovers actually shows the changing dynamics of the labor market. With labor shortages, workers expect higher wages, and inflation fuels the fire here. Especially those who set up their own initiatives during the pandemic, retire or are considering returning to their original desk job after the pandemic returns, also have an impact on their own rotation within the labor market. I am quoting from our article “Macro Perspective – The Labor Market Impact of Initiative-Driven Job Changes” dated January 16: “Companies will either slow down in finding employees in the current situation, or they will raise the wage scale if they want to speed up. At the very least, they need to reach a level that creates real wage increases. Just because payroll jobs aren’t growing fast enough doesn’t mean people aren’t working.”


We will consider the phenomenon of tightness and inflation in the labor market together. The fact that employment is accelerating enough to create inflation will ensure that the Fed does not take a step back before tightening. The phenomenon we are watching now is how aggressive will this tightening be? All kinds of inflationary data increase the expectations of aggressiveness. In the less aggressive data, we see partial relief, especially in bata bond yields. Until the first rate hike on March 16, the approach will be based on these parameters.

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