NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: February Supply Managers’ Manufacturing Index
KEY DATA: ISM (Manufacturing): 61.4 (up 0.6 point)
IN A NUTSHELL: “”Manufacturing continues to soar and that is the best indication that the economy was improving before the oil price spike.”
WHAT IT MEANS: There is still a lot of uncertainty about the state of the economy and that has gotten worse now that oil is hovering around the $100 per barrel level. But at least we can say that conditions were pretty decent before the chaos in North Africa led to the sharp increase in energy. The manufacturing sector continues to expand at a robust pace, according to the National Institute for Supply Management. The February survey of purchasing managers rose a little in February. While the improvement was small, it is the level that is awesome. You have to go back to 1983 when the economy was bouncing back sharply from the back-to-back recessions to see an overall activity index this high. New orders, including exports and imports, are not only strong but they are growing faster. Production is accelerating and backlogs are building as well. As a consequence, firms are hiring new workers to meet the expanding demand. Indeed, the employment index is one of the highest in the sixty three years this index has been compile. On the other hand, cost pressures are building and while a whole variety of commodities were up, there were none that were reported to be down.
MARKETS AND FED POLICY IMPLICATIONS: This is a strong report that under most circumstances would make everyone smile. But the skyrocketing cost of energy is overhanging the economy. Mr. Bernanke chimed in on that issue today indicating he was not that worried about the higher costs unless they were sustained. That makes sense since he is looking well down the road. But in the short run, there is likely to be some easing in consumption but not enough to kill the recovery, only restrain it. The health of the manufacturing sector supports the view that without a long period of very high energy prices, we should get through this crisis. For now, though, it is likely that the first half of this year will be another period of modest recovery. Hopefully, things shake out over the next few months and we can pick up where we left off, that is, with an economy that is poised to change gears.
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