Yesterday’s slam dunk for the ISM manufacturing index (It came in at 56.9 vs, 54 expected) was good news for the economy, but it has a downside as well.
Stronger than expected U.S. economic activity could mean inflation is set to pop higher.
Deutsche Bank’s Joseph LaVorgna:
We continue to be of the view that the core inflation trend is near an inflection point, as the latest reading represents the lowest level of core inflation since September of 2001. Typically, inflation lags output by six to eight quarters, hence the lack of pricing power we are seeing at present reflects economic conditions at the depths of the recession, when real GDP was contracting at -6.8% and -4.9% in Q4-08 and Q1-09, respectively. The inflation inflection should become increasingly apparent as the labour market and consumption data solidify more explicitly through year end. Manufacturing remains robust as the ISM Index corroborated the strength of the regional production surveys. New export orders (60.5 vs. 54.5), showed particular strength and we are forecasting the export sector to add nearly half of one percentage point to growth in the current quarter.
He’s expecting a robust GDP print this quarter of 2.6%, which would certainly be yet another black eye for double-dip recession table-pounders David Rosenberg and Nouriel Roubini. Yet Mr. LaVorgna also forecasts a rebound in core inflation as well, to 1.1%, given that core inflation came in at just 0% during September.
(Via Deutsche Bank, Don’t forget about the data, Joseph LaVorgna, 1 November 2010)