May 4, 2021 - Economy

Strong U.S. business sentiment hit a snag in April

Data: Investing.com; Chart: Dion Rabouin/Axios Visuals

While the overall ISM manufacturing index fell in April after a big jump in March and missed expectations, the prices paid index increased again, touching a fresh 13-year high.

What it means: Prices continue to rise for businesses as supply chain disruptions have been unrelenting and commodities prices march steadily upward. But the positive sentiment for businesses that has accompanied those price hikes could be fading.

By the numbers: The headline ISM manufacturing reading was 60.7, a disappointment compared to expectations of 65.0 by economists, which would have been a continuation from March's strong 64.7 reading.

  • The prices paid index rang in at 89.6, suggesting the overwhelming majority of businesses surveyed are seeing price hikes.
  • New orders unexpectedly slipped to 64.3 versus the expected 69.5 and a reading of 68.0 in the prior month.
  • The index's backlog of orders reading was the highest on record at 68.2.
  • Employment declined to 55.1 from 59.6 in March.

What they're saying: "Combined with slower supplier delivery times and manufacturer inventory drawdown in April, these indicators suggest supply chain issues are contributing to a pullback in activity for large manufacturers," Lewis Alexander, U.S. chief economist at Nomura, says in a note to clients.

Watch this space: "Overall, the takeaway was one of being underwhelmed by the data — although it is important to keep in mind the >50 readings across the board are constructive," Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, says in a note.

  • Lyngen also notes that construction spending for March came in meaningfully below expectations at 0.2% month over month.
  • Construction spending was expected to rise by 1.6% month over month as housing prices have soared and after an unexpected -0.6% print in February that was largely blamed on the weather.

But, but, but: Alexander cautions that the report "is likely a reminder that supply constraints matter for how quickly the economy can rebound post-COVID, but are not necessarily a cause for concern with respect to the overall direction of economic activity."

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