The Institute for Supply Management's prices gauge jumped 6.8 points to 77.9, one day after core PCE inflation rose just 0.2% for August. The overall manufacturing index eased to 54.5, short of forecasts, while new orders and backlogs improved.
The top line of Thursday's factory survey said manufacturing was steady. The prices line said something else.
The Institute for Supply Management's manufacturing index fell to 54.5 in September from 54.6 in August, a ninth straight month above the 50 mark that separates expansion from contraction. Economists had expected 54.9.
Inside the report, the prices index rose to 77.9 from 71.1. Of the purchasing managers surveyed, 58.6% said they paid more for materials, 38.6% said prices were unchanged and 2.8% said they paid less. At the industry level the split was cleaner still: 16 industries reported paying higher prices, and not one reported paying less.
The rest of the survey
Demand indicators mostly firmed. New orders rose to 55.3 from 53.7, and order backlogs climbed 4.6 points to 56.4. Employment improved to 52.7 from 51.2. Production was the soft spot, easing to 56.7 from 58.3. New export orders were 50.9 and imports 51.0. Customers' inventories sat at 41.6, a level that indicates buyers consider their own stocks too thin.
A separate survey pointed the other way on activity. S&P Global's final U.S. manufacturing PMI came in at 55.9, below its flash reading of 57.0.
What respondents said
Six in 10 comments from purchasing managers were negative. Among those, 46% cited pricing volatility, 34% tariffs, 30% the Iran war and 21% longer lead times. One respondent in transportation equipment pointed to the trade fight with Canada. A machinery maker described a narrow boom: "Orders have doubled yet again" from semiconductor, electronics and government customers, the respondent said, "with remaining sectors flat to down." Another respondent described "temporary market effects," including customers bringing purchases forward ahead of raw-material price increases.
Economists at First Trust named three drivers of the price jump: higher steel and aluminum costs, tariffs, and petroleum-based products made more expensive by the Middle East conflict.
Against Wednesday's data
The timing sharpens the contrast. On Wednesday, the government reported that core personal consumption expenditures prices rose 0.2% in August and 3.0% from a year earlier. A day later, the most current read on goods costs in the supply chain moved 6.8 points in the opposite direction, while the headline it sits under moved a tenth of a point.
Longer-dated Treasury yields rose after the 10 a.m. release, with the 10-year touching about 5.34%, and the S&P 500 slid to a two-week low before both reversed in the afternoon. Oil prices and selling in European bonds were moving markets in the same hours.
Federal Reserve Vice Chair Philip Jefferson, speaking in the afternoon, said, "I see upside risks to inflation."
Two readings
One reading is that price pressure in the goods pipeline is building again. Every industry in the survey is paying more, the named drivers are persistent ones such as tariffs, metals and energy, and rising backlogs give suppliers room to pass costs on.
A second reading is that the survey overstates how durable the pressure is. Respondents themselves describe pulled-forward buying, the headline index slipped, the S&P Global measure was revised down from its flash, and the demand strength described in comments is concentrated in chips, electronics and government work.
The next test
September's producer and consumer price reports, due later this month, will show whether a prices index near 78 is reaching what companies actually charge. Friday's employment report will show whether the 52.7 employment reading is matched in factory payrolls.