One thing that moved markets

… is the expansion of two pillars of U.S. industry – manufacturing and services – for the first time in 17 months, with notable improvements in new orders and production.¹

The Institute for Supply Management’s (ISM) manufacturing index rose to 50.3%, with anything above 50 representing an expansion in business activity. Four of the six largest manufacturing industries – which account for more than half of manufacturing GDP – grew in March.

Each month, the ISM reports compare current conditions to the previous month by measuring the difference between positive and negative responses to certain business activities – think: orders, production, employment, and prices.

Manufacturing executives reported a positive shift in demand, output, and input conditions. And despite ongoing supply chain issues and higher raw materials costs, manufacturers are optimistic about future demand and business conditions.

Meanwhile, the services sector expanded for the 15th consecutive month in March. The index came in at 51.4%, indicating continued growth but at a slower pace compared to February.² The services sector has been mostly growing over the past 46 months, showing resilience except for a brief contraction in December 2022.

March also carried a slight increase in business activity and a decrease in new orders growth. Employment saw a contraction, highlighting recent challenges in filling positions and managing labor costs.

Context for the greater goods

Generally speaking, the expansion of manufacturing and services is a good sign: When industries and the operations within them are growing, it’s a net positive for production, jobs, and the broader economy.

However, expansion and the increased demand that follows also have implications for prices, which are already being reflected in the cost of raw materials. This could be a major headwind for goods inflation.

Why it matters

The economic expansion is a good sign, but may have implications on the Federal Reserve’s decisions around  interest rates. While investors have been calling for a soft landing – meaning inflation cools and the economy doesn’t fall into recession – these indicators point to continued growth and inflation above trend.

A strong economy and labor market make it more challenging to fully squash inflation. The expansion could bring back the Federal Reserve’s “higher-for-longer” approach to interest rates.

The good news? A stronger economy can handle higher rates. The bad news is that consumers and businesses hoping for relief in borrowing costs might have to wait longer for that first cut.

And a few top headlines

1. More than half of Gen Z and Millennials say they overspend on streaming services each month, according to a new survey.³
   • With a slew of streaming options, younger consumers (Gen Z and Millennials) are shelling out $57 monthly on streaming services, whereas older generations (Gen X, Boomers, and the Silent Generation) spend $45 each month. Rising subscription costs may give way to new habits: 71% of Gen Z and Millennials say they’ve canceled memberships that require a premium to gain more access.
2. What’s in your shopping cart? The Wall Street Journal analyzed average prices across the past five years to determine what $100 would afford.⁴
   • Using a selection of commonly purchased items, a grocery list from 2019 would cost 36.5% more today. Some goods, like eggs and sports drinks, popped over 40%.
3. In a continued direct-to-consumer retail shift, blue-jeans buyers are picking up their new Levi’s online or in the retailer’s own shops instead of at department stores.
   • Levi’s said its direct-to-consumer sales made up a record 48% of overall sales in a three-month period ending in February, an increase of 42% year-over-year and 25% higher on a two-year basis.⁵

What to be on the lookout for next week

The Consumer Price Index (CPI) for March will be released on Wednesday.

Inflation has been near-constant news in recent years, and plays a critical role in the Federal Reserve’s policy path. Despite progress since the Fed started raising interest rates, several recent reports have highlighted less-than-ideal figures, causing many to question the three projected interest rate cuts for 2024.

The most recent Personal Consumption Expenditures data shows core inflation falling to 2.8% annually, its lowest level since September of 2022. However, it also indicates prices increasing at 3.5% on a 3-month annualized basis. In other words, there are data points for both the inflation bulls and bears, leaving the overall picture a bit up in the air.⁶

This next report may help clear things up, giving markets and the economy a better idea of where inflation is headed.