ISM Reports for December Confirm Inflation The January 6th report from the ISM (Institute of Supply Management) on the state of the U.S. service economy in December indicated neither growth, nor decline. The tepid 50.1 reading was in contrast to the 55.9 number for December manufacturing that was released two days earlier. It would have been much better news for the economy if the numbers had been reversed since the service sector of the U.S. economy is four times bigger than the manufacturing sector. Neither report is adjusted for inflation. Both have a 'Prices' component that figure in the overall numbers, so inflation can make the top line number look better. The Prices component was indeed one of the highest numbers in both reports. The dividing line for contraction versus expansion for the ISM is 50. Numbers in the 60's are very strong. The Prices component in the Manufacturing report for December came in at 61.5, up 6.5 over November. It was the third highest number. Prices in the Non-Manufacturing (services) report were up 0.9 to 58.7. This was the second highest component, exceeded only by Inventory Sentiment. December was by no means the first time the inflation numbers were high. Inflation was already evident in the reports for August 2009. In that month, the Prices component was 65.0 and 63.1 for Manufacturing and Non-Manufacturing respectively. The Non-Manufacturing number was up a whopping 21.8 from July. Prices in the Manufacturing report were up 10.0, having already been above the 50 level the month before. Gold began a major rally on this news that first took it to $1000 and then well beyond that level. The revival in manufacturing is not just taking place in the U.S. but is occurring globally. Reports out of the UK indicate manufacturing activity there is at a 25-month high. Manufacturing in the Eurozone is at a 21-month high. China recently announced that its manufacturing sector expanded at the fastest rate in 20 months. Government stimulus programs and close to zero interest rates are having their impact and it is showing up in production statistics. This is better news for manufacturing-based economies, than it is for service-based economies like the United States. Expansionary fiscal and monetary policies are good for economic growth in the short term. This growth is not necessarily sustainable however and there is eventually a price that has to be paid with inflation. Where is the inflation coming from? While it is likely to show up in price increases across the board in the long run, in the short run it is appearing in raw materials. The December ISM Non-Manufacturing report had an important statement confirming this. Toward the bottom of the report, the following statement can be found: "No commodities were reported down in price". Government stimulus seems to be doing a good job of stimulating prices. Daryl Montgomery Organizer,New York Investing Meetup http://investing.meetup.com/21