The November 2025 ISM® Manufacturing PMI® Report delivered a Manufacturing PMI® of 48.2%. This level below 50 signifies contraction in manufacturing. The Manufacturing PMI® is in its 9th straight month in contraction and 35th month of contraction in the past 37 months. January and February of this year were the only two months of growth over this timespan. Fortunately, manufacturing is not weak enough to drag the entire economy into contraction. According to ISM, a Manufacturing PMI® above 42.3% “over a period of time” is consistent with an expanding economy. In fact, “the past relationship between the Manufacturing PMI^® and the overall economy indicates that the November reading corresponds to a 1.7% increase in real gross domestic product (GDP) on an annualized basis”.

Unfortunately, the ongoing contraction in manufacturing has not cooled off inflationary pressures. Currently, higher steel and aluminum prices have cascaded through the manufacturing value chain. Tariffs on imported goods have created additional cost burdens. The ISM^® Prices Index increased month-over-month from 58.0% to 58.5%. The Prices Index is also up 6 percentage points year-over-year and has increased for 14 straight months. 

Perhaps tellingly, Computer & Electronic Products was one of four industries that grew in November. I assume the rush to implement AI across enterprises and government is providing this push. For example, Dell Technologies (DELL) reported exceptionally strong demand for AI servers. From the transcript of the recent Q3 2026 earnings call: “AI server demand remained exceptionally strong. We booked $12.3 billion in orders in the quarter, bringing year-to-date orders to $30 billion, both record figures. The large-scale customer base continues to broaden with expansion across neo-cloud or Tier 2 CSPs and sovereigns”.

With manufacturing locked in contraction and services still carrying economic growth, the divide between these two sides of the economy has become central to understanding today’s stagflationary pressures. Input costs continue to rise even as new technologies reshape demand patterns. The expanding adoption of AI could influence productivity and cost structures in unexpected ways. How these pressures resolve in 2026 will be essential to tracking whether stagflation persists, begins to unwind, or takes on a new form altogether.

Full disclosure: long DELL

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In last week’s Q4 earnings conference call, Lennar described an important chain of events that are underway. The company has been proactive in getting ahead of slowing demand and rising rates by purposely reducing margins to accommodate price reductions and incentives on a community-by-community basis. (The following housing markets are Lennar’s most problematic: Orlando, Pensacola, Northern Alabama, Austin, Phoenix, Utah, Reno, and Portland). In turn, Lennar is using its size and market dominance to force concessions from its supply chain. For example:

“We have very strong relationships with our trade partners. We have demonstrated to them that we have taken the first step by lowering sales prices to drive sales, and they understand this and understand the dynamic of labor availability as overall starts slow and they’re working closely with us to lower their prices…As with our trade partners, our land partners or sellers understand that we are maintaining volume and increasing market share while taking the first hit to our margin. They will need to work together and participate or we’ll need to move on.”

Lennar was even more direct in describing its advantage when inferring that the supply chain needs the work that Lennar can provide by keeping sales volumes flowing:

“…you really can’t underestimate the leverage that we get in working with our trade partners as things slow down across the board. People are looking for work. If we’re going to be the ones out there to do — starting homes, we’re going to get cost concessions, bringing cost concessions from our trade partners, from our land partners, and we’re just going to continue”

The industry-wide slowdown in housing starts has “sped up the availability of labor and materials for Lennar.” As a result, the company can use its dominant market position to extract lower costs out of the supply chain. Scarcity in the supply chain is easing and inflationary pressures are easing. Smaller builders are likely suffering the most from this change in dynamics.

Interestingly, LEN jumped 3.8% to a 10-month closing high in response to what was a surprisingly bullish earnings report considering the market environment. This buying was particularly impressive given the post-Fed sell-off underway in the stock market. It looked like another win for the seasonally strong period for home builder stocks. However, since then, gravity has slowly exacted its toll as interest rates have started to climb again. That post-earnings celebration is completely reversed now. The chart below marks earnings with a dashed vertical line labelled “E” in the bottom axis.

Epilogue

An irony awaits the economy on the other side of this housing reality check. With builders slowing down starts in parallel with housing demand postponed by punishing mortgage rates, an economic recovery will deliver a rush that will expose new market dysfunctions. Home prices could quickly turn around as eager buyers once again scramble for limited inventory. The major builders will continue to move slowly in adding supply to the market. The intense rationalization of the housing market will keep “normalization” out of reach in the most attractive housing markets.

In the meantime, waning inflationary pressures should at least benefit more participants than runaway inflation.

Be careful out there!

Full disclosure: no position

The post Lennar Corporation: How the Fed Is Cooling Inflation In the Housing Market appeared first on Inflation Watch.

There are all sorts of names now for today’s inflation. I still like the concept of “Persistently Elevated, Unactionable Inflation.” In its earnings report this morning, Goldman Sachs (GS) highlighted the prospect for “entrenched inflation.” Again, inflation peaking hardly matters if prices continue to increase at a high rate. In an environment where the Fed is scrambling to normalize monetary policy, entrenched inflation is analogous to unactionable inflation. From Goldman’s Q2 2022 earnings conference call (from the Seeking Alpha transcript):

“We see inflation deeply entrenched in the economy. And what’s unusual about this particular period is that both demand and supply are being affected by exogenous events, namely the pandemic and the war in Ukraine. And my dialogue with CEOs operating big global businesses, they tell me that they continue to see persistent inflation in their supply chains.”

Maybe

However, in a classic “on the other hand” moment, Goldman also noted that its economist predicts that “….inflation will move lower in the second half of the year.” So which is it? Goldman gave almost no clue from its plans or actions what it really believes about inflation. One potential exception comes from its plan to “reduce certain professional fees going forward.” Goldman referred to this fee cut in the context of improving operating efficiency.

Goldman Definitely Puts Employees On Notice

Operating efficiency is a great euphemism for tightening spending and constraining labor expenses. I took particular note that Goldman may reinstate its annual performance review. The company suspended this review during the pandemic. That gracious move likely took a lot of stress off an already pandemic-stressed workforce. Now, these looming performance reviews will motivate incrementally more productivity and provide a basis for trimming the workforce after year-end in parallel with a slowed “velocity” in hiring.

Conditions Could Improve

Despite an abiding caution, Goldman was quick to point out that conditions could improve.

“We’re being flexible and being prepared to be nimble in case the environment gets worse. By the way, we don’t know that the environment is going to get worse. The environment might get better, too.”

In the context of an inflationary economy, presumably “get better” aligns with the Goldman economist’s prediction of lower inflation pressures in the back half of the year. However, recession/stagflation is a potential side effect of the Fed’s apparent growing success in clamping down on inflation expectations. In other words, to get better, a rebound from recessionary pressures better move VERY fast.

Goldman Sachs Group, Inc (GS) gained 2.5% post-earnings but remains caught in a well-defined downtrend this year. Both the 20-day moving average (DMA) and the 50DMA have guided GS downward. (Source: TradingView.com)

Be careful out there!

Full disclosure: no positions

The post Goldman Sees Entrenched Inflation…Maybe appeared first on Inflation Watch.

““As we look ahead, we currently do not anticipate any relief from inflationary cost pressures in the third quarter. We expect aggregate global economic growth to remain positive with end-use market activity comparable to the second quarter, adjusted for traditionally lower seasonal demand. However, uncertainties exist regarding global trade policies, which may create uneven demand by region and in certain industries. Specific to PPG, we expect that the previously announced architectural customer assortment change will lower our third quarter year-over-year sales volume growth rate by between 120 and 150 basis points. We remain confident that our leading-edge technologies and products, which are bringing value to our customers, will facilitate our growth going forward….

Currently the new tariffs are starting to add some modest cost to our raw materials. Based on the strength in the US dollar in the second quarter, we expect foreign currency exchange rates to have an unfavorable impact to our sales in the third quarter”

This was the essence of the guidance industrial paint company PPG Industries (PPG) provided in its 2nd quarter earnings report. I added the emphases because the warnings on inflation and international demand were clear precursors to the company’s pre-earnings warning tonight. The stock traded down about 10% in after market trading in response to significant cuts in revenue and earnings guidance. I was most interested in the explanation which made the second quarter’s caution come to life (emphases mine)…

““In the third quarter, we continued to experience significant raw material and elevating logistics cost inflation, including the effects from higher epoxy resin and increasing oil prices…These inflationary impacts increased during the quarter and, as a result, we experienced the highest level of cost inflation since the cycle began two years ago.

“Also, during the quarter, we saw overall demand in China soften, and we experienced weaker automotive refinish sales as several of our U.S. and European customers are carrying high inventory levels due to lower end-use market demand…Finally, the impact from weakening foreign currencies, primarily in emerging regions, has resulted in a year-over-year decrease in income of about $15 million. This lower demand, coupled with the currency effects, was impactful to our year-over-year earnings and is expected to continue for the balance of the year.”

Instead of moderating, inflationary pressures are mounting on PPG. The weakness in China is telling in the context of the trade war with the U.S. The lower “end-use market demand” points to the trickle-down impact of “peak auto.” These warnings are each important given PPG has a market cap of $26.5B and trailing 12-month revenue of $15.4B. I fully expect other industrial companies to deliver similar news this earnings season.

Interestingly, Credit Suisse downgraded the stock in late September and the market responded by taking PPG down 2.8% on relatively high trading volume. The gap down confirmed the end of PPG’s post-earnings run and breakout above 200-day moving average (DMA) resistance. Until the downgrade the stock finally looked ready to challenge its 2018 high.

Source: FreeStockCharts.comThe market is supposed to be a forward-looking mechanism, so it is natural to wonder why PPG was rallying so well in the first place. I do not put all the blame on investors. I assume the company itself was partially responsible through its sizable share repurchase program. For the first half of 2018, PPG spent $1.1B on its own shares: 4.1% of the company’s current market capitalization. With this kind of aggressiveness, PPG should quickly move in on the new 52-week low to add to take out even more shares.

As earnings season unfolds, I will be paying close attention to company commentary on trade woes and inflation. The stock market has spent most of the past several months ignoring risks, so there are a good group of over-priced stocks out there waiting their turn for a douse of realty. Collectively, these warnings could be the catalyst that delivers the oversold market conditions I am anticipating.

Full disclosure: no positions

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From the earnings report:

“Our inability to increase prices in the face of higher raw sugar costs because of competitive pressures from domestic and Mexican sources was the principal driver of the quarter’s disappointing results,” commented John Sheptor, president and CEO of Imperial Sugar. “Raw sugar purchased during the quarter was priced largely against the March and May futures contracts, which peaked near $40 per hundredweight prior to the USDA import quota announcement in early April. The subsequent decline in the raw sugar futures market which occurred after the quota announcement was only temporary and the raw market has rallied back to near the same level. Our raw sugar costs in the fourth fiscal quarter should see little relief, while sales prices thus far in the fourth quarter have only improved modestly.”

Higher manufacturing costs also hurt operating results in the previous quarter.

Note that last week, the International Sugar Organization (ISO) confirmed that no relief is in sight from higher sugar prices.

The post Imperial Sugar squeezed by poor demand and high sugar prices appeared first on Inflation Watch.

“While we delivered record second quarter sales and non-GAAP adjusted EBITDA, our results were impacted by rapidly rising diamond and metal prices amid a weakening consumer environment in the U.S. Despite these external headwinds, we achieved sales growth across all product categories, including double-digit sales growth in the non-engagement category.”

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“We do, however, expect a positive margin impact of a more stable pricing environment to be offset by the following factors: the costs of many upstream materials, especially rare earth elements, which have increased significantly. These costs are expected to adversely impact gross margins by at least 200 basis points…”

Seagate has been unable to offset these costs, but over the long-term believes there are no supply problems:

“In regards to the increasing cost of upstream materials, Seagate has historically been able to absorb these cost increases and insulate our customers. However, the recent dramatic increase in the cost of rare earth elements, combined with a pre-existing upward trend for a broad base of other commodities, far exceeds our ability to find offsetting cost reductions. While we are exploring opportunities to reduce the content of certain rare earth elements that are used in the manufacture of hard disk drive components, we will be discussing with our customers, passing through what we hope are temporary surcharges related to upstream earth-based commodities. It’s important to note that for the relevant rare earth materials, there does not appear to be a significant supply constraint. And while we have a short-term concern over margin impact, we do not currently have a long-term concern.”

During the Q&A session, Seagate management explained that rare earths are about 2% of the cost of a hard drive due to usage of rare earths in the the VCM magnet and the motor. Management also indicated there remains high uncertainty as to whether the company can pass on the higher costs of rare earths to customers although Seagate does not need to wait for demand of its drives to surpass supply in order to raise these prices.

Seagate appears very optimistic that no real supply issue exists with rare earths. Management is particularly optimistic that U.S. mines alone (presumable Molycorp?) will solve the problem and bring prices down. They even went so far as to call current prices a “bubble”:

“…it doesn’t appear that there’s a true supply constraint here. There’s a lot of dynamics around owners of rare earth materials and processors of rare earth materials and who is controlling inventories at what level, as opposed to there’s fundamentally some shortage. If there was fundamentally a shortage, then I would think that the fact that price is supposedly representing supply and demand. If you effectively reduce supply or enormously increase demand, that would mean that there’s a sustained increase in price. I think this feels a little bit like a bubble…So I think our point is that right now, since it doesn’t feel like there’s a fundamental supply issue, that it probably works itself out. And by the way, if these prices stay high, guess what, there’s a bunch of U.S.-based mines that are going to come online again, and it will solve itself. It’s not like the stuff doesn’t exist. It’s just that a lot of mines were closed down when the prices fell below $75, whatever the magic price is, and we’re well above that right now. So I don’t think it’s a long-term issue.”

Management compared the price run in rare earths to a run they experienced with ruthenium in 2006 that lasted for 2006. I do not know about the dynamics of that market. I will need to research more closely what happened in 2006 to understand the specific similarities to today’s rare earth market. Stay tuned…

Disclosure: Author is net long Molycorp (MCP)

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“We expect to generate strong sales growth at Wendy’s for the remainder of the year driven by exciting new product introductions, including hamburgers, chicken and salads, in addition to strategic price increases…Margins will be negatively impacted by increases in commodity costs primarily driven by unprecedented beef prices that are affecting the restaurant industry. We have reaffirmed our same-store sales outlook and expect to offset some of these commodity increases with prudent price increases, while protecting transactions and market share…”

WEN expects improved sales trends through the rest of the year, and this must help give them the confidence to raise prices.

The company’s confidence really shines through as management discusses future prospects further in light of higher commodity costs:

“Although we have revised our outlook for the year to reflect higher expected commodity costs, we continue to make significant strategic progress improving our core menu offerings including breakfast. We are also pleased with our progress developing Wendy’s international business, which represents a significant opportunity. The Arby’s turnaround is progressing nicely and we plan to resume our stock buyback program after the conclusion of the strategic alternatives process, subject to market conditions. As we’ve said before, 2011 is a transition year and we are confident that the investments we are making will position Wendy’s for 10% to 15% average annual EBITDA growth in 2012 and beyond…”

Disclosure: author owns WEN

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“…First, we have stepped up our agenda to reduce costs and improve profitability. Second, because input cost volatility is here to stay, we are focused on pricing to offset inflation through efficient pricing mechanisms. We are working hard to maintain, and where necessary, improve our pricing tools…”

I liked how the earnings announcement avoided direct mention of raising the prices of non-milk products.

The market liked the announcement too. The stock soared 11.5% on the day.

The post Dean Foods focuses on “efficient pricing mechanisms” to battle rising input costs appeared first on Inflation Watch.

“Reaffirms full-year total net revenue growth in the 8% to 10% range. Lowers full-year diluted earnings per share guidance by $0.10 to the $1.43 to $1.50 range, driven entirely by the significant rise in coffee costs during the last three months“

Interestingly enough, PEET implied that the run-up in coffee prices is overdone. This news should provide some reassurance and relief to coffee fans, especially since it seems PEET is resisting the urge to ramp up its own prices to keep up with the rising input costs (emphasis mine):

“While we expect to offset most of the year-over-year coffee cost increase we’re experiencing, we will continue to act in the long-term best interests of our business and not overreact to the recent run-up in world coffee prices.”

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