Last summer, while most were still shell-shocked by the president's imposition of steep tariffs, still recovering from the market's enormous swings, and still worried about the weak labor market, Nancy Lazar over at Piper Sandler insisted that people were missing the real story.
"This has been and will continue to be a cycle lead by capital spending," she wrote in August. And not just from AI names. The coming capex boom, she predicted, would be fueled by "the lagged impact of Fed easing, less policy uncertainty, and a capex surge from OBBA's instant expensing." (OBBA being the budget bill passed last year.)
Well, fast-forward to yesterday, and her prediction is looking better and better. The Institute for Supply Management said its manufacturing gauge surged four points to a reading of 52 for February. That's the first time it's been in expansion (over 50) in a year. It's the highest absolute reading in almost four years.
The ISM is one of the most reliable and longest-running economic indicators. Its release instantly caused a U-turn higher in markets, with the Dow ending up 1% and the transport stocks hitting a new all-time high.
The ISM itself warned that the results might be overly rosy. The big jump in new orders, typically an excellent sign for the future, could be companies stockpiling products ahead of rising tariffs, they warned. Survey participants were also much less optimistic in their commentary than the headline number indicated.
But Lazar and her colleague, Chris Menzenski, said this was hardly an isolated report. In fact, on Friday morning, as markets were supposedly reacting to the president naming Kevin Warsh as the next Fed chair nominee, we had also gotten a super strong Chicago PMI regional report--including a huge spike in both new orders and employment, similar to the ISM yesterday.
"S&P's manufacturing gauge, and a composite of regional gauges, both sit above 50," Lazar wrote yesterday. "Fastenal's sales and heavy truck orders also signal improvements in the industrial sector." The ISM has been unusually weak, in other words, until now. Fastenal's shares jumped 3% yesterday, while the XLI industrials ETF closed at a new all-time high.
The hope is that this will ultimately lead to more hiring. No doubt employment has been the weakest part of the economy in recent months. And now we're told the government won't even be releasing the January jobs report on Friday because of the partial government shutdown.
However middling the report might eventually prove to be, it will likely remain a "side story" for a little longer still while the capex boom plays out. "We think we are starting to see the beginning of a greater wave of capex investment that will drive greater activity and investment throughout 2026," said Jeffries economist Thomas Simons, who has also been pounding the table on this theme for months.
"Sentiment appears to be trailing the improvement in actual levels of orders and production," he added. Indeed, sour sentiment has been a defining hallmark of this economic expansion so far.
See you at 1 p.m!
Kelly