December 2014 ISM Reports

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The Institute for Supply Management’s (ISM) monthly opinion survey showed that growth of economic activity in the U.S. manufacturing sector slowed markedly in December, missing expectations (consensus was 57.5%) by the most since January. The PMI tumbled from November’s 58.7% to 55.5% in December -- its lowest since June (50% is the breakpoint between contraction and expansion). ISM’s manufacturing survey represents under 10% of U.S. employment and about 20% of the overall economy. All sub-indices except employment and slow supplier deliveries (implying suppliers may be having difficulty keeping up with orders) were lower in December.

“Comments from the panel are mixed,” said Bradley Holcomb, chair of ISM’s Manufacturing Business Survey Committee, “with some indicating that falling oil prices have an upside while others indicate a downside. Other comments mention the negative impact on imported materials shipment due to the West Coast dock slowdown.” 

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Wood Products contracted in December, as virtually all reported changes in the sub-indices pointed to slower activity. Paper Products’ expansion, by contrast, was tarnished only slightly by falling export orders. 

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment – also slowed in December. The NMI registered 56.2%, 3.1 percentage points below November’s 59.3%. It was the biggest miss to expectations (consensus was 58.0%) since September 2013, and the lowest value since June. The sub-indices were lower “across the board” in December. Anthony Nieves, chair of ISM’s Non-Manufacturing Business Survey Committee, was upbeat nonetheless. “Comments from respondents are mostly positive about business conditions and the overall economy for year-end.” 

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Two of the three service industries we track (Construction and Ag & Forestry) reported expansion in December, although supporting evidence was fairly thin. Apparently the increase in backlogged orders was not enough to move Real Estate’s overall activity “meter.”

Natural gas was the only relevant commodity up in price. Lumber, cardboard and fuel (both gasoline and diesel) were down in price. No relevant commodities were in short supply.

For once, ISM’s and Markit’s surveys were in agreement. ISM’s PMI and Markit’s U.S. Manufacturing PMI paralleled each other in December (i.e., both showed slower expansion); so, too, did ISM’s NMI and Markit’s U.S. Services PMI.

“[Manufacturers] are citing greater uncertainty about the outlook, especially in export markets,” said Chris Williamson, Markit’s chief economist, “leading to some scaling back of expansion plans and a greater reluctance for customers to place orders compared to earlier in the year, which suggests a slowdown could become more entrenched unless demand revives.” Capping off 4Q2014, Williamson said, “[Markit’s] PMI surveys act as good leading indicators of GDP data, and suggest that the pace of U.S. economic growth will have slowed in the fourth quarter. According to the PMIs, fourth quarter growth is looking more like 2.0% rather than the 5.0% annualized rate of expansion enjoyed in the third quarter.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.