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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 again in January. The PMI
retreated from December’s 55.1% (originally 55.5%) to 53.5% in January -- its lowest reading since March
2014
(50%
is the breakpoint between contraction and expansion). Expectations
had centered around 54.5%.
ISM’s manufacturing survey represents under
10% of U.S. employment and about 20% of the overall economy. All sub-indices
except inventories and imports were lower in January.
“Comments
from the panel indicate that most industries, but not all, are experiencing
strong demand as 2015 kicks off,” said Bradley Holcomb, chair of ISM’s
Manufacturing Business Survey Committee. “The West Coast dock slowdown
continues to be a problem, negatively impacting both exports and imports as
well as inventories.”
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Wood
Products expanded in January, although supporting changes in the sub-indices were
limited to inventories and backlogged orders. Increasing new orders, production
and employment were sufficient to put Paper Products into expansion category. The port slowdown mentioned above figured
prominently in respondent comments. “Chinese New Year, West Coast port dock
slowdowns, coupled with railroad embargo are all creating logistical challenges
and increased backlog of orders,” wrote one Wood Products respondent. “West
Coast port slowdown is getting serious,” added a Paper Products respondent. “Mill
has 40+ days of production at the ports and various warehouses.”
The
pace of growth in the non-manufacturing sector -- which accounts for 80% of the
economy and 90% of employment -- managed to eke out a small gain in January. The
NMI registered 56.7%, 0.2 percentage point above December’s 56.5% (originally
56.2%). The sub-indices were generally higher than in December; notable
exceptions included employment, input prices and imports. “Comments from
respondents vary by industry and company,” said Anthony Nieves, chair of ISM’s
Non-Manufacturing Business Survey Committee; “however, they are mostly positive
and/or reflect stability about business conditions.”
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Two
of the three service industries we track (Real Estate and Construction) reported
contraction in January; in both cases the drop-off in new orders (along with
employment in the case of Construction) negated the countervailing impacts of
other sub-indices. The comment from one respondent that “construction demand is
growing” apparently was not representative of the entire industry.
Relevant
commodities up in price included uncoated freesheet; lumber: pine, spruce,
treated. Natural gas; paper; and propane were down in price. Some reported fuel
(both gasoline and diesel) as cheaper, others as more expensive. No relevant
commodities were in short supply.
ISM’s
and
Markit’s
surveys were largely in agreement in January. Whereas ISM’s PMI reflected
decelerating growth, Markit’s U.S. Manufacturing PMI was unchanged; ISM’s NMI and
Markit’s U.S. Services PMI both showed modestly accelerating activity.
“Manufacturing
continued to expand in January,” said Chris Williamson, Markit’s chief
economist, “but the sector remains in a lower gear compared to that seen last
summer. Factory output growth and job creation remain well below last year’s
peaks, adding to the suspicion that the pace of economic expansion in the first
quarter could even fall below the 2.6% rate seen in the final quarter of last
year.
“The
strong dollar is hurting the competitiveness of exports, and the weak oil price
is already resulting in weaker demand for investment goods from the energy
sector. However, low oil prices are also helping to cut manufacturing costs,
which fell for the first time in two-and-a-half years, and should also help
boost consumer spending power, driving economic growth high.
“The
fear is that the economy will become increasingly reliant on the consumer to
sustain growth, which is another reason besides the economic slowdown to
believe that policymakers will be wary of raising household’s borrowing costs
via rate hikes any time soon.”
Summing
up the U.S. Services PMI report, Williamson said, “Markit’s U.S. PMI surveys
accurately anticipated the near-halving in the pace of economic growth in the
fourth quarter of 2014, and suggest that the rate of expansion remained little
better than 2.0% annualized at the start of 2015.
“Companies
are clearly struggling at the moment, with the surveys recording the smallest
increase in new orders seen since the financial crisis six years ago amid
weaker US and global economic growth and the strong US dollar.
“However,
the survey also found that companies remained in hiring mode, pointing to
another robust non-farm payroll gain in January. At the same time, cost
pressures hit a post-crisis low due to the oil price rout, which should pave
the way for further falls in headline inflation in coming months.
“Irrespective
of the employment gain, the combination of lower inflation and slower economic
growth suggests that any lifting of interest rates before mid-year is looking
increasingly unlikely.”
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.
