January 2015 ISM and Markit 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 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.