February 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 February. The PMI retreated from January’s 53.5% to 52.9% in February -- in line with expectations of 53.0%, but the lowest reading since January 2014. (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. The key new-orders sub-index slipped again but remained in expansion.

“Comments from the respondent panel express a growing level of concern over the West Coast dock slowdown,” said Bradley Holcomb, chair of ISM’s Manufacturing Business Survey Committee, which is “negatively impacting exports and imports, and requiring workarounds and added costs.” 

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Wood Products was unchanged in February; movement in the sub-indices was limited to declining input prices and new export orders. Paper Products expanded again, with broad support among most sub-indices. 

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- eked out another small gain in February. The NMI registered 56.9%, 0.2 percentage point above January’s 56.7%; the markets were expecting 56.5%. Important internals weakened (e.g., business activity and new orders) but remained solidly in expansion; all other sub-indices were higher than in January. “Comments from respondents have increased in regards to the effects of the reduction in fuel costs and the impact of the West Coast port labor issues on the continuity of supply,” said Anthony Nieves, chair of ISM’s Non-Manufacturing Business Survey Committee. “Overall, supply managers feel mostly positive about the direction of the economy.” 

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Construction was the only service industry we track to report contraction in February. The drop-off in new orders more than offset the countervailing impacts of other sub-indices. “Less money [is] being spent on capital projects by the major oil companies,” commented one Construction respondent.

Relevant commodities down in price included oil, natural gas, and lumber: pine, plywood, spruce, treated. Some reported fuel (both gasoline and diesel) as cheaper, others as more expensive. No relevant commodities were in short supply.

Agreement among ISM’s and Markit’s surveys was mixed in February. Whereas ISM’s PMI reflected decelerating growth, Markit’s U.S. Manufacturing PMI showed greater momentum; ISM’s NMI and Markit’s U.S. Services PMI both showed accelerating activity.

Comments from Chris Williamson, Markit’s chief economist, are presented below:

Manufacturing -- “Manufacturing braved the cold weather in February, reporting an upturn in the pace of growth. A flurry of activity towards the month end helped raise production to a greater extent than signaled by the earlier flash reading. The upbeat survey points to minimal impact from the adverse weather that affected many parts of the country during the month.

“While growth of manufacturing output remained below the peaks seen last year, the survey is broadly consistent with production rising at an annualized rate approaching 4%.

“Employment continued to rise, albeit with the rate of job creation slipping as many companies cited increased uncertainty about the outlook, especially with the strong dollar hitting competitiveness.

“Lower oil prices meanwhile once again helped reduce firms’ costs slightly for a second month running, but average selling prices rose at the fastest rate since November, suggesting core inflationary pressures are in fact rising.

“The combination of strong production growth, ongoing job creation and rising factory prices will keep alive the possibility that the Fed could be encouraged

Services -- “The pace of U.S. economic growth jumped to a four-month high in February, according to Markit’s PMI survey data. Business picked up especially towards the end of the month, when the impact of bad weather on the East Coast and port delays on the West Coast began to clear, which suggests this may be a temporary upturn.

“Even with the strong growth recorded in February, the average reading across the manufacturing and services surveys for the first quarter so far is up only slightly compared to the fourth quarter of last year, meaning growth this year is running at a rate similar to the 2.2% annualized pace seen late last year.

“That’s certainly not a pace of expansion that will worry the Fed into hiking interest rates any time soon. However, the ongoing resilience of the U.S. economy, and in particular the sustained robust job creation signaled in February, adds to the sense that policymakers will continue to prepare the ground for a rate rise later this year.”

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.