May 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 quickened slightly in May. The PMI registered 52.8%, an increase of 1.3 percentage points over the April reading of 51.5%. (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 most apparent changes included a substantial moderation in the pace of input price decreases; and increases in new orders, employment, inventories, backlogged orders and imports. 

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Wood Products was unchanged in May; "Oversupply is continuing to tighten profit margins," commented one respondent. Paper Products expanded amidst widespread support.

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- slowed in May. The NMI registered 55.7%, 2.1 percentage points lower than the April reading of 57.8%. Except for input prices, exports and imports, all other sub-indexes were lower in May than in April. 

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All three service industries we track reported expansion in May. The employment sub-index was the most consistent source of strength.

Relevant commodities up in price included fuel (both diesel and gasoline) and paper. Some reported natural gas as cheaper, others as more expensive. No relevant commodities were in short supply.

ISM’s and Markit’s surveys exhibited some divergence in May. Markit’s Manufacturing PMI showed some moderation (ISM was stronger), whereas Markit’s Services PMI reflected much slower growth.

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

Manufacturing -- “With manufacturers reporting the smallest rise in new orders since the start of last year, the survey provides further evidence that the strong dollar is hurting the economy. Falling exports and slumping profits were two weak links in the economy during the first quarter and look set to act as ongoing drags in the second quarter.

“While the economy still looks set to rebound from the decline seen in the first quarter, the extent of the second quarter recovery therefore remains highly uncertain and could well disappoint.

“It is encouraging to see employment growth holding up so well, with May seeing an increased rate of job creation in the manufacturing sector. But employment can often be a lagging indicator and payroll numbers will inevitably come under pressure if order book growth fails to improve in coming months.

“It therefore remains too early to take a reliable reading on the health of the economy and the data flow over the summer will be crucial in determining the timing of the first Fed rate hike.”

Services -- “Slowing service sector growth adds to signs that the U.S. economy has lost some momentum after an initial bounce-back from weather-related weakness at the start of the year.

“May’s PMI data showed service sector activity rising to a slightly smaller degree than signaled by the flash reading. Alongside the slowdown in manufacturing, the services PMI points to the weakest pace of U.S. economic growth since January.

“While the survey still supports the view that GDP growth looks set to recover after the 0.7% rate of decline seen in the first quarter, the softness of the data raises big question marks for policymakers over the strength of the rebound and whether the economy is losing momentum as it heads into the summer.

“The strong dollar is clearly hurting, with new orders growth deteriorating in both manufacturing and services. On the other hand, order books growth remained strong enough to encourage firms to take on staff in increasing numbers in May, leading to the largest rise in employment for almost a year. With the job market gains pushing the economy towards full employment, policymakers may consider rate hikes appropriate even in the face of slower growth.”

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.