June 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 in June. The PMI registered 53.5%, an increase of 0.7 percentage point over the May reading of 52.8%. (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 increases in employment and inventories, decreased order backlogs, and moderation in the growth of imports. 

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Wood Products expanded in June as increased new orders apparently overshadowed the contraction in backlogged and export orders. Paper Products was mixed, but managed to expand as well.

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- quickened marginally in June. The NMI registered 56.0%, 0.3 percentage point higher than the May reading of 55.7%. The sub-indexes that provide some forward-looking context were mixed. 

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Two of the three service industries we track reported expansion in June. The was little consistency among the sub-indexes.

Relevant commodities up in price included fuel (both diesel and gasoline) and paper. Natural gas was cheaper. No relevant commodities were in short supply.

ISM’s and Markit’s surveys were consistent insofar as all reported expansion across manufacturing and services; Markit, however, reported slower growth instead of ISM’s faster growth.

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

Manufacturing -- “Purchasing managers are reporting the slowest rate of manufacturing expansion for over a year and a half, suggesting that the economy is slowing again.

“The slowdown is largely linked to a third consecutive monthly fall in exports, in turn attributed by many companies to the strong dollar undermining international competitiveness.

“Investment spending also appears to be waning, with recent months seeing the slowest growth of new orders for business equipment and machinery for two years. The investment slowdown suggests companies are becoming more risk averse and cautious in their spending. The current impressive rate of factory job creation could soon likewise wane unless the outlook improves.

“The good news is that the export and investment drags are being offset by an ongoing surge in consumer spending, which is in turn most likely linked to falling prices in recent months. An upturn in growth of new orders for consumer goods helped drive an increase in overall manufacturing orders books during the month, providing a ray of hope that output growth will stabilize at its current modest pace.

“Policymakers will be concerned about the unbalanced nature of growth, and in particular the loss of export and investment drivers, and will want to see growth pick up again in coming months before committing to higher interest rates.”

Services -- “The June PMI data round off a solid second quarter for the US economy, with GDP likely to have risen at an annualized 3% rate. However, it’s important to look at what’s happened over the course of the quarter, rather than looking at the quarter as a whole. Although still signaling moderate growth in June, the manufacturing and service sector surveys indicate that the rate of economic expansion has slowed markedly since the start of the quarter, when business was boosted by a rebound from weather related weakness.

“The loss of growth momentum seen in the surveys means GDP growth could slacken off again in the third quarter and hiring could likewise ease off.

“Fed talk will most likely continue to prepare the ground for rate hikes later this year, but policymakers will want to see firmer evidence that the economy retains healthy growth momentum before taking the plunge and hiking interest rates, especially given ongoing disappointing pay growth and benign inflation.”

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.