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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 in July. The PMI
registered 52.7%, a decrease of 0.8
percentage point below the June reading of 53.5%.
(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 slowdown in employment
growth; shrinking inventories, order backlogs and exports; and declining input
prices.
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Wood
Products contracted in July, dragged down by declines in production and orders.
Paper Products expanded, with broad-based support among the sub-indexes. “There's
an abundance of containerboard in the global markets,” observed one Paper
Products respondent, however.
The
pace of growth in the non-manufacturing sector -- which accounts for 80% of the
economy and 90% of employment – jumped to its highest level in July. The NMI registered
60.3%, 4.3 percentage points higher than the June reading of 56%. The
sub-indexes were higher virtually "across the board.”
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Two
of the three service industries we track reported expansion in July. The sub-indexes
were generally higher.
Gasoline
was the only relevant commodity up in price. Some respondents reported paying
more for diesel, others less. Construction labor was the only commodity in
short supply.
ISM’s
and
Markit’s
surveys were consistent insofar as all reported expansion across manufacturing
and services. However, ISM’s PMI declined while Markit’s Manufacturing PMI
increased slightly; also ISM’s NMI increased much more strongly than did Markit’s
Services PMI.
Comments
from Chris Williamson, Markit’s chief economist, are presented below:
Manufacturing -- “The PMI picked up in July but the sector
continues to endure one of the slowest growth phases seen over the past year
and a half. Companies reported that the strong dollar once again hurt export
competiveness, exacerbating already-weak demand in many countries, especially
emerging markets and Asian economies.
“However,
the data suggest the manufacturing sector is struggling rather than collapsing
against the various headwinds. Relief has also come in the form of lower
commodity prices, and low oil prices in particular.
“Low
prices have helped to reduce manufacturers’ costs and protect margins, while
households are also benefitting from low fuel bills in particular. The survey
data showed manufacturing growth being led once again by producers of consumer
goods in July.
“Policymakers
are unlikely to be dissuaded from raising interest rates on the back of the
weak manufacturing performance, focusing instead on the steady improvement in
the labor market and robust service sector growth which have been signaled at the
start of third quarter. However, with other manufacturing PMI surveys showing
emerging markets suffering their steepest downturn for two years, worries about
the global economy may well deter the Fed from tightening policy this year.”
Services -- “The Markit PMI data indicate that the US economy
enjoyed a good start to the third quarter. Faster growth in services accompanied
a similar upturn in manufacturing, leaving the economy on course to see a rate
of expansion similar to the 2.3% pace achieved in the second quarter.
“The
survey also points to further impressive job creation, with a 225,000 non-farm
payroll increase signaled for July. Inflows of new business across both
manufacturing and services also picked up to a three-month high.
“At
face value, the sustained robust expansion signaled in July augurs well for a
rate hike later in the year, possibility as early as September assuming the
labor market continues to improve in the meantime.
“However,
dig a little deeper and there are causes for concern which could worry
policymakers into deferring any tightening of policy.
“Growth
has clearly slowed compared to this time last year, and a further drop in
service sector companies’ optimism about the year ahead to one of the lowest
seen over the past five years indicates that firms are expecting growth to slip
further in coming months. Hiring could soon wane unless business confidence
picks up again soon.
“The
survey also illustrates how the strong dollar and falling oil prices add to the
argument for holding off with any tightening of policy. Rates of inflation of
both firms’ input costs and selling prices eased in July amid lower import
costs and falling global commodity prices. The strong dollar is also continuing
to hurt export performance, dampening economic growth prospects.”
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.
