July 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 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.