September 2015 ISM and Markit Reports

Click image for larger version

The Institute for Supply Management’s (ISM) monthly opinion survey showed that growth of economic activity in the U.S. manufacturing sector nearly stalled in September. The PMI registered 50.2% (50.5% expected), a decrease of 0.9 percentage point below the August reading of 51.1%, and the lowest reading since April 2013. (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. Except for customer inventories, sub-index values were either lower or unchanged compared to August. 

Click image for larger version

Wood Products contracted in September, thanks to erosion among the most important sub-indexes. Paper Products expanded as usual, with only backlogged and new export orders serving as headwinds.

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- tumbled in September. The NMI registered 56.9% (58.0% expected), 2.1 percentage points lower than the August reading of 59.0%. Here, too, the sub-indexes were mostly lower (seven out of 11). 

Click image for larger version

Two of the three service industries we track (Real Estate and Construction) reported expansion. Ag & Forestry was unchanged.

No relevant commodity was more expensive. Diesel and gasoline prices were lower. Construction labor was the only relevant commodity in short supply.

ISM’s and Markit’s manufacturing surveys diverged somewhat as ISM’s PMI decreased while Markit’s Manufacturing PMI increased.

Comments on Markit’s reports are presented below:

Manufacturing -- “The U.S. manufacturing sector has seen a distinct loss of growth momentum in recent months,” wrote Chris Williamson, chief economist at Markit, “and endured the worst performance for two years during the third quarter. Headwinds include the rising dollar, weak demand in global markets, a downturn in business investment and financial market jitters.

“We must remember, however, that the manufacturing sector only accounts for around one-tenth of the economy, and robust service sector data -- as indicated by last week’s flash PMI results -- indicate that the wider economy remains in good health, albeit with signs that businesses have become more worried about the outlook. The survey data suggest that the economy continued to grow at a 2.2% annualized rate in the third quarter and added 207,000 jobs in September.

“The manufacturing slowdown therefore will be insufficient on its own to deter the Fed from hiking rates later this year, but adds a warning light that the pace of economic growth is set to slow as we move into the final quarter of the year. The Fed is therefore likely to keep an open mind as to whether tighter policy is appropriate given current economic conditions and await a clearer idea of the health of the economy in the fourth quarter.”

Services -- “The U.S. economic growth slowed in the third quarter according the PMI surveys, down to around 2.2%,” wrote Williamson. “But this largely represents a payback after growth rebounded in the second quarter, suggesting that the economy is settling down to a moderate rate of growth in line with its long term average.

“Hiring also remains relatively robust, albeit down from earlier in the year, again suggesting that the economy has shifted down a gear but remains in good health.

“At the moment it remains unclear as to whether growth will weaken further as we move into the fourth quarter. However, with inflationary pressures waning, policymakers may have some breathing space to gauge the extent of any slowdown. Lower fuel costs helped push average prices charged for goods and services dropping at steepest rate for nearly five years.”

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.