October 2015 ISM and Markit Reports

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The Institute for Supply Management’s (ISM) monthly opinion survey showed that the U.S. manufacturing “remained stuck in neutral” in October. The PMI registered 50.1% (50.0% expected), 0.1 percentage point below the September reading of 50.2%, and the lowest reading since May 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. The key internal new orders sub-index improved and remains in expansion; also, the contraction in backlogged orders improved relative to September. 

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Wood Products contracted in October, as a drop in new domestic orders more than offset a rise in export orders. Paper Products expanded as usual, with only imports declining. "Demand remains steady with 3% top-line unit growth. Sales are flat [on a U.S. dollar basis] due to currency and cost changes," wrote one Paper Products respondent. "Wood products market is sluggish with prices varying up/down depending on size and grade," added a Wood Products respondent.

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- picked up in October. The NMI registered 59.1% (56.7% expected), 2.2 percentage points higher than the September reading of 56.9%. Important internals improved and remain in expansion. 

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Only Construction reported an increase in activity among the service industries we track; Real Estate and Ag & Forestry went completely without mention in this report.

Some respondents indicated fuel prices (both gasoline and diesel) went up, others down. Oil and lumber prices were lower. No relevant commodity was in short supply.

ISM’s and Markit’s surveys diverged rather markedly as ISM’s PMI decreased while Markit’s Manufacturing PMI increased; similarly ISM’s NMI accelerated while Markit’s Services PMI decelerated to a four-month low.

Comments from Markit Chief Economist Chris Williamson are presented below:

Manufacturing -- “Stronger manufacturing growth in October brings encouraging news after the sector saw the pace of expansion slump to a two-year low in the third quarter.

“Factory output growth accelerated, equivalent to around a 4% annualized rate of increase, as firms saw the largest monthly jump in new order inflows since March. Export growth has also revived, suggesting firms are managing to adapt to the stronger dollar, as job creation picked up after slowing in September.

“With the Fed eagerly watching the data flow to see whether the 3Q economic slowdown will intensify, the improvement in the manufacturing sector increases the odds of policymakers voting to hike rates at the FOMC’s December meeting.

“However, with inflationary pressures remaining very subdued and signs of the slowdown persisting into the 4Q in the larger service sector, the policy outlook is by no means certain and debate about whether the economy yet needs higher interest rates will no doubt remain intense.”

Services -- “The PMI surveys indicated that the pace of economic growth held steady in October, but remains weaker than the rate seen throughout much of the year so far. Job creation also slipped to the lowest seen for eight months, as service sector firms in particular have become increasingly nervous about committing to additional headcounts.

“The surveys nevertheless signal ongoing moderate growth of business activity and employment in the manufacturing and service sectors, which will keep alive the possibility that policymakers could be persuaded into raising interest rates before the year is over. However, the survey data also reinforce strong arguments -- notably a continued absence of inflationary pressures -- that there is no rush to tighten policy.

“Much will now depend on the November survey data, which will provide a reliable guide to business conditions in 4Q.”

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.