December 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 contracted further in December. The PMI registered 48.2% (49.2% expected), a decrease of 0.4 percentage point from the November reading of 48.6%, and the lowest reading since June 2009. (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. Key changes to internals included a contraction in employment, a small expansion in exports, and further erosion in imports. 

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Wood Products contracted on declines in new and backlogged orders, while Paper Products expanded on higher new orders, production and employment.

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment – marginally slowed in December. The NMI registered 55.3% (56.5% expected), 0.6 percentage point lower than the November reading of 55.9%. Important internals (e.g., new orders, employment and exports) strengthened, however. 

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Real Estate and Construction reported increases in activity, whereas Ag & Forestry was unchanged. “Professional and skilled craft labor is difficult to find,” observed one Construction respondent.

No relevant commodities were higher in price; diesel fuel and gasoline were lower. No relevant commodity was in short supply.

ISM’s and Markit’s surveys paralleled each other in December: ISM’s PMI fell further into contraction while Markit’s Manufacturing PMI slowed but remained in expansion. The pace of growth decelerated in both ISM’s NMI and Markit’s Services PMI.

Comments from Markit Chief Economist Chris Williamson are presented below:

Manufacturing -- “The manufacturing sector saw a disappointing end to 2015, and its plight looks set to continue into the New Year as headwinds show no sign of abating any time soon.

“Order book growth has stalled as producers report some of the toughest trading conditions since the end of the global financial crisis.

“The strong dollar is hurting exporters as well as hitting domestic sales as firms compete against inflows of cheap imports. Low oil prices are meanwhile hitting demand for goods and machinery from the energy sector. There are signs that consumers are becoming more cautious in relation to spending as interest rates lift off their historic lows, and overseas demand remains in the doldrums. All of these factors look set to continue to hurt manufacturers, and even intensify, in coming months.

“However, with the Fed stressing that the trajectory of interest rates will be data dependent, any extended period of weakness at least suggests that the rate hiking process will be very gradual.”

Services -- “The PMI surveys show the service sector losing momentum alongside a stalling of growth in the manufacturing sector, pushing the overall rate of economic expansion down to the weakest for a year.

“While the survey data indicate that the economy grew at a reasonably healthy 1.9% annualized clip in the fourth quarter, the weakness seen in the final month of the year raises concerns that growth is losing momentum, possibly quite markedly.

“The survey also signals robust employment growth, but likewise suggests the pace of hiring has slowed since earlier in the year as businesses have become more cautious in the face of worries such as the forthcoming elections, the strong dollar, global growth jitters and the outlook for interest rates. The December survey data are consistent with non-farm payrolls rising by around 175,000 compared to an average of 200,000 in the first eleven months of the year.

“Having hiked interest rates for the first time in almost a decade at the end of last year, the Fed will likely err on the side of caution and hold off with further policy tightening until the full extent of the slowdown becomes apparent.”

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.