January 2016 ISM and Markit Reports

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The Institute for Supply Management’s (ISM) monthly opinion survey showed that the contraction in U.S. manufacturing slowed marginally in January. The PMI registered 48.2%, an increase of 0.2 percentage point from the December reading of 48.0%. (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. Changes to key internal sub-indexes included small expansions in new orders and imports, a further decline in employment, and a drop in exports. 

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Wood Products expanded on new and export orders, although one commenter mentioned that the “market is sluggish to start the year.” Paper Products contracted on broad-based erosion.

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- tumbled in January. The NMI registered 53.9%, 5.6 percentage points lower than the December reading of 59.5%, and the weakest level since February 2014. With the exception of supplier deliveries and order backlogs, all sub-index values were lower in January than in December. 

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Real Estate and Construction reported increased activity, whereas Ag & Forestry declined.

Relevant commodities higher in price included some lumber products; oil, diesel fuel and gasoline were cheaper. No relevant commodity was in short supply.

ISM’s and Markit’s surveys paralleled each other again in January: ISM’s PMI contracted more slowly while Markit’s Manufacturing PMI exhibited slightly faster 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 -- “Despite picking up slightly, the January PMI reading is one of the worst seen over the past two years, highlighting the ongoing plight of the manufacturing sector.

“One bright light appeared, in that order book growth picked up, led by an upturn in domestic demand. However, hiring remained in the doldrums, suggesting that firms remain cautious in relation to the business outlook and reluctant to expand capacity.

“The manufacturing sector continues to struggle against the headwinds of weak global demand, the strong dollar, slumping investment in the energy sector and rising financial market uncertainty, all of which mean the goods-producing sector looks set to act as a drag on the wider economy again in the first quarter of 2016.”

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.

“The US upturn has lost substantial momentum over the past two months, the trend in business activity sliding to the worst for over three years.

“Slower service sector activity, combined with subdued manufacturing growth, means January’s expansion was the weakest seen since October 2012 with the sole exception of October 2013, when business was affected by the government shutdown.

“Deteriorating financial market conditions, global growth uncertainties and the upcoming election are all taking their toll, not to mention the strong dollar, which is not only hurting manufacturing but is also hitting the service sector through reduced tourism and travel.

“Payroll growth remained robust, but backlogs of uncompleted work have been falling in recent months, which usually means that such strong hiring is unlikely to persist unless demand picks up again in coming months.

“While the first quarter may see a rebound in GDP due to technical factors such as an inventory adjustment and weather-related variations, the survey data paint a darker underlying picture of business conditions.”

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.