February 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 further in February. The PMI registered 49.5%, an increase of 1.3 percentage points from the January reading of 48.2%. (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 a pick-up in production, a smaller reduction in employment, slower input price erosion, and contractions in both exports and imports. 

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Wood Products expanded on new orders and production. "Market is beginning to trend up with spring season on its way," commented one Wood Products respondent. For Paper Products, increases in employment and inventories apparently trumped all other sub-indexes.

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment – slowed marginally in February. The NMI registered 53.4%, 0.1 percentage point lower than the January reading of 53.5%, and the weakest level since February 2014. Changes in the sub-indexes were mixed, with notable increases in business activity, and export and import orders. 

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All three service sectors we track reported expansion.

Paper was the only relevant commodity higher in price. Corrugated boxes, oil and oil-based products, diesel fuel, gasoline, natural gas, and lumber products were cheaper. Labor was the only relevant commodity in short supply.

ISM’s and Markit’s surveys were somewhat at odds with each other in February: ISM’s PMI contracted more slowly while Markit’s Manufacturing PMI expanded more slowly. The pace of growth decelerated in ISM’s NMI while Markit’s Services PMI fell into outright contraction.

Comments from Markit Chief Economist Chris Williamson are presented below:

Manufacturing -- “The February data add to signs of distress in the U.S. manufacturing economy. Production and order book growth continues to worsen, led by falling exports. Jobs are being added at a slower pace and output prices are dropping at a rate not seen since mid-2012.

“The deterioration in the manufacturing sector’s performance since mid-2014 has broadly tracked the dollar’s rise, which makes U.S. goods more expensive in overseas markets and leads U.S. consumers to favor cheaper imported goods.

“With other headwinds including the downturn in the oil sector, heightened uncertainty due to financial market volatility, global growth worries and growing concerns about the presidential election, it’s no surprise that the manufacturing sector is facing its toughest period since the global financial crisis.”

Services -- “Business activity stagnated in February as malaise spread from the manufacturing sector to services. The Markit PMIs are signaling a stagnation of the economy in February, suggesting growth has deteriorated further since late last year.

“Prices pressures are waning again in line with faltering demand. Average prices charged for goods and services are dropping once again, down for the first time in five months, as firms compete to win new business

“Worse may be to come, as inflows of new business have slowed sharply, causing backlogs of work across both sectors to fall at the fastest rate seen since the 2008-9 financial crisis. Such weak demand suggests that business activity and price discounting look set to continue.

“However, perhaps the brightest warning light is the downturn in business optimism to the joint-lowest recorded by the survey, suggesting firms are bracing themselves for trouble ahead.

“The only positive note in the PMI report is the sustained robust rate of job creation in the services sector, though it seems inevitable that firms will take a more cautious approach to hiring if demand continues to wane in coming months.”

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.