April 2016 ISM and Markit Reports

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The Institute for Supply Management’s (ISM) monthly opinion survey showed that U.S. manufacturing’s pace of expansion slowed slightly during April. The PMI registered 50.8%, a decrease of 1.0 percentage point from the March reading of 51.8%. (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. Perhaps the most dramatic change was a substantial jump in input prices. Otherwise, except for exports and imports, sub-index values either remained in contraction or were lower than in March. 

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Wood Products and Paper Products both expanded, thanks to new orders, exports and (Paper only) imports, production and employment. "Market is starting to pick up as expected," wrote one Wood Products respondent.

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- accelerated again in April. The NMI registered 55.7%, 1.2 percentage points higher than the March reading. Key sub-indexes were mixed, with new orders and input prices exhibiting the largest increases. 

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All three service sectors we track reported expansion. The most consistent change in a key sub-index was an increase in new orders. “Severe non-skilled labor shortage is hurting the construction industry," observed one Construction respondent.

Relevant commodities --
* Priced higher: Diesel (all grades), gasoline, lumber products, and paper.
* Priced lower: Natural gas.
* Prices mixed: None.
* In short supply: Construction labor.

ISM’s and Markit’s surveys were in general agreement during April insofar as the headline numbers of each pair of reports moved roughly in parallel; however, commentary in Markit’s manufacturing survey painted a somewhat darker outlook than was the case for ISM.

Commenting on the data, Markit’s chief economist Chris Williamson said:

Manufacturing -- “The April PMI data suggest there’s no end in sight to the current downturn in manufacturing activity. The survey indicates that factory output is dropping at an annualized rate of approximately 3%, and factory headcounts are being culled at a rate of around 10,000 per month.

“Destocking is also very much in evidence as companies often reported weaker than expected demand and exports are slumping at the fastest rate for one and a half years.

“Rather than reviving after a disappointingly weak first quarter, the data flow therefore appears to be worsening in the second quarter, raising question marks over whether GDP growth will improve on the near-stalling seen in the first three months of the year.”

Services -- “The PMI surveys show the economy continuing to pick itself up after the stagnation seen in February, with growth accelerating for a second successive month in April. However, the rate of expansion remains tepid, reliant on sluggish growth in services as manufacturers report a stalling of production.

“The surveys are consistent with economic growth picking up from the 0.5% seen in the first quarter to a mere 1.0% at the start of the second quarter, suggesting the bounce-back from the weak start to the year is far from impressive.

“The fragility of growth is highlighted by inflows of new business rising at a rate only marginally above the post-recession low seen in March, and optimism about the year ahead also remains close to a post-recession low.

“The drop in confidence seen so far this year is beginning to hit the labour market, with the survey signalling 160,000 extra jobs being created in April, down from an average of 200,000 in the first three months of the year.”

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.