June 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 quickened during June. The PMI registered 53.2%, an increase of 1.9 percentage point from the May reading of 51.3%. (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. With the exception of input prices, all sub-index values were higher in June than in May. 

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The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- also accelerated in June. The NMI registered 56.6%, a jump of 3.6 percentage points above the May reading. The only sub-indexes with lower June values were input prices and order backlogs. 

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Wood Products was unchanged while Paper Products expanded. All three service sectors we track reported expansion. “Business is strong in the private sector; bidding a lot of commercial buildings,” observed one Construction respondent.

Relevant commodities --
* Priced higher: Construction labor, all grades of diesel, gasoline, oil, corrugate and paper.
* Priced lower: None.
* Prices mixed: None.
* In short supply: Construction labor.

ISM’s and Markit’s June surveys were in general agreement, with both of Markit’s surveys showing at least modest increases in activity.

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

Manufacturing -- “Although the manufacturing PMI ticked higher in June, the latest reading rounds off the worst quarter for goods producers for six years.

“The lackluster performance of the manufacturing economy adds to signs from the flash services PMI surveys that the underlying pace of economic growth in the second quarter remained subdued after a disappointing start to the year.

“The upturn in the employment index suggests that firms may be expecting the recent bout of weak demand to be temporary, though hiring clearly remains subdued amid fragile business confidence.

“Producers are struggling in the face of the strong dollar, the energy sector decline and presidential election jitters. With companies craving certainty, heightened tensions between the UK and the European Union are likely to unsettle the global business environment further in coming months, and therefore risk dampening growth in the United States and export markets. The data flow in the next two months will therefore be critical to policymakers in gauging the appropriate outlook for interest rates.”

Services -- “Rebound, what rebound? The final PMI numbers confirm the earlier flash PMI signal that the pace of U.S. economic growth remained subdued in the second quarter. While volatile official GDP numbers are widely expected to show a rebound from a lackluster start to the year, the PMIs suggest the underlying malaise has not gone away. The surveys point to an annualized pace of economic growth of just 1% in the second quarter.

“Service sector confidence has slumped to the lowest since 2009 alongside ongoing woes in the energy and manufacturing sectors, as well as worries about the outlook amid presidential election uncertainty.

“Hiring has also slowed, though remains surprisingly upbeat. The surveys signal non-farm payroll growth of 150,000 in June, suggesting many companies expect the slowdown to be short-lived.”

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.