July 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 decelerated in July. The PMI registered 52.6%, a decrease of 0.6 percentage point from the June reading of 53.2%. (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. Only the production and inventories sub-indexes posted higher July values. 

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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 decelerated in July. The NMI registered 55.5%, a drop of 1.0 percentage point from the June reading. The only relevant sub-indexes with higher July values were new orders, order backlogs, and exports. 

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Wood Products expanded while Paper Products contracted. “Oversupply continues to dominate demand. Poor weather is having a negative impact on building, creating short term slow demand,” one Wood Products respondent observed. Two of the three service sectors we track reported contraction. “Lower oil and chemical pricing is affecting the overall business for new projects (capital spending is down),” wrote one Construction respondent.

Relevant commodities --
* Priced higher: Construction; construction labor; lumber products; natural gas; petroleum-based products.
* Priced lower: None.
* Prices mixed: Fuel and corrugate.
* In short supply: Construction labor.

ISM’s and Markit’s surveys were at odds with each other in July insofar as both of Markit’s surveys showed at least some expansion (to an eight-month high in the case of manufacturing).

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

Manufacturing -- “The stronger manufacturing PMI survey data for July fuel hopes that the sector will act as less of drag on the economy in the third quarter after a disappointing first half of the year.

“Having signaled the sector’s worst performance for over six years in the second quarter, contributing to a sluggishness in the economy that was later seen in the soft GDP numbers, the improvement in July suggests that manufacturers and exporters will have helped lift the economy at the start of the third quarter.

“Job creation has also picked up, hopefully in a sign that producers are seeing a brighter picture, coping with a strong dollar and having put the worst of the energy sector’s restructuring behind them.”

Services -- “Those looking for signs of the U.S. economy moving up a gear in the third quarter will be disappointed by the PMI readings for July.

“The surveys are indicating that the pace of economic growth has held at around 1% at the start of the third quarter, largely unchanged on the signals sent by PMIs for the first and second quarters.

“Once again, there’s better news on hiring, with the overall rate of job creation edging up to the highest since January. The surveys are broadly consistent with non-farm payrolls rising by 160,000 in July.

“Hiring is holding up in part because of signs that the soft patch that the economy has gone through may prove temporary. Inflows of new business across the economy rose at the fastest rate seen so far this year in July, and backlogs of work were pushed higher for the first time since last October as a result.

“Business confidence about the outlook is also improving, rising in the service sector to the highest since January.

“These survey results add to the sense that policy makers will be encouraged by the resilience of the labor market in particular, but will want to see signs of stronger economic growth before hiking interest rates again. Another rate hike by the end of the year therefore still looks a strong possibility, though with odds of the timing of that hike skewed heavily towards December.”

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.