September 2016 ISM and Markit Reports

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The Institute for Supply Management’s (ISM) monthly opinion survey showed that U.S. manufacturing edged back into expansion during September. The PMI registered 51.5%, an increase of 2.1 percentage points from the August reading of 49.4%. (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. Slow supplier deliveries and new export orders were the only sub-indexes with lower values in September than in August. 

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The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- jumped in September. The NMI registered 57.1%, 5.7 percentage points higher than the August reading. Slow supplier deliveries was the only sub-index with a lower September value. 

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Wood Products contracted while Paper Products expanded. Two of the three service sectors we track (Construction and Ag & Forestry) expanded.

Relevant commodities --
* Priced higher: Petroleum; diesel; packaging; paper.
* Priced lower: Lumber -- pine, plywood and spruce.
* Prices mixed: Diesel.
* In short supply: Construction labor.

Consistency between ISM’s and Markit’s surveys was mixed in September; Markit’s manufacturing survey showed deceleration, but acceleration in services.

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

Manufacturing -- “Manufacturing growth slowed to a crawl in September, suggesting the economy is stuck in a soft patch amid widespread uncertainty in the lead-up to the presidential election.

“The survey saw firms pulling back on expanding production and focusing instead on cost-cutting, as inflows of new business slowed to the weakest seen so far this year.

“Any growth is largely being driven by the consumer, in turn helped by tailwinds of low interest rates, low inflation and a solid labor market.

“Business spending, in contrast, is being subdued by the headwinds of uncertainty about the economic outlook, cost-driven inventory reduction and the strong dollar, the latter linked to yet another drop in exports.”

Services -- “Coming hard on the heels of the IMF’s downgrade to the U.S. economic outlook, the upturn in the PMI is a welcome development and suggests that the pace of economic growth gained some momentum in September. However, take a longer look and it’s clear that this is by no means a robust upturn.

“Even with the latest increase the surveys are indicating that the economy is growing at an annualized rate of only 1%.

“The survey responses reveal that a heightened degree of political uncertainty is subduing the economy, manifesting itself in particular in a marked slowdown in corporate hiring. Across both manufacturing and services the surveys point to the smallest monthly gain in jobs since April 2010, consistent with a mere 115,000 rise in non-farm payrolls.

“Business optimism about the year ahead is at one of the lowest levels seen since the global financial crisis. The surveys therefore add ammunition to those arguing for the Fed to hold off with hiking interest rates again, at least until the dust settles after the election.”

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.