January 2017 ISM and Markit Reports

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The Institute for Supply Management’s (ISM) monthly opinion survey showed that the pace of expansion in U.S. manufacturing continued accelerating during January. The PMI registered 56.0%, or +1.5 percentage points. (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. The most noteworthy change in the sub-indexes was input prices -- the most widespread increase since January 2005. 

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The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- slowed fractionally, to 56.6%. Price increases were the most widespread since July 2014. 

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Paper Products and Construction expanded, while Wood Products and Real Estate contracted.

Relevant commodities --
* Priced higher: Diesel; natural gas; paper; corrugate and corrugated boxes.
* Priced lower: None.
* Prices mixed: Gasoline.
* In short supply: Labor (both construction and temporary).

Consistency between ISM’s and IHS Markit’s surveys was fairly strong: Manufacturing PMIs accelerated in both surveys; ISM’s NMI ticked lower, while Markit’s services PMI showed the fastest rise in business activity since November.

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

Manufacturing -- “The US manufacturing sector has started 2017 with strong momentum. Despite exports being subdued by the strong dollar, order books are growing at the fastest pace for over two years on the back of improved domestic demand.

“With optimism about the year ahead at the highest since last March, the outlook has also brightened.

“Production is consequently growing at the strongest rate for almost two years and inventories are rising at a rate not seen for nearly a decade as firms respond to higher demand, suggesting the goods-producing sector will make a decent contribution to first quarter GDP.

“With input costs also rising at the steepest rate for over two years, and hiring sustained at an encouragingly solid pace as firms expand capacity, all of the survey indicators point to the Fed hiking interest rates again soon.”

Services -- “The US economy has started 2017 on the front foot. Business activity across the economy is growing at the fastest rate for over a year and optimism about the business outlook has risen to the highest for a year and a half.

“The January surveys signal annualized GDP growth of approximately 2.5%, setting the scene for a solid first quarter. With January seeing the largest inflow of new business for 18 months, there’s good reason to believe that firms will be even busier in coming months.

“Even more encouraging is the ongoing impressive rate of job creation, with the January PMI numbers comparable to around 200,000 jobs being added.

"A waning of price pressures takes some heat off the Fed, though the sustained strong output and jobs growth signaled by the surveys will fuel speculation that the next rate hike will be sooner rather than later, with June looking most likely.”

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.