February 2017 ISM and Markit Reports

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The Institute for Supply Management’s (ISM) monthly opinion survey showed that the expansion in U.S. manufacturing accelerated during February to its fastest pace since August 2014. The PMI registered 57.7%, or +1.7 percentage points from January. (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. Growth in employment slowed, however, despite faster new orders and production. 

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The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- gained 1.1 percentage points, rising to 57.6% (the highest reading since February 2015). No sub-index value fell below 50. 

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Only Real Estate contracted. “U.S. construction labor is tight,” commented one Construction respondent.

Relevant commodities --
* Priced higher: Corrugate, corrugated boxes, lumber and paper.
* Priced lower: None.
* Prices mixed: Diesel and gasoline.
* In short supply: Construction labor.

Consistency between ISM’s and IHS Markit’s surveys was mixed: Whereas both of ISM’s surveys showed faster expansion, Markit’s manufacturing and services PMIs both decelerated slightly -- while remaining safely in expansion.

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

Manufacturing -- “The February survey points to a modest cooling in the rate of expansion of the manufacturing sector, but it remains too early to tell if this is the start of a more prolonged slowdown.

“Even with the latest slowing, the goods-producing sector is still on course for its best quarter for two years, representing a markedly improved picture compared to this time last year.

“Growth is being driven by robust domestic demand, stemming in turn from buoyant consumers and increased investment spending by the energy sector in particular.

“Manufacturing is far from booming, however, as the strong dollar means near-stagnant exports continue to act as a drag on growth.”

Services -- “Taken together, the PMI survey readings for the first two months of the year suggest the economy is growing in the first quarter at a respectable annualized rate approaching 2.5%.

“The burning question is whether the February slowdown merely represents some pay-back after a strong start to the year for U.S. businesses, or whether it’s the start of a more entrenched slowdown.

“A warning clue rests with the business expectations index, which indicates that business optimism has mellowed back to its post-election level, suggesting that companies are becoming more cautious with regard to spending and hiring.

“However, companies continue to report buoyant domestic demand, especially from consumers, and continue to take on staff in reasonable numbers, the rate of hiring having slowed only modestly. The February survey is broadly consistent with 175,000 payroll jobs being added, which represents a pace of hiring that will do little to deter the Fed from delaying its next rate hike.”

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.