May 2017 ISM and Markit Surveys

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“Soft” data from the Institute for Supply Management’s (ISM) monthly opinion survey showed that the expansion in U.S. manufacturing was essentially stable in May. The PMI registered 54.9%, up 0.1 percentage point from April. (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. Four of the sub-indexes (new orders, employment, and both inventory categories) had higher values, while six had lower 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 -- slowed modestly when retreating by 0.6 percentage point, to 56.9%. Four sub-indexes (employment, inventories, order backlogs, and inventory sentiment) exhibited higher values, while six were lower. 

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Of the industries we track, only Wood Products did not expand. “Our business is definitely paying attention to developments with the Canadian lumber tariff announcement,” wrote one Paper Products respondent. “The final outcome could change our fiber pricing.” A Construction commenter observed that “lumber tariff effects are beginning to show up.” A Public Administration respondent mentioned "continuing to feel [the] effect of overheated commercial construction market -- few bidders, higher prices. Scarce construction labor seems to be the driver."

Relevant commodities --
* Priced higher: Construction trades/subcontractors; corrugate and corrugated boxes; diesel; labor (including general, service, temporary, and construction); lumber; and oil.
* Priced lower: None.
* Prices mixed: Gasoline.
* In short supply: Labor (including general, service, skilled, and construction).

ISM’s and IHS Markit’s surveys diverged in May. Whereas ISM showed stable manufacturing growth, Markit’s manufacturing PMI slipped to and eight-month low. Also, whereas ISM’s NMI fell, Markit’s services PMI accelerated.

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

Manufacturing -- “Manufacturing growth momentum continued to ebb in May, down to its weakest since just before the presidential election.

“Manufacturing output, order books and employment all grew at only modest rates as sluggish sales prompted firms to scale back hiring. Exports sales remained especially lackluster, hampered in part by the relatively strong dollar. The survey also brought signs of companies becoming more cautious about holding inventory.

“Factories’ raw material prices meanwhile rose at a sharply reduced rate, which should at least help take pressure off profit margins and also feed through to weaker pressure on consumer price inflation.”

Services -- “Although service sector business activity picked up in May, the PMI surveys for manufacturing and services collectively indicate only a modest pace of economic growth so far in the second quarter.

“Historical comparisons with GDP indicate the PMI is signaling second quarter GDP growth of just over 2%, suggesting there may be some downside risks to IHS Markit’s current forecast of a GDP growth rebound to just over 3% in the second quarter.

“However, the key message from the PMI is that the economy is enjoying steady, albeit unspectacular, growth, and that the pace of expansion has been slowly lifting higher in recent months.

“Hiring meanwhile remains on a firm footing, with the survey’s employment indicators running at levels consistent with around 160,000 jobs added to the economy in May.

“In another sign of the economy’s underlying steady expansion, average prices charged for goods and services is running at the second highest in almost two years, indicating that rising demand is helping restore some pricing power.”

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.