July 2017 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey showed that the expansion in U.S. manufacturing slowed in July. The PMI registered 56.3%, down 1.5 percentage points from June. (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. Index/sub-index values were generally lower in July -- the most notable exception being input prices. 

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The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- decelerated more noticeably (-3.5 percentage points) to 53.9%. As with manufacturing, the service index/sub-indexes generally exhibited lower values. 

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Of the industries we track, only Ag & Forestry contracted. "Export orders are continuing to strengthen,” observed one Wood Products respondent, adding, “The understatement is how stable domestic business is as well.”

Relevant commodities --
* Priced higher: Corrugate; corrugated boxes; diesel; labor (general and construction); paper products.
* Priced lower: Gasoline.
* Prices mixed: Lumber.
* In short supply: Labor (construction, services, and temporary).

ISM’s and IHS Markit’s July surveys moved in opposite directions, with ISM signaling deceleration but Markit acceleration.

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

Manufacturing -- “The second half of the year got off to a good start for U.S. manufacturers, with the health of the sector improving at the fastest rate for four months. Output, new orders, employment and buying activity all grew at increased rates. The only real blot on the copybook was a decline in exports for the first time since last September.

“However, although rising, the survey indices remain consistent with only very modest increases in comparable official data such as manufacturing output, durable goods orders and payroll numbers. Clearly the manufacturing sector remains stuck in a low gear, though is at least gaining momentum and will hopefully shift up a gear as we move through the second half of the year if demand continues to improve. IHS Markit expects GDP growth to accelerate to a near 3% annualized rate in the third quarter, fueled by gains in consumer spending and business investment, which should benefit manufacturing.”

Services -- “The PMI surveys have now shown growth accelerating for four consecutive months, meaning the economy started the third quarter with the strongest momentum since January. This is also a broad-based improvement, with the upturn in service sector activity coming on the heels of news of faster manufacturing growth.

“With inflows of new business into the vast service sector rising at the fastest rate for two years, the survey data support the view that the economy is on course for solid growth in the third quarter. At current levels, the surveys are indicative of GDP rising at an annualized rate of approximately 2%, but if growth accelerates further in line with the upturn in new business, the third quarter could be even stronger.

“Hiring meanwhile remains encouragingly buoyant, with the July PMI surveys indicating a payroll rise in the region of 200,000. Firms retained a strong hiring appetite in response to widespread optimism of future growth and the need to deal with rising backlogs of existing orders, underscoring the current positive mood in the business sector.”

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.