August 2017 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey suggested that the expansion in U.S. manufacturing accelerated in August. The PMI registered 58.8%, up 2.5 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. Only the customer-inventory, export and import sub-index values were noticeably lower 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 -- also accelerated (+1.4 percentage points) to 55.3%. The only sub-index of economic consequence with a noticeably lower value was inventories. 

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Of the industries we track, only Ag & Forestry contracted; Wood Products was unchanged. "Business has strengthened over the summer, beyond [the] same period last year," observed one Paper Products respondent. "Impressive numbers month-over-month,” added a Construction respondent; “8% more projects and 4% higher revenues."

Relevant commodities --
* Priced higher: Corrugate; corrugated boxes; fuel (diesel and gasoline); labor (general and construction); lumber; and paper.
* Priced lower: None.
* Prices mixed: None.
* In short supply: Labor (construction, services, and temporary).

ISM’s and IHS Markit’s August surveys were directionally consistent, although Markit’s manufacturing PMI decelerated.

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

Manufacturing -- “Although still above the 50 ‘no change’ level, the decline in the PMI shows signs of a renewed stuttering of the manufacturing economy during August. The latest reading indicates one of the weakest improvements in the overall health of the sector seen over the past year, and translates into disappointing signals for comparable official data.

“The drop in the output index indicates that manufacturing could act as a drag on the economy in 3Q, with exports dampening order book growth.

“The survey brings more encouraging signs of improved domestic demand, however, with orders for both consumer goods and investment goods such as plant and machinery on the rise, boding well for the wider economy to continue to expand as we move through 2H2017.”

Services -- “The U.S. service sector moved up a gear in August, providing a welcome boost to the economy after the sister PMI survey showed slower manufacturing growth. The two PMI surveys collectively point to the fastest rate of economic expansion since January as businesses enjoyed a summer growth spurt.

“The strong survey data add to the expectation that the economy was picking up further momentum before hurricane Harvey hit, the impact of which is still a big unknown. While the pre-Harvey data were pointing to 3Q GDP rising at an annualized rate of 3.5%, this could now be slightly below 3.0%.

“Encouragingly, August saw companies become more optimistic about the year ahead, with confidence across manufacturing and services climbing to the highest since January. Any hurricane-related impact is therefore likely to result in only a temporary lull, with stronger growth returning later in the year.

“With new orders growth accelerating, backlogs of work rising and job creation buoyant, the surveys clearly point to an economy that’s generally in expansion mode.

“For Fed-watchers, the upturn in price pressures sends an additional hawkish signal for policy. Average selling prices for goods and services rose at the steepest rate for nearly three years. Another rate hike in December is therefore looking increasingly 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.