September 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 September. The PMI registered 60.8% (the highest reading since May 2004), up 2.0 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 producer-inventory and import sub-index values were lower in September than 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 (+4.5 percentage points) to 59.8% (the highest NMI reading since that index began being reported). 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. Respondent comments included the following:
* Construction: "Overall, consistent growth in construction/office renovation jobs. Eight percent more jobs and 6 percent more revenue."
* Paper Products: "We are closely watching the Houston events as many of our production chemicals are produced in the Gulf region. Some tightening of supply and/or price increases expected."
* Wood Products: "Lumber prices starting to drop, and log prices starting to increase. Not the best combination."

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

ISM’s and IHS Markit’s September surveys were directionally consistent. Key findings from Markit’s surveys include the following:

Manufacturing --
* Production rises modestly but new order growth softens
* Employment expands at quickest rate for nine months
* Input prices increase at fastest pace since December 2012

Services --
* Robust expansion in business activity
* Upturn in new business remains steep despite easing since August
* Inflationary pressures intensify

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

Manufacturing -- “While the headline PMI remained resiliently elevated in September, despite disruption from hurricanes Harvey and Irma, the details of the survey are more worrying. Output growth was unchanged on August’s 14-month low, and translates into stagnation at best in terms of the official manufacturing output data. Firms’ expectations of future output growth also slipped to a four-month low.

“There was better news on the hiring front, with job creation perking up to a nine-month high. However, with employment rising faster than output, productivity may be slipping.

“Although the hurricanes appear to have made little overall impact on production, supply delays were widely reported and prices for many inputs rose, suggesting some near-term upward pressure on inflation.”

Services -- “Given the disruption caused by recent hurricanes, some pull-back in business activity was understandable, so the resilient reading of the September services PMI makes for encouraging reading.

“Looked at alongside the manufacturing PMI, the survey data point to GDP rising at an annualized rate of just over 2% in the third quarter. Growth is largely reliant on the services economy, however, as manufacturing lags behind, struggling in part due to the strong dollar.

“While rebuilding and a return to normal business conditions after the hurricanes will hopefully boost growth in the fourth quarter, it’s worrying to see business expectations about activity levels over the coming year drop in September. Measured across both manufacturing and services, future optimism is at its lowest since February, suggesting companies have become increasingly cautious about the outlook.

“However, while optimism has slipped, the ‘hard’ survey data on recent output, new orders and hiring trends remain solid. Combined with the further upturn in price pressures seen in September, the survey data will further fuel expectations that the Fed will be keen to hike interest rates again before the year is out. Average prices charged for goods and services rose at the fastest rate for three years in September, though it’s not yet clear how much of the rise reflected short-term hurricane effects.”

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.