October 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 decelerated in October. The PMI registered 58.7%, down 2.1 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 sub-index value was higher in October than in September. 

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The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- accelerated (+0.3 percentage points) to 60.1%, the highest NMI reading since that index was created in 2008. Sub-indexes with lower values in October included new orders, input prices and order backlogs. 

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All of the industries we track expanded. Respondent comments included the following --
* Construction: "The current hurricane damage will result in a shortage of some building materials and draw labor forces away from our area."
* Real Estate, Rental & Leasing: "Business levels increased due to hurricane recovery efforts."

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

ISM’s and IHS Markit’s October surveys were consistent insofar as both pairs reported expansion of their respective sectors; rates of (de)acceleration differed, however, as is customary. Key findings from Markit’s surveys include the following:

Manufacturing --
* Production and new orders both increase at steeper rates
* Supplier performance deteriorates at quickest pace since February 2014
* Growth in employment picks up to 28-month record

Services --
* Output growth in line with that seen in September
* Upturn in new business softens to six-month low
* Input price inflation eases to seven-month low

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

Manufacturing: “US manufacturing stepped up a gear at the start of the fourth quarter, boding well for higher factory production to support robust economic growth in the closing months of 2017.

“Production volumes jumped higher on the back of a substantial improvement in order book inflows, in part due to supply chains returning to normal after the hurricanes but also reflecting a combination of strong underlying demand.

“Factory jobs growth has also picked up to one of the strongest since the global financial crisis, underscoring the improvement in optimism about future trading among manufacturers.

“An important change in October was the broadening out of the expansion to smaller firms, which have lagged behind the strong growth reported by larger rivals throughout much of the year to date but under-performed to a lesser extent in October.”

Services: “The services PMI survey highlights the dilemma facing the Fed as it seeks to determine the right policy course amid signs of solid growth but soft inflation.

“Together with the manufacturing PMI, which rose higher in October as hurricane-related supply chain disruptions eased, the latest services survey is consistent with underlying growth in the economy of approximately 3%, as well as buoyant jobs growth.

“With the data for October setting the scene for another robust GDP increase in the fourth quarter, a December rate hike is very much on the cards.

“However, a drop in inflationary pressures adds an element [of] uncertainty to the picture. Having been buoyed by supply chain disruptions in prior months, input cost pressures eased at the start of the fourth quarter, and the rate of increase of average prices charged for goods and services dropped markedly.

“While the Fed may likely tilt towards hiking in December on the back of robust economic growth, much may depend on the data flow in coming weeks for signs that stronger growth is feeding through to higher prices.”

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.