December 2017 ISM and Markit Surveys

Click image for larger version

The Institute for Supply Management’s (ISM) monthly sentiment survey showed that the expansion in U.S. manufacturing accelerated in December. The PMI registered 59.7%, up 1.5 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. All of the sub-indexes except employment exhibited higher values in December than in November. 

Click image for larger version

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- decelerated further (-1.5 percentage points) to 55.9%. Only employment, slow supplier deliveries, and input prices had higher sub-index values in December. 

Click image for larger version

Of the industries we track, Wood Products contracted while Ag & Forestry was unchanged; Paper Products, Real Estate and Construction expanded. Respondent comments included the following --
* Construction: "Lumber prices are increasing due to product [being] damaged in the recent wildfires. Duties on steel from Vietnam is expected to cause an increase in steel prices. Ongoing shortages in construction related [to] labor continue to be a problem."
* Paper Products: "All suppliers are reporting strong business activity and difficulties obtaining qualified employees." 

Relevant commodities --
* Priced higher: Caustic soda; corrugate; diesel fuel; construction labor; lumber products; natural gas; paper.
* Priced lower: None.
* Prices mixed: Gasoline; lumber products.
* In short supply: Construction contractors; groundwood; labor (general, construction and temporary); and lumber products.

IHS Markit’s December surveys were broadly consistent with ISM’s. Key findings from Markit’s surveys include the following:

Manufacturing --
* Output expands at quickest pace in 11 months...
* ...supported by steep increase in total new work.
* Rate of job creation fastest since September 2014.

Services --
* Slower expansion in business activity in December.
* Upturn in new orders remains relatively strong.
* Business confidence slips further to a 15-month low.

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

Manufacturing: “U.S. manufacturers ended 2017 on a high. Output growth accelerated to its fastest since the start of the year on the back of a marked upswing in demand as the year came to a close.

“Prospects for the upturn also look good. With business optimism about the year ahead running at its highest for two years in the closing months of 2017, companies are clearly expecting to be busier in 2018.

“The upbeat mood is underscored by an increased appetite to hire new staff, with the survey indicating that factory payroll numbers are rising at a rate not seen for over three years.

“Indicators of backlogs of work and input buying likewise suggest production will continue to grow at a solid pace as we move into 2018. However, the strengthening of demand for raw materials has led to supply chain delays, which have in turn been increasingly linked to higher prices as a sellers’ market develops. Input price inflation accelerated to one of the highest rates seen over the past five years in December, as suppliers hiked prices for a wide range of inputs.

“The combination of strengthening growth, a solid labor market and rising prices will add to expectations that the Fed will remain on track for another rate hike in the near future, with March looking a likely possibility.”

Services: “The final services and manufacturing PMI surveys collectively signaled faster business activity growth than the earlier flash readings, though still indicated a moderation in the pace of expansion to the weakest since June. A welcome improvement in manufacturing output growth was countered by a slowdown in the comparatively larger services economy.

“However, while moderating, the overall rate of expansion remains relatively robust, with the PMIs running at levels consistent with the economy growing at a solid 2-2.5% annualized rate in 4Q.

“Similarly, hiring, while also slowing slightly at the end of the year, continued to run at a pace indicative of non-farm payrolls up by around 195,000 in December as firms boosted capacity in line with rising demand. Price pressures meanwhile moderated but remained elevated by standards seen over the past three years.

“The US economy therefore ends 2017 with an encouraging scoresheet of steady economic growth, solid hiring and firmer inflationary pressures, supporting the view that interest rates will continue to rise in 2018.

“A note of caution is sounded by a deterioration in optimism about the outlook in the service sector to the joint-weakest in the past 18 months. However, hopefully news of tax cuts and fiscal stimulus in 2018 will help revive business spirits and drive growth higher.”

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.