January 2018 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 decelerated slightly in January. The PMI registered 59.1%, down 0.2 percentage point from the rebenchmarked and revised reading for December 2017. (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. New orders, production and employment exhibited lower values in January than in December. 

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 -- accelerated markedly (+3.9 percentage points) to 59.9%. Only inventories and inventory sentiment had lower sub-index values in January. 

Click image for larger version

Of the industries we track, Wood Products and Ag & Forestry contracted; Paper Products, Real Estate and Construction expanded. Respondent comments included the following:
* "Month-over-month steady growth, on average, [is] 3% on project volume and 1% on total revenue" (Construction).
* "Business continues to strengthen" (Paper Products).

Relevant commodities --
* Priced higher: Fuel (diesel and gasoline); construction labor; lumber (incl. hardwood); natural gas; pulp; paper; caustic soda; sulfuric acid; corrugate; and crude oil.
* Priced lower: None.
* Prices mixed: None.
* In short supply: Coated freesheet; construction subcontractors; labor (general, construction and temporary).

IHS Markit’s January surveys diverged from ISM’s.

Manufacturing -- January PMI signals strongest manufacturing growth since March 2015.
Key findings:
* Output and new orders expand at quickest rates for a year;
* Purchasing activity rises at steepest pace since September 2014;
* Input price inflation eases but remains sharp.

Services -- U.S. business activity growth eases to nine-month low.
Key findings:
* Upturn in output softens but remains solid;
* New business expands at fastest pace since September 2017;
* Backlogs increase at joint-strongest rate since March 2015.

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

Manufacturing: “U.S. manufacturing started 2018 in fine fettle, with the PMI up to its highest for over two-and-a-half years. Output growth accelerated in response to fuller order books, the latter buoyed by the twin drivers of robust domestic demand and rising exports.

“Factory payroll growth remained among the highest seen over the past three years, underscoring the bullish mood evident across the manufacturing sector.

“Pricing power is also returning as a result of strengthening demand, which should help bolster profit margins, but is likely to also feed through to higher consumer prices.

“The acceleration of manufacturing growth and upward price trends are grist to the mill for Fed hawks, adding to the likelihood of interest rates rising in March.”

Services: “A slowdown in the service sector comes as a disappointment, though was partially offset by faster manufacturing growth during the month. Combined, the two PMI surveys point to the economy expanding at a reasonably solid, albeit not exciting, 2-2.5% annualized rate at the start of the first quarter.

“Beneath the headline numbers, the survey findings are more encouraging, and suggest the pace of economic growth could accelerate in coming months. Most importantly, growth of new orders jumped higher in both sectors in January, registering the largest upturn in new work since last August and one of the biggest gains seen over the past three years.

“Backorders also showed the biggest rise for almost three years as firms struggled to cope with rising demand.

“This upturn in client demand was a key factor behind another month of strong hiring, but also encouraged firms to hike prices. Selling price inflation accelerated in both manufacturing and services as pricing power continued to return.”

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.