March 2018 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey showed that the expansion in U.S. manufacturing decelerated slightly in March. The PMI registered 59.3%, down 0.5 percentage point from the February reading. (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 perhaps customer inventories were consistent with lessened activity; all industries reported paying higher input prices. 

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The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- slowed for a second month (-0.7 percentage point) to 58.8%. Sub-indexes with higher values were offset by an equal number of decliners; as with manufacturing, all service industries reported paying higher prices. 

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All of the industries we track expanded in March. Respondent comments included the following:
* "The unbelievable amount of market volatility in construction-related materials that started with lumber continues with the tariffs on steel and aluminum. Accurate, long-term planning has become incredibly difficult, as distributors that historically held costs for at least 30 days are now, in some cases, committing to only seven days, as prices can change drastically in that time." (Construction)

* "Housing market [is] still strong, despite a shortage of construction workers." (Public Administration)

Relevant commodities --
* Priced higher: Caustic soda; corrugate; coated paper.
* Priced lower: None.
* Prices mixed: None.
* In short supply: Construction subcontractors and labor.

IHS Markit’s March surveys were mixed, with the manufacturing PMI rising but services falling

Manufacturing -- Manufacturing growth is strongest in three years.
Key findings:
* PMI rises to highest since March 2015
* Output and new orders continue to increase markedly
* Input costs rise to the greatest extent since November 2012

Services -- Growth remains strong.
Key findings:
* Service sector output and new order growth ease...
* ...but rates of expansion remain robust overall
* Upturn in employment reaches seven-month high.

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

Manufacturing: “US factories reported a strong end to the first quarter, with the PMI advancing to a three-year high. The goods producing sector should therefore make a positive contribution to economic growth in the first quarter, as rising demand fueled further improvements in factory production.

“Optimism about the year ahead has meanwhile also risen to its highest for three years, generating yet another solid payroll gain and suggesting strong growth momentum will be sustained in the second quarter.

“Companies cited rising demand at home and abroad plus recent government policy announcements as helping shore up confidence in terms of their future production levels.

“However, recent tariff announcements were already reported to have added to inflationary pressures, and also led to the stockpiling of goods expected to rise further in price in coming months. Input cost inflation consequently hit the highest since 2012. Increased costs were often passed on to customers, meaning prices charged for goods at the factory gate showed the steepest rise in over four years.”

Services: “Measured across both manufacturing and services sectors, US business activity growth slowed in March compared to February's 27-month high, but remained encouragingly solid.

“The month rounds off a quarter in which the PMI surveys indicate that the economy grew at an annualized rate of approximately 2.5% (though official GDP data are likely to come in at least 0.5% weaker, due to seasonality issues).

“Strong inflows of new orders means growth looks set to accelerate into the second quarter. The past two months have seen the largest back-to-back increases in demand for almost three years.

“The strongest jobs gain since December 2016 further underscored the bullish outlook, as firms stepped up their hiring to meet the recent upturn in demand.

“Price pressures meanwhile eased slightly during the month, though remained elevated by standards of the past four years, linked in many cases to healthy demand boosting firms' pricing power, as well as recent tariff announcements adding to inflationary pressures in the manufacturing sector.

“Expectations about future growth were mixed: while recent protectionist announcements appear to have helped bolster confidence in parts of the domestic manufacturing sector, service sector optimism came off the boil.”

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.