April 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 noticeably in April. The PMI registered 57.3%, down 2.0 percentage points from the March 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. Only 2.6% of respondents reported paying lower prices; 61.2% reported paying higher prices. "The increases in prices across all industry sectors continues," said ISM’s Timothy Fiore, noting “price increases in metals (all steels, steel components, aluminum and copper), corrugate, wood, wood products and plastics.” Moreover, the Prices sub-index is at its highest level since April 2011. 

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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 slowed (-2.0 percentage points) to 56.8%. Price increases were somewhat more subdued in the service sector: 33% reported higher prices; 4% lower prices. 

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All of the industries we track expanded in April. Respondent comments included the following --

·     Construction: "The trade tensions are impacting purchasing of steel and are causing suppliers to send letters of concern regarding contracted purchases for this year and the future based on these proposed tariffs."

·     Finance & Insurance: "Economy is humming along. [Activity in] both residential and commercial construction [is] apparent. Agriculture sector seems to be moderating at these commodity price levels. The international trade situation appears to be shifting on a minute-by-minute basis, which has folks nervous."

·     Public Administration:  "Construction activity continues to remain strong in the region, resulting in capacity issues and shortages of labor, materials and subcontractors."

Relevant commodities --
* Priced higher: Caustic soda; corrugate and corrugated boxes; fuel (diesel and gaoline); and wood.
* Priced lower: None.
* Prices mixed: None.
* In short supply: Construction subcontractors and labor.

IHS Markit’s April surveys presented a much more upbeat view than did ISM’s.

Manufacturing -- U.S. manufacturing operating conditions improve at fastest rate since September 2014.
Key findings:
* PMI rises to highest level in over three-and-a-half years
* Output grows at quickest pace since January 2017
* Inflationary pressures intensify

Services -- New business growth fastest since March 2015.
Key findings:
* New orders increase at accelerated and sharp pace
* Upturn in business activity quickens
* Business confidence highest since May 2015

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

Manufacturing: “April saw US manufacturers reporting the strongest monthly improvement in business conditions since September 2014. The survey suggests the economy has started the second quarter on a solid footing and sends an encouraging signal for GDP growth to accelerate after the modest 2.3% rate of expansion seen in the first quarter.

“With inflows of new orders rising at an accelerated pace, greater input buying and business expectations regarding future production levels running at one of the highest levels seen over the past three years, there’s plenty of evidence to suggest strong growth will persist through May.

“The upturn is being led by large firms, with smaller companies trailing behind but nonetheless also seeing some of the best business conditions for three years.

“Warning lights are being flashed in relation to inflation, however, with factories reporting the strongest rise in prices for nearly seven years. Suppliers are hiking prices in response to surging demand, while tariffs and higher oil prices are also exerting upward pressure on costs. With the average price of goods leaving factories rising at the fastest rate since 2011, consumer price inflation looks set to accelerate.”

Services: “The improved service sector performance comes on the heels of news of faster manufacturing growth, pointing to a welcome broad-based strengthening of the economy at the start of the second quarter.

“As such, the data support the view that second quarter GDP growth will come in stronger than the 2.3% rate seen at the start of the year.

“The two surveys also collectively point to another month of solid job gains, commensurate with the official measure of non-farm payrolls rising by approximately 200,000 in April.

“Perhaps the most important development, however, is the upturn in price pressures. Survey evidence indicates that rising demand has allowed increasing numbers of companies to raise prices for both goods and services in recent months. Higher oil prices are also pushing up costs. Measured across both manufacturing and services, input costs are rising at the fastest rate since 2013, which will inevitably put greater pressure on consumer prices in coming months, all of which makes for a hawkish policy outlook.”

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.