June 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 accelerated in June. The PMI registered 60.2%, up 1.5 percentage points (PP) from the May 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. "This indicates strong growth in manufacturing for the 22nd consecutive month, led by continued expansion in new orders, production and employment,” said Timothy Fiore, Chair of ISM’s Manufacturing Business Survey Committee. “However, inventories continue to struggle to maintain expansion levels as a result of supplier deliveries slowing further."

“The price increases across all industry sectors continue,” said Fiore, including metals (all steels, steel components, aluminum and copper), chemicals, corrugate, freight, electronic components, fuels, plastics and wood products. 

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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 rose further (+0.5PP) to 59.1%. Most sub-indexes exhibited significant changes, although changes overall were mixed. 

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All of the industries we track except Ag & Forestry expanded in June. Respondent comments included the following --

* Construction: "Tariffs, freight [issues] and labor shortages continue to have an inflationary influence on costs."

Relevant commodities --
* Priced higher: Caustic soda; corrugate and corrugated boxes; oil; diesel; natural gas; paper and paper products; wood pallets; and lumber.
* Priced lower: Gasoline.
* Prices mixed: None.
* In short supply: Construction subcontractors; and labor (construction and temporary).

IHS Markit’s June surveys presented a generally upbeat view.

Manufacturing -- U.S. manufacturing growth remains strong despite hitting four-month low.
Key findings:
* Output expands at slower, but still solid, rate
* New orders increase at softest rate since November 2017
* Suppliers¡¦ delivery times lengthen to the greatest extent in series history

Services -- Business activity growth remains sharp in June.
Key findings:
* Output expansion the second-strongest since April 2015
* Steep, but slower upturn in new orders
* Rate of input price inflation joint-quickest since September 2013

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

Manufacturing: “The PMI for June rounds off the best quarter for manufacturing [in] almost four years, but also fires some warning shots about what lies ahead. As such, the second quarter could represent a peak in the production cycle.

“The survey has a good track record of accurately anticipating changes in the official manufacturing output data, and suggests the goods-producing sector is growing at an annualized rate of around 2.5%.

“On the downside, new orders inflows were the weakest for seven months, with rising domestic demand countered by a drop in export sales for the first time since July of last year. Business optimism about the year ahead also fell to the lowest since January, with survey respondents worried in particular about the potential impact of trade wars and tariffs.

“Tariffs were widely blamed on a further marked rise in input costs, and also linked to worsening supply chain delays -- which hit the highest on record, exacerbating existing tight supply conditions.”

Services: “Another month of solid business activity growth means the second quarter saw the strongest performance from the service sector [in] three years. Coming on the heels of a robust manufacturing expansion in the second quarter, the survey data add to indications that the economy has picked up considerable growth momentum since the first quarter.

“June also saw further impressive job gains, with the manufacturing and services surveys indicating that the last two months have seen business hiring increase at the steepest rate for just over three years. At this level, the survey’s employment indices are historically consistent with a non-farm payroll rise on the order of 230,000.

“On the downside, price pressures remained elevated, and are likely to feed through to higher consumer price inflation in coming months. There are also signs that growth could weaken in the third quarter: business expectations about future growth have pulled back from recent highs, and new order flows have slowed for two successive months. However, all indicators remain at sufficiently high levels to suggest that any slowdown may only be modest.”

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.