July 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 in July. The PMI registered 58.1%, down 2.1 percentage points (PP) from the June 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 23rd consecutive month, led by continued expansion in new orders, production and employment. Inventories are expanding at a faster rate as a result of supplier deliveries improving compared to the prior month,” said Timothy Fiore, Chair of ISM’s Manufacturing Business Survey Committee. The only sub-indexes with higher July values included employment and inventories. 

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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 (-3.4PP) to 55.7%. Only employment, input prices and imports exhibited significant increases. 

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

* Wood Products: "The so-called trade war is now taking its toll on business activity, resulting in substantial reductions to new export orders. China has all but stopped taking orders, causing inventories to build up in the U.S. Domestic business is steady. However, it is too small to carry the load that export markets have retreated from. As a result, we will be meeting as a corporation next week to recast our second-half sales and revenue projections."

* Construction: "Business is strong in both our commercial-construction and residential-service areas."

* Wholesale Trade: "Import tariffs on wood and steel. Shortages of rail cars, truck drivers and skilled labor. High-priced construction materials."

Relevant commodities --
* Priced higher: Caustic soda; corrugate and corrugated boxes; oil; fuel (diesel and gasoline); natural gas; paper; lumber; transportation and trucking services.
* Priced lower: None.
* Prices mixed: None.
* In short supply: Construction subcontractors; labor (construction and temporary); and truck drivers.

IHS Markit’s July surveys presented a mixed view.

Manufacturing -- PMI dips to five-month low in July
Key findings:
* Manufacturing growth remains strong, despite easing slightly
* Output expands at softest pace for eight months
* Inflationary pressures intensify

Services -- Service sector business activity growth remains sharp, but prices charged rise at fastest rate in almost four years
Key findings:
* Business activity upturn one of the strongest in last three years
* New business expands at weakest rate for six months
* Input price inflation eases, but charges rise at accelerated pace

Markit commentary --

Manufacturing: “The U.S. manufacturing sector continued to expand in July, but shows increasing signs of struggling against headwinds of supply shortages, rising prices and deteriorating exports.

"The latest survey showed output rising at a rate roughly equivalent to an annualized 1% pace of expansion, which is the weakest since late last year. While a weakening of new export orders for a second successive month suggested foreign demand has waned compared to earlier in the year, the slowdown can be also in part attributed to increased difficulties in sourcing sufficient quantities of inputs. Suppliers’ delivery delays were more widespread than at any time in the survey’s history. With producers often scrambling to buy enough raw materials, suppliers enjoyed greater pricing power. Not surprisingly, with tariffs also kicking in, cost pressures spiked higher again.

"Some relief for manufacturers came from strong domestic demand, which meant firms were increasingly able to pass higher costs on to customers. Average prices charged for goods consequently rose at the steepest rate for seven years, which is likely to feed through to higher consumer prices in coming months."

Services: “U.S. service providers experienced strong growth conditions at the start of the third quarter, with business activity rising at only a slightly softer pace than in June. Strong domestic demand helped to support another improvement in new order levels and a solid expansion of payroll numbers in July.

“However, business expectations across the service economy edged down to a six-month low. Survey respondents cited concerns about rising costs and trade frictions, alongside difficulties sustaining the tempo of new business growth seen in the second quarter of 2018.

”Rising operating expenses continued to place pressure on margins in the service economy, partly reflecting higher wages and fuel bills in July. There were signs that higher input costs have started to shift through to consumers, as service providers recorded the fastest increase in their average prices charged since September 2014.”

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.