August 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 August. The PMI registered 61.3%, down 3.2 percentage points (PP) from the July 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 24th consecutive month, led by continued expansion in all subindexes that make up the PMI,” said Timothy Fiore, Chair of ISM’s Manufacturing Business Survey Committee. The only sub-indexes with lower August values included input prices, exports and imports. 

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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 quickened (+2.8PP) to 58.5%. Only input prices and imports decelerated. 

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Of the industries we track, Wood Products and Ag & Forestry contracted in August. Respondent comments included the following --

* Construction: "Tariff-related cost increases are beginning to accelerate, whether tariffs have been put into effect or not."

* Real Estate: "Overall, business has increased. Many factors can be attributed to this increase in demand, [including] the [federal] budget and positive outlook on the economy."

Relevant commodities --
* Priced higher: Corrugate; fuel; paper; transportation and trucking services; freight.
* Priced lower: None.
* Prices mixed: Diesel and lumber.
* In short supply: Construction subcontractors; labor (construction and general); freight; and truck drivers.

IHS Markit’s August surveys, although still strong, were not quite as upbeat.

Manufacturing -- August PMI signals strong growth despite dipping to nine-month low

Key findings:
* PMI indicates strong improvement in operating conditions
* Rates of output and new order growth ease but remain solid
* Inflationary pressures soften

Services -- Service sector activity growth eases, amid weaker new business upturn

Key findings:
* Output and new business expand at softer rates in August
* Employment growth eases to seven-month low
* Inflationary pressures ease

Commentary by Chris Williamson, Markit’s chief business economist --

Manufacturing: "Manufacturers reported the smallest output rise for almost a year in August, suggesting production growth could be as weak as 0.2% in the third quarter.

"Exports remain the key source of weakness for producers, with foreign orders barely rising in August after two months of modest declines. The strongest growth is being seen in consumer-facing companies, reflecting robust domestic demand, in turn linked to the strong labor market and buoyant consumer confidence, though even here growth has slowed.

"However, at least some of the slowdown compared to earlier in the year reflects production being curbed by widespread shortages of inputs, [truckers] and labor, leading to a further build-up of backlogs of work. For producers of investment goods such as plant and machinery, order books are backing-up at a rate not exceeded in over ten years.

"Tariffs and trade wars were also commonly cited as factors behind companies building safety stocks of inputs to ensure supply or lock-in lower prices, exacerbating supply shortages and also driving prices even higher. Looking at the survey responses, almost two-thirds (64%) of companies reporting higher input prices explicitly blamed tariffs as the cause of increased costs. Almost one-in-three went on to cite tariffs as the cause of having to hike prices to customers. Overall price pressures eased somewhat, however, which if sustained could take some heat off consumer price inflation in coming months."

Services: “The weaker PMI numbers indicate that the third quarter is unlikely to see the pace of economic growth match the 4.2% clip seen in the second quarter, though it’s clear that domestic demand remains strong, helping companies raise prices at a near-record rate.

“The survey data so far for the third quarter signal annualized GDP growth of just under 3.0%. However, further momentum was lost in August, and the weakest rise in new orders for goods and services for eight months suggests growth could wane further in September.

“Similarly, while the survey employment readings remain roughly consistent with a non-farm payroll gain of just under 200,000, the rate of job creation may likewise start to slow. Backlogs of work barely rose for a second successive month in August, indicating that existing operating capacity levels are broadly sufficient to cope with current demand growth.

“However, despite the signs of slower growth, companies continued to report strong pricing power, underscoring the on-going buoyancy of domestic demand in particular. Average prices charged for goods and services rose at a rate only slightly below July’s nine-year survey record high.”

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.