September 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 September. The PMI registered 59.8%, down 1.5 percentage points (PP) from the August 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 25th consecutive month, led by strong production output, continued strength in new orders, improvements in supply chain delivery performance, and better utilization of existing inventory accounts,” said Timothy Fiore, Chair of ISM’s Manufacturing Business Survey Committee. 

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The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- accelerated (+3.1PP) to a record-high 61.6%. 

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Of the industries we track, only Wood Products (which went unmentioned in the report) did not expand. Respondent comments included the following --

* Construction: "New residential construction market is still strong, with a good backlog of orders. Labor shortages and tariffs on materials continue to negatively weigh on earnings."

* Paper Products: "Sourcing hourly workers for remote locations continues to be a challenge for both full-time and part-time opportunities. Have implemented a wide variety of recruiting techniques and suppliers to aid us in sourcing this hard-to-find talent."

Relevant commodities --
* Priced higher: Diesel; freight; paper; paper products; corrugate; and lumber.
* Priced lower: Unleaded gasoline.
* Prices mixed: None.
* In short supply: Construction subcontractors; labor (general, construction and temporary); and freight.

IHS Markit’s September surveys, ran counter to ISM’s.

Manufacturing -- Output and new order growth gains momentum in September

Key findings:
* PMI rises to four-month high
* Steeper increases in production and new business
* Backlogs expand at joint-fastest rate for three years

Services -- Service sector activity growth dips to eight-month low

Key findings:
* Business activity expands at weaker pace
* Prices charged inflation at record high
* The pace of job creation at joint-fastest since June 2014

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

Manufacturing: "U.S. manufacturing showed resilience in the face of storms in September, with output rising at one of the fastest rates seen so far this year. New orders growth has lifted to the highest since May and is being boosted in particular by strong domestic demand, especially in consumer markets. In contrast, export orders grew only very modestly again.

“Worries about trade wars and tariffs continued to dominate, pushing business confidence in the outlook down to its lowest for a year.

“Tariffs, alongside higher oil prices, were meanwhile a key factor reportedly driving input costs higher. Almost two-third of all companies reporting higher input prices ascribed the increase to tariffs.

“Worries about the impact of tariffs on prices also led to increased incidences of stock building, exacerbating existing supply chain delays and driving prices further higher. Raw material inventories rose at one of the steepest rates seen this side of the global financial crisis. While stock building boosts current sales at suppliers it poses downside risks to growth in future months.”

Services: “Service sector business growth has eased considerably since peaking back in May, but remains relatively solid. Some of the slowdown can be traced to capacity constraints, with new business once again rising at a steeper rate than firms were able to boost output.

“Combined with the manufacturing results, the September survey adds to signs that the pace of economic growth cooled to the lowest since January but continued to run close to a 3% annualized rate over the third quarter as a whole.

“Firms are hiring in increasing numbers to expand capacity, with the employment index from the manufacturing and services surveys rising to a level indicative of a further non-farm payroll rise in excess of 200,000.

“However, despite the increase in employment, many companies are clearly still struggling to meet demand, with strong inflows of new business causing backlogs of work to accumulate across the economy at one of the fastest rates seen since 2014.

“The combination of reduced spare capacity and robust domestic demand is driving prices charged for goods and services higher at a rate not seen since the global financial crisis.”

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.