October 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 further in October. The PMI registered 57.7%, down 2.1 percentage points (PP) from the September 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 report reflects “moderately strong production output and continued supplier delivery performance issues,” 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 -- also decelerated (-1.3PP) to 60.3%. 

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Of the industries we track, only Wood Products contracted. Respondent comments included the following:

* Construction -- "Tariffs are beginning to impact business. We ask our suppliers to hold pricing for six months, but we are experiencing difficulties."

* Public Administration -- "September 30 was the last day of the fiscal year. To close out the year and transition to the new year, activity levels will be different from the usual. Economic growth continues to be high, especially related to construction projects. As such, construction contractors, sub-contractors and labor remain in short supply."

Relevant commodities:
* Priced higher -- Construction subcontractors; labor (general and temporary); paper and paper products; corrugate; freight; transportation costs; fuel (diesel and gasoline); and natural gas.
* Priced lower -- Lumber.
* Prices mixed -- None.
* In short supply -- Construction subcontractors; labor (general, construction and temporary); and trucking.

IHS Markit’s October surveys, with both headline numbers increasing, ran counter to ISM’s.

Manufacturing -- New order growth accelerates to five-month high

Key findings:
* Upturn in new business quickens to sharp rate
* Export orders increase fractionally
* Rate of job creation picks up to ten-month high

Services -- Business activity growth regains momentum in October

Key findings:
* Output expansion accelerates
* Input price inflation fastest since September 2013
* Rate of job creation dips to nine-month low

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

Manufacturing -- "The manufacturing sector saw a strong start to the closing quarter of 2018, with new order inflows rising sharply and business optimism spiking higher in an encouraging sign that firms expect the good times to continue into 2019.

“The increasingly bullish mood was also reflected in one of the largest monthly increases in factory payroll numbers seen over the past seven years as firms grew capacity to meet rising workloads.

“The key area of concern remained tariffs, which were widely reported to have contributed to another month of stalled export sales and a steep rise in prices for many inputs. Average input prices rose at one of the sharpest rates seen over the past six years in October. In a clear sign that inflationary pressures are continuing to build, strong customer demand meant firms were often able to push cost increases through to selling prices. Average prices charged for goods leaving the factory gate consequently jumped to one of the greatest extents seen since mid-2011.”

Services -- “A rebound from a weather-torn September and strong demand propelled service sector growth in October. Combined with the steady output growth being recorded in the manufacturing sector, the survey data suggest the economy grew at its fastest rate since July.

“Comparisons with GDP indicate that the latest survey data translate into an annualized rate of economic growth of around 2.5%, representing a solid start to the fourth quarter.

“Expectations of future business growth spiked higher, suggesting companies are expecting a strong end to the year for the economy.

“Average selling prices for goods and services rose at a rate only marginally below September’s ten-year survey record high, however, indicating that intensifying inflationary pressures remain a key concern.

“Price rises often reflected the need to pass higher costs on to customers, in turn often linked to tariffs, upward wage growth and higher interest rates. Consumer price inflation therefore looks set to remain elevated.”

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.