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The Institute for
Supply Management’s (ISM) monthly sentiment survey showed that in December the
expansion in U.S. manufacturing decelerated. The PMI registered 54.1%, down 5.2 percentage points (PP) from
the November 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. The only sub-indexes with
higher December values were customer inventories and export orders.
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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 (-3.1PP) to 57.6%. Only new
orders and exports exhibited higher index values.
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Of the industries we track, Paper
Products contracted and Real Estate was unchanged; the rest expanded. Respondent
comments included:
* Construction -- "New residential home sales
have slowed significantly. Tariff delay has slowed material cost increases, but
all indications are that January will bring price increases."
* Real
Estate, Rental & Leasing -- "Business is exceeding expectations. 2019
should [equal] or exceed 2018."
Relevant commodities:
* Priced higher -- Construction subcontractors; freight;
labor (general and construction).
* Priced lower -- Crude oil; lumber products.
* Prices mixed -- Fuel (diesel and gasoline).
* In short
supply -- Construction subcontractors; labor (general, construction and temporary);
hardwood.
IHS Markit’s
December survey headlines also showed decelerating activity.
Manufacturing -- PMI slips to 15-month low in December
Key
findings:
* Weakest improvement in operating conditions since September 2017
* New order growth eases to 15-month low
* Business confidence lowest since October 2016
Services -- New business growth weakest since October 2017
Key
findings:
* New orders expand at solid, albeit slower rate
* Business activity growth softens to three-month low
* Business confidence dips to lowest in a year
Commentary
by Chris Williamson, Markit’s chief business economist:
Manufacturing -- "Manufacturers reported a weakened pace of
expansion at the end of 2018, and grew less upbeat about prospects for 2019.
Output and order books grew at the slowest rates for over a year and optimism
about the outlook slumped to its gloomiest for over two years. The month rounds
of a fourth quarter in which manufacturing production is indicated to have
risen at only a modest annualized rate of about 1%.
“Some
of the weakness is due to capacity constraints, with producers again reporting
widespread difficulties in finding suitable staff and sourcing sufficient
quantities of inputs. However, the survey also revealed signs of slower demand
growth from customers, as well as rising concerns over the impact of tariffs. Just
over two thirds of manufacturers reporting higher costs attributed the rise in
prices to tariffs.
“Growth
was led by strengthening demand for consumer goods, and robust growth was also
reported for investment goods such as plant and machinery. But producers of
intermediate goods -- who supply inputs to other manufactures -- reported the
weakest rise in new orders for over two years, hinting at increased destocking
by their customers. “A shift to inventory reduction was highlighted by
purchasing activity in the manufacturing sector rising at the weakest rate for
one and a half years in December, providing further evidence that companies
have become increasingly cautious about spending amid rising uncertainty about
the outlook.”
Services -- “Service sector business activity grew at a reassuringly
solid rate in December, though like the manufacturing economy has seen the pace
of expansion moderate somewhat since the strong rates enjoyed earlier in the
year. Despite the slowing, the December surveys remain consistent with GDP
growing at a healthy annualized rate of about 2.5% in the fourth quarter, with
momentum easing only very slightly as the quarter proceeded.
"Hiring
also remains encouragingly buoyant. The December survey is indicative of
non-farm payrolls growth of approximately 190,000, driven mainly by increased
service sector job gains as firms boosted capacity in line with rising demand.
Domestic markets remained the main source of business growth, though the weaker
dollar was also reported to have helped boost exports.
"Growth
may continue to moderate in coming months, however, as backlogs of unfinished
work across the manufacturing and service sectors failed to rise for the first
time since June 2017, reflecting the recent slowing in growth of new business.
Firms’ expectations of growth in the coming year also deteriorated markedly,
down to the second-lowest in over two years, adding to the gloomier outlook.
"Inflationary
forces meanwhile cooled during the month as lower oil prices helped to
alleviate upward cost pressures from tariffs and, to a lesser extent, wages.
Average prices charged for goods and services rose at the slowest rate for a
year as a result, which should feed through to lower consumer inflation in
coming months, with PCE inflation dipping below 2%.”
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.
