January 2019 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey showed that in January the expansion in U.S. manufacturing accelerated. The PMI registered 56.6%, up 2.3 percentage points (PP) from the December 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 increases in the new orders (+6.9PP) and production (+6.0PP) sub-indexes were particularly noteworthy. 

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The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- decelerated (-1.3PP) to 56.7%. The exports orders sub-index tumbled by 9.0PP while the new order retreated by 5.0PP. 

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Of the industries we track, only Real Estate and Construction expanded. Respondent comments included:

·     Paper Products -- "Unlike in the last few years, we are experiencing a 1Q slowdown."

·     Construction -- "Business has slowed well below expectations as our customers deal with the effects of economic situations exacerbated by the government shutdown."

·     Real Estate, Rental & Leasing -- "Order input stable, and supplier deliveries growing. The industry is struggling with capacity constraints."

Relevant commodities:

·     Priced higher -- Labor; and freight.

·     Priced lower -- Fuel (diesel and gasoline).

·     Prices mixed -- None.

·     In short supply -- Construction subcontractors; and labor (general, construction, skilled and temporary).

IHS Markit’s January survey headlines generally paralleled those of ISM.

Manufacturing -- Output growth picks up to four-month high in January

Key findings:

·     Production and new orders both rise at sharper rates

·     Pace of employment growth accelerates

·     Input price inflation eases to one-year low

Services -- Joint-weakest rise in new business since October 2017

Key findings:

·     Rate of new order growth matches December's recent low

·     Activity expansion softest in four months

·     Price pressures ease to 22-month low 

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

Manufacturing -- "January saw U.S. manufacturers start the year with renewed vigor. Production rose at a markedly increased rate, commensurate with the factory sector contributing to robust economic growth of approximately 2.5% in 1Q if such momentum can be sustained in coming months.

"Other encouraging signs included an improved rate of job creation and increased purchasing of inputs, suggesting firms are in the mood for expanding capacity.

“The upturn in business activity in January helped lift confidence in the outlook, though many companies clearly remain concerned about the impact of trade wars and rising protectionism.

“Domestic markets provided the main source of new work for manufacturers, offsetting a near-stalling of export trade, the latter linked to subdued demand for U.S. goods in foreign markets. Although higher than December, the overall rise in new orders was the second-lowest since last August, hinting at a slight cooling of demand growth in recent months which served to keep the headline PMI below the average recorded last year.”

Services -- “The robust economic growth signaled by the U.S. PMI surveys at the start of the year sits in stark contrast to the near-stalling of growth seen in Europe, China and Japan. At current levels, the surveys are consistent with annualized GDP growth of around 2.5% at the start of the year.

“Jobs growth remained buoyant as business optimism perked up to its highest since October. Backlogs of work are meanwhile building up, in part because firms struggled to meet demand, which has in turn allowed sellers to continue to push prices higher.

“However, although still robust, the rates of economic growth, job creation and inflation signaled by the PMI surveys have cooled since peaks seen last year. This possibly reflects some impact from the government shutdown, though scant evidence of such was seen in the anecdotal evidence from the surveys, but also reflects an easing of demand growth, notably from abroad. Foreign sales of goods and services barely rose in January, contrasting with signs of faster growth of domestic orders.” 

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.