February 2019 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey showed that in February the expansion in U.S. manufacturing decelerated. The PMI registered 54.2%, down 2.4 percentage points (PP) from the January 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 drop-offs in new orders (-2.7PP), production (-5.7PP) and employment (-3.2PP) 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 -- accelerated (+3.0PP) to 59.7%. Jumps in new orders (+7.5PP), order backlogs (+3.0PP) and export orders (+4.5PP) helped lift the NMI. 

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All of the industries we track expanded. Respondent comments included:

·     Paper Products -- "Strong domestics market. Slow export markets."

·     Construction -- "Still strong in all areas, due mostly to commercial construction activity."

Relevant commodities:

·     Priced higher – Paper and paper-based products; oil; and labor.

·     Priced lower -- Diesel.

·     Prices mixed -- None.

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

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

Manufacturing -- PMI dips to 18-month low in February

Key findings:

·     Operating conditions improve at slowest pace since August 2017

·     Rates of output and new order growth soften

·     Inflationary pressures ease

Services -- Business activity growth accelerates to seven-month high in February

Key findings:

·     Output increases at sharp rate

·     New business expansion also picks up pace

·     Faster rises in employment and backlogs highlight strain on capacity

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

Manufacturing -- "The PMI indicates the U.S. manufacturing sector is growing at its weakest rate for one and a half years, with firms reporting a marked easing in production growth in February, linked to a similar slowdown in order book growth.

“The survey exhibits a strong advance correlation with comparable official data, and suggests that factory production and orders growth rates are close to stalling midway through 1Q, albeit in part representing some payback after a strong January. Export markets remained the principal drag on order books.

“Having seen demand grow faster than production through much of 2018, order book and output trends have come back into line in recent months, hinting at an alleviation of capacity constraints as demand cools. Backlogs of work barely rose as a result, and price pressures have likewise moderated, though tariffs were again reported to have pushed costs higher. Hiring has consequently also slowed.

“Worries regarding the impact of tariffs and trade wars, alongside wider political uncertainty, undermined business confidence, with expectations of future growth running at one of the most subdued levels seen for over two years and suggesting downside risks prevail for coming months."

Services -- “The U.S. PMI surveys tell a tale of two economies in February, with any slowdown story confined to the goods-producing sector. While manufacturing struggled, with the surveys consistent with a near stalling of factory output and order books, the service sector remained encouragingly resilient, enjoying its strongest burst of activity for seven months.

"With the size of the vast service sector overshadowing the manufacturing sector, the two surveys suggest the overall pace of economic growth accelerated in February. Having correctly indicated that the economy grew at a slower but still solid pace in 4Q (our model from the survey indicated 2.5% growth against an initial official estimate of 2.6%), the data for the first two months of 2019 point to a similar 2.6% annualized rate of expansion. In addition to signaling stronger economic growth, the surveys suggest hiring also remained encouragingly solid in February with a 250,000 non-farm payroll rise indicated, albeit predominantly driven by the service sector.

"The worry is that the manufacturing slowdown will spill over to the service sector, damping economic growth in coming months. Companies themselves certainly appear to have become more circumspect, with business optimism cooling in February amid worries over the impact of tariffs, trade wars, higher prices and rising interest rates.”

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.