March 2019 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey showed that in March the expansion in U.S. manufacturing marginally accelerated. The PMI registered 55.3%, up 1.1 percentage points (PP) from the February 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. Increases in employment (+5.2PP) and input prices (+4.9PP) 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 (-3.6PP) to 56.1%. The drop in new orders (-6.2PP) and jump in input prices (+4.3PP) were significant. 

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Of all the industries we track, only Paper Products contracted. Respondent comments included:

• Wood Products -- "Weather in the domestic market is constraining homebuilding across the nation -- too wet in the south, severe winter in the north. Expectations are that homebuilding backlog is growing, and a surge of domestic business will come in May and June. Internationally, the Chinese trade war is still holding business back, but expectations are that in April or May, business will spring back materially as tariffs resolve."
• Construction -- "While we have a slowed down in residential service and install [area], we are still experiencing strength in the new commercial construction area."
• Real Estate -- "April is when our real[ly] busy season begins and it has arrived early this year, demand is quite strong."

Relevant commodities:

• Priced higher -- Construction subcontractors; fuel (diesel and gasoline); labor (general, construction and temporary); and paper and paper products.
• Priced lower -- None.
• Prices mixed -- None.
• In short supply -- Construction subcontractors; labor (general, construction and temporary); and truck deliveries.

IHS Markit’s March survey headlines diverged from those of ISM.

Manufacturing -- PMI dips to lowest since June 2017 and price pressures moderate

Key findings:

• Operating conditions improve at modest pace
• Output and new order growth rates ease
• Inflationary pressures soften further

Services -- Solid upturn in services activity, but business expectations drop to lowest since December 2017

Key findings:

• Business activity and new order growth rates soften, but remain strong
• Degree of business optimism at 15-month low
• Pace of cost inflation relatively subdued

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

Manufacturing -- "A further deterioration in the manufacturing PMI suggests the factory sector is acting as an increasing drag on the U.S. economy. The March survey is consistent with production falling at a quarterly rate of 0.6% according to historical comparisons with official data.

“Encouragingly, companies report that at least some of the slowdown is due to capacity constraints, notably in terms of skill shortages. One-in-three companies reporting a drop in headcounts cited an inability to fill vacancies. Those looking for positive signals will therefore note that hiring remained encouragingly solid during the month and expectations of future output perked up, albeit still running below levels seen this time last year.

“However, things may well get worse before they get better, as the forward-looking indicators are a cause for concern. New order growth has fallen close to the lows seen in the 2016 slowdown, often linked to disappointing exports, tariffs and signs of increasing caution among customers. The ratio of new orders to existing inventory has meanwhile fallen to its lowest since June 2017, suggesting the production trend may weaken further in April.”

Services -- “Another solid service sector performance helped offset a deteriorating trend in manufacturing to leave the PMI surveys indicative of robust economic growth in March. For the first quarter as a whole, the surveys are consistent with the economy growing at an annualized rate of approximately 2.5%, painting a relatively rosy picture compared to official data, which so far suggest GDP could come in slightly weaker.

“Dig deeper and the picture darkens. Inflows of new work have moderated markedly compared to this time last year as manufacturing weakness and growing concerns about the economic outlook have increasingly spread to the service sector. Business optimism about the year ahead is now the lowest for two and a half years, posing downside risks to growth in coming months.

“Hiring has already been hit by the drop in business optimism and weakened inflows of new work, easing to the lowest since mid-2017, albeit still indicating non-farm payroll growth of around 165,000.

“However, the surveys also provide evidence that hiring is in part being constrained by labor shortages, which is limiting capacity in both manufacturing and services, causing backlogs of work to build up again in March and suggesting that businesses -- especially in the service sector -- will remain busy in the near term at least.”

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.