May 2019 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey showed that in May the expansion in U.S. manufacturing decelerated. The PMI registered 52.1%, down 0.7 percentage point (PP) from the April 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 jump in input prices (+3.2PP) and drop in order backlogs (-6.7PP) were the most noteworthy sub-index changes. 

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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 (+1.4PP) to 56.9%. The jump in employment (+4.4PP) and drop in imports (-5.0PP) were the most noteworthy sub-index changes. 

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Of the industries we track, only Real Estate and Construction expanded. "Ability to source and retain employees continues to strain the business," observed one Construction respondent.

Relevant commodities:

* Priced higher -- Freight; fuel (diesel and gasoline); and labor (general, construction and temporary).

* Priced lower -- Oriented strand board and natural gas.

* Prices mixed -- None.

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

IHS Markit’s May survey headlines were mixed relative to those of ISM.

Manufacturing -- PMI drops to lowest since September 2009

Key findings:

* Marginal improvement in operating conditions
* New orders fall for first time since August 2009
* Output expectations dip to joint-lowest in series history

Services -- New business expansion eases to slowest since March 2016

Key findings:

* Output and new orders rise at only a marginal rate
* Business expectations dip to lowest since June 2016
* Input cost inflation weakest since September 2016

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

Manufacturing -- "May saw U.S. manufacturers endure the toughest month in nearly ten years, with the headline PMI down to its lowest since the height of the global financial crisis. New orders are falling at a rate not seen since 2009, causing increasing numbers of firms to cut production and employment. At current levels, the survey is consistent with the official measure of manufacturing output falling at an increased rate in the second quarter, meaning production is set to act as a further drag on GDP, with factory payroll numbers likewise in decline.

“While tariffs were widely reported as having dampened demand and pushed costs higher, both producers and their suppliers often reported the need to hold selling prices lower amid lackluster demand. While this bodes well for inflation, profit margins are clearly being squeezed as a result.

“With future optimism sliding sharply lower in May, risks to near-term growth have shifted further to the downside.

“While companies of all sizes are struggling, the biggest change since the strong growth seen late last year is a deteriorating performance among larger companies, where surging order book growth just a few months ago has now turned into contraction, the first such decline seen in the series’ ten-year history.”

Services -- “The final PMI data for May add to worrying signs about the health of the U.S. economy. With the exception of February 2016, business reported the weakest expansion for five and a half years as a trade-led slowdown continued to widen from manufacturing to services.

"Inflows of new business showed the second-smallest rise seen this side of the global financial crisis as the steepest fall in demand for manufactured goods since 2009 was accompanied by a further marked slowdown in orders for services.

"The survey data indicate a deterioration of annualized GDP growth to just 1.2% in May, down from 1.9% in April, putting the second quarter on course for a 1.5% rise.

"Employment growth has come off the boil in line with weaker-than-expected sales and gloomier prospects for the year ahead, albeit still showing some resilience. The survey data are running at a level broadly consistent with around 150,000 jobs being added in May.

"The slowdown has also seen inflationary pressures fade rapidly. Despite upward pressure on prices from tariffs, the rate of increase of average prices charged for goods and services barely rose in May, in marked contrast to the strong rises seen earlier in the year, as increasing numbers of companies competed on price amid weak demand.

"As with manufacturing, the biggest change in recent months has been a sharp deterioration in growth of orders and output at larger companies, linked in part to worsening export trends, trade war worries and rising geopolitical uncertainty."

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.