June 2019 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey showed that in June the rate of expansion in U.S. manufacturing decelerated to its slowest since September 2016. The PMI registered 51.7%, down 0.4 percentage point (PP) from the May 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 production (+2.8PP) and drop in input prices (-5.3PP) 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 -- also decelerated further (-1.8PP) to 55.1%. Increases in the input prices (+3.5PP) and order backlog (+3.5PP) sub-indexes were noticeable. 

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Of the industries we track, only Wood Products and Ag & Forestry did not expand. Respondent comments included the following:

* Wood Products -- "Weather in various markets across the country has improved month over month, which has positively affected our daily output. If the trend continues, we will have to replenish [at] an increased month-over-month rate."

* Construction -- "New residential sales are off the typical pace by 10 to 15% year over year. Tariffs are working their way through the system, raising costs on finished materials. Wet weather has slowed construction and starts for the beginning of the season."

Relevant commodities:

* Priced higher -- Paper products.

* Priced lower -- Corrugated boxes; lumber products; and natural gas.

* Prices mixed -- Fuel (diesel and gasoline).

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

IHS Markit’s June survey headlines were slightly more upbeat than those of ISM.

Manufacturing -- New orders return to growth in June

Key findings:

* Modest upturns in output and new business
* Employment expands at slowest rate since August 2016
* Inflationary pressures remain muted

Services -- Subdued growth of business activity continues in June

Key findings:

* Activity growth edges up from May's 39-month low
* New business growth quickens, but remains historically subdued
* Business confidence dips to three-year low

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

Manufacturing -- "U.S. manufacturers reported business conditions to have remained the toughest for nearly a decade in June. The past two months have seen the lowest readings since the height of the global financial crisis in 2009.

“The survey provides accurate advance indicators of comparable official data, and paints a worrying picture of marked declines in both output and jobs. The June survey sub-index readings are consistent with manufacturing output contracting at a quarterly rate of 0.7% and factory payrolls falling by 18,000.

“A major development in recent months has been the deteriorating performance of larger companies, where the last two months have seen the lowest PMI readings for a decade. After inventories rose sharply earlier in the year, large companies have moved to destocking in May and June amid a sharp slowing in new order inflows.

“Although business optimism about the future lifted slightly higher, it remained close to survey lows to indicate persistent low morale. Worries centered on signs of slowing demand both at home and internationally, weaker sales, and geopolitical uncertainty.

“Tariffs meanwhile continued to push up prices, but weak demand often limited the ability of firms to pass higher prices onto customers, suggesting overall inflationary pressures have weakened compared to earlier in the year."

Services -- “An improvement in service sector growth provides little cause for cheer, as the survey data still indicate a sharp slowing in the pace of economic growth in the second quarter. The PMI data for manufacturing and services collectively point to GDP expanding at an annualized rate of 1.5%.

"A major change since the first quarter has been a broadening-out of the slowdown beyond manufacturing, with the service sector growth now also reporting much weaker business activity and orders trends than earlier in the year.

"Hiring was hit as firms scaled back their expansion plans in the face of weaker than expected order inflows and gloomier prospects for the year ahead. Jobs growth was the weakest for over two years and future expectations across both services and manufacturing has slipped to the lowest seen since comparable data were first available in 2012.

"Trade wars and geopolitical concerns topped the list of companies’ worries about the year ahead, alongside forecasts of slower economic growth. Progress in U.S.-China trade talks could therefore be key to helping lift confidence in coming months."

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.