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The Institute for
Supply Management’s (ISM) monthly sentiment survey showed that in July the rate
of expansion in U.S. manufacturing decelerated to its slowest since August 2016.
The PMI
registered 51.2%, down 0.5 percentage
point (PP) from the June 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 collapse in order backlogs (-4.3PP) overwhelmed the modest
rise in new orders (+0.8PP).
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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 (-1.4PP, to 53.7%) to its
slowest rate since August 2016. Although service-industry inventories dropped
to the breakeven 50%, they are nonetheless increasingly seen as still too high.
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Of the industries we track, Paper
Products and Ag & Forestry contracted. Respondent comments included the
following:
Construction -- "Tariffs
continue to push costs higher, and customers are looking for more discounts due
to mortgage-rate fluctuations."
Relevant commodities:
Priced higher -- Paper
products.
Priced lower -- Corrugated boxes.
Prices mixed -- Fuel (diesel
and gasoline).
In
short supply -- Construction subcontractors; and labor (general, construction
and temporary).
IHS Markit’s
July survey headlines were mixed relative to those of ISM.
Manufacturing -- PMI falls to lowest since September 2009
Key findings:
*
Fractional output growth and muted demand hold back overall expansion
* Employment falls for first time since June 2013
* Output expectations moderate to series low
Services -- New business growth accelerates to four-month high
in July
Key findings:
*
Faster rates of expansion in output and new orders
* Business expectations slip to new series low
* Selling prices rise only fractionally
Commentary
by Chris Williamson, Markit’s chief business economist:
Manufacturing -- "U.S. manufacturing has entered into its
sharpest downturn since 2009, suggesting the goods-producing sector is on
course to act as a significant drag on the economy in 3Q. The deterioration in
the survey’s output index is indicative of manufacturing production declining
at an annualized rate in excess of 3%.
“Falling
business spending at home and declining exports are the main drivers of the
downturn, with firms also cutting back on input buying as the outlook grows
gloomier. U.S. manufacturers’ expectations of output in the year ahead has sunk
to its lowest since comparable data were first available in 2012, with worries
focused on the detrimental impact of escalating trade wars, fears of slower
economic growth and rising geopolitical worries.
“Employment
is now also falling for only the second time in almost ten years as factories
pull back on hiring amid the growing uncertainty.
“More
positively, new order inflows picked up for a second successive month. Although
remaining worryingly subdued compared to the strong growth seen earlier in the
year, the modest improvement will fuel hope that production growth could tick
higher in August.”
Services -- “An improvement in the overall rate of business
growth signaled by the services PMI for July is welcome news, but the overall
weak pace of expansion remains a concern. The PMIs for manufacturing and
services collectively point to GDP expanding at an annualized rate of under 2%
in July, below that seen in 2Q and among the weakest seen over the past three
years.
"A
sharp drop in future expectations meanwhile suggests downside risks have
increased in the near-term at least, hinting that the upturn in growth seen in
July could prove short-lived and that GDP growth could remain disappointingly
modest in 3Q.
"Optimism
is at its lowest ebb since comparable data were first available in 2012 as
companies have grown increasingly concerned about the year ahead, fueled by
trade war worries and wider geopolitical jitters, as well as growing worries
that the economic cycle has peaked."
Commenting
on the J.P.Morgan Global Composite PMI, Olya Borichevska, from Global Economic
Research at J.P.Morgan, said: “The July PMI data tell a story of two diverging
sectors. Although the pace of expansion in global economic output and new
orders rose to three-month highs, this was mainly driven by improved growth at
service providers. In contrast, manufacturers continued to struggle, hit hard
by the weakening trend in international trade flows. The outlook also became
less positive, with the Future Output Index falling to its lowest level in the
series history.”
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.
