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Macro Pulse highlights recent activity and events expected to affect the U.S. economy over the next 24 months. While the review is of the entire U.S. economy its particular focus is on developments affecting the Forest Products industry. Everyone with a stake in any level of the sector can benefit from
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Thursday, September 5, 2019

August 2019 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey showed that in August, U.S. manufacturing contracted for the first time since August 2016. The PMI registered 49.1%, down 2.1 percentage points (PP) from the July 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. Significant declines were seen in the indexes for new orders (-3.6PP), employment (-4.3PP) and exports (-4.8PP). 
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The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- accelerated (+2.7PP, to 56.5%). The increase was driven primarily by jumps in the business activity (+8.4PP) and new orders (+6.2PP) indexes. 
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Of the industries we track, only Paper Products contracted. Respondent comments included the following:
Construction -- "Lower mortgage rates have not had a great effect on new residential construction sales. Tariffs continue to apply upward cost pressures to current supply chains."
Real Estate, Rental & Leasing -- "Construction markets remain busy. Projects that were delayed are trying to get back on track."

Relevant commodities:
Priced higher -- None.
Priced lower -- Corrugated boxes, natural gas, crude oil and pulp.
Prices mixed -- Fuel (diesel and gasoline).
In short supply -- Construction subcontractors; and labor (general, construction and temporary).

Findings of IHS Markit’s August manufacturing survey aligned with those of ISM, but diverged significantly in the services survey.
Manufacturing -- Manufacturing PMI lowest for almost a decade as export decline intensifies
Key findings:
* PMI at 50.3 in August (49.9 flash, 50.4 in July), lowest since September 2009
* Rates of output and new order growth remain subdued
* New export orders fall at quickest pace for 10 years

Services -- Slowest increase in new business since March 2016
Key findings:
* New business growth eases to marginal rate
* Input prices fall for the first time in the series history
* Business confidence slides to fresh series low

Commentary by Chris Williamson, Markit’s chief business economist:
Manufacturing -- "The August PMI indicates that U.S. manufacturers are enduring a torrid summer, with the main survey gauge down to its lowest since the depths of the financial crisis in 2009. Output and order book indices are both among the lowest seen for a decade, indicating that manufacturing is likely to have again acted as a significant drag on the economy in the third quarter, dampening GDP growth.
“At current levels, the survey indicates that manufacturing production is falling at an annualized rate of approximately 3%.
“Deteriorating exports are the key to the downturn, with new orders from foreign markets dropping at the fastest rate since 2009. Many companies blame slower global economic growth for weakened order books, but also point the finger at rising trade war tensions and tariffs.
“Hiring has stalled as companies worry about the outlook: optimism about the year ahead is at its lowest since comparable data were first available in 2012. Similarly, price pressures are close to a three-year low, as crumbling demand has removed firms’ pricing power.”

Services -- “U.S. businesses reported one of the toughest months since the global financial crisis in August, with growth of output, order books and hiring all slowing amid steep falls in both export and business confidence.
“Only on two occasions since the global financial crisis have the U.S. PMI surveys recorded a weaker monthly expansion, and these were months in which business was hit by the government shutdown and bad weather in 2013 and 2016 respectively. This time, trade wars and falling exports appear to be the main drivers of weakness, exacerbating fears of a broader economic slowdown both at home and globally.
“At current levels, the August PMIs are indicating annualized GDP growth of 1.0%, putting the economy on course for growth of just below 1.5% in the third quarter. Such weak readings hint at downside risks to current third quarter growth projections, which generally point to an expansion of just over 2%.
“A major factor behind the deterioration was the spreading of the manufacturing downturn to the service sector, via weakened household and business confidence. Jobs growth is also increasingly being affected by worries regarding the outlook. Overall jobs growth in August was the weakest since early-2012, commensurate with non-farm payrolls rising at a monthly rate of under 100,000.”

Commenting on the J.P.Morgan Global Composite PMI, Olya Borichevska, from Global Economic Research at J.P.Morgan, said: “The August PMI points to growth at the slowest pace over the past three years. Signs of further potential weakness are also gathering, with growth of new order inflows losing impetus, job creation slowing and business confidence sliding to a fresh series-record low. With market conditions tight and global trade tensions heightened, a sustained revival in global GDP growth still looks to be some way off in the distance.”
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.

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