September 2019 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey showed that in September, U.S. manufacturing contracted further. The PMI registered 47.8%, down 1.3 percentage points (PP) from the August 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. Notable declines occurred in the indexes for inventories, exports and production; indexes rose (but remained below 50) for input prices and imports. 

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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 (-3.8PP, to 52.6%), its lowest reading since August 2016. Drivers behind the drop were widespread, but offset to some extent by increases in the order backlog and exports indexes. 

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Of the industries we track, only Construction and Ag & Forestry expanded. Respondent comments included the following:

Construction -- "We are very busy right now [and] expect to be so for the next 12 months. We are still very shorthanded with qualified labor."

Ag & Forestry -- "Demand has been variable -- up one month, down the next. I think customers are watching our input costs and buying ahead on the dips, to the extent that contracts allow."

Relevant commodities:

Priced higher -- Construction subcontractors and labor, freight and natural gas.

Priced lower -- Corrugated boxes and pulp.

Prices mixed -- Fuel (diesel and gasoline).

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

Findings of IHS Markit’s September surveys were mixed relative to their ISM counterparts, but the overall conclusions were the same -- conditions in both manufacturing and services are tepid at best.

Manufacturing -- September PMI rises to five-month high as output growth strengthens

Key findings:

* Stronger, albeit only slight improvement in operating conditions
* Faster increases in output and new business
* Job creation quickens to marginal rate

Services -- New business growth slides to lowest in survey history

Key findings:

* Expansion in new orders eases to marginal rate
* Employment declines for first time since February 2010
* Input prices reduced at sharpest pace in series history

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

Manufacturing -- "News of the PMI hitting a five-month high brings a sigh of relief, but manufacturing is not out of the woods yet. The September improvement fails to prevent U.S. goods producers from having endured their worst quarter for a decade. Given these PMI numbers, the manufacturing recession appears to have extended into its third quarter.

“It’s also far from clear that the trend will improve in the fourth quarter. Inflows of new work remain worryingly subdued, to the extent that current production growth is having to be supported by firms increasingly eating into order book backlogs. Business sentiment about the year ahead is also stuck at gloomy levels.

“The current situation contrasts markedly with earlier in the year, when companies were struggling to keep up with demand. Now, spare capacity appears to be developing, which is causing firms to curb their hiring compared to earlier in 2019 and become more cautious about costs and spending.“

Services -- “A disappointing service sector PMI follows news of lackluster manufacturing and means the past two months have seen one of the weakest back-to-back expansions of business activity since 2009, sending a signal of slower GDP growth in the third quarter. The surveys are consistent with the economy growing at a 1.5% annualized rate in the third quarter, with forward-looking indicators suggesting further momentum could be lost in the fourth quarter. In particular, inflows of new business have almost stalled, with September seeing the smallest increase since 2009, and business expectations about the year ahead remain stuck at one of the gloomiest levels since at least 2012.

“In this environment, companies are taking an increasingly cost-conscious approach to payrolls, with September consequently seeing surveyed firms report a net drop in headcounts for the first time since 2010. This translates into non-farm payroll growth trending below 100,000.

“Price pressures have also abated in line with the weak demand picture, suggesting official inflation gauges could likewise moderate 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.