October 2019 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey showed that in October, U.S. manufacturing contracted at a marginally slower pace. The PMI registered 48.3%, up 0.5 percentage point (PP) from the September 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 changes in the sub-indexes included a turnaround (although barely back into positive territory) in exports (+9.4PP) and a drop in input prices (-4.2PP). 

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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 (+2.1PP, to 54.7%). Drivers behind the rise were concentrated in new orders (+1.9PP) and employment (+3.3PP). 

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Of the industries we track, only Paper Products contracted. Respondent comments included the following:

Construction -- "Current outlooks for commodities, equipment, and materials indicate purchasing now has leverage. Investment is still hampered by uncertainties in trade, global economic environment, manufacturing and the like."

Real Estate -- "Business remains brisk and well ahead of last year to date, as we near the peak of our busiest season. Looking ahead, our customers remain upbeat about their business well into next year."

Paper Products -- "Trade cost pressures continue to be a headwind in our business."

Relevant commodities:

Priced higher -- Lumber products.

Priced lower -- Freight, diesel and gasoline.

Prices mixed -- None.

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

Findings of IHS Markit’s October surveys were mixed relative to their ISM counterparts, but the overall conclusions were the same -- the U.S. economy remains rather fragile.

Manufacturing -- PMI rises to six-month high in October

Key findings:

* Modest improvement in operating conditions as PMI rises to 51.3
* Faster upturns in output, new orders and employment
* Output prices broadly unchanged

Services -- Slowest rise in business activity since February 2016

Key findings:

* Marginal upturn in output
* Fastest fall in employment for almost a decade
* Renewed rise in input prices

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

Manufacturing -- "Tentative signs of renewed vigor are appearing in the U.S. manufacturing sector, with the survey’s production gauge having now risen for three successive months to suggest that the soft patch bottomed out in July. Growth of new orders hit a six-month high, fueled in part by a renewed increase in exports, prompting producers to take on more staff, with payroll numbers rising at the quickest pace since May.

"The improvement in current conditions was matched by a lifting of business optimism about the year ahead to the highest seen since June. It was also encouraging to see this optimism feed through to an upturn in demand for investment goods, such as plant and machinery, as this hints that firms are moving back into expansion mode, albeit only tentatively so far.

"However, while the outlook has improved, further growth is by no means assured. Survey respondents continue to report widespread concerns over issues such as tariffs, the auto sector’s ongoing malaise, a lack of pricing power amid weak demand and uncertainty about the economic and political situation over the coming year. While the survey data are moving in the right direction, the overall picture therefore remained one of only very modest growth and guarded optimism."

Services -- “Although October saw signs of manufacturing pulling out of its recent soft patch, the far-larger service sector remained in the doldrums as inflows of new work failed to grow for the first time since 2009. Taken together, the manufacturing and service sector surveys consequently suggest that the U.S. economy got off to a disappointing start in the fourth quarter, consistent with GDP growing at an annualized rate of less than 1.5%.

“With inflows of new work drying up, firms are relying on previously-placed orders to sustain current output growth, meaning the rate of expansion could weaken further in coming months if demand doesn’t revive. Hence we’re seeing jobs being cut at an increased rate among surveyed companies, with employment falling for a second successive month and to a degree not seen since 2009. Such a weakening of the survey’s employment index will likely feed through to the official jobs numbers as we move toward the end of the year.

“The news was by no means all negative, however, with firms becoming more optimistic about the year ahead, buoyed by hopes of an easing of trade tensions and stimulus from lower interest rates. However, the overall degree of optimism remains sharply lower than this time last year as companies remain concerned by ongoing uncertainty about the outlook.”

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.