November 2019 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey showed that in November, U.S. manufacturing contracted at a marginally faster pace. The PMI registered 48.1%, down 0.2 percentage point (PP) from the October 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. New orders (-1.9PP), employment (-1.1PP), order backlogs (-1.1PP) and exports (-2.5PP) all fell further into negative territory. 

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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 (-0.8PP, to 53.9%). Although growth in business activity slowed dramatically (-5.4PP), new orders (+1.5PP), employment (+1.8PP) and exports (+2.0PP) all rose. Meanwhile, imports (-3.5PP) contracted further. 

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Of the industries we track, only Paper Products and Real Estate expanded. Respondent comments included the following:

Wood Products -- "Markets have downshifted further. The continued confusion surrounding China trade has kept export markets on edge. Profits are elusive. Cash-flow planning is paramount. The general economy is slowing down."

Construction -- "Activity is still up in all areas, but primarily in commercial construction."

Relevant commodities:

Priced higher -- Lumber products.

Priced lower -- None.

Prices mixed -- None.

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

As has become common in recent months, findings of IHS Markit’s November surveys were mixed relative to their ISM counterparts.

Manufacturing -- November PMI at seven-month high amid stronger upturn in new orders

Key findings:

* Output and new order growth rates improve to 10-month highs
* Fastest rise in employment since March...
* ...but business confidence remains subdued

Services -- Business activity growth strengthens in November

Key findings:

* Faster, albeit only marginal, rise in output
* Renewed increase in new business
* Optimism remains historically subdued

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

Manufacturing -- "A third consecutive monthly rise in the PMI indicates that US manufacturing continues to pull out of its soft patch. New orders and production are rising at the fastest rates since January, encouraging increasing numbers of firms to take on more workers. Exports are also back on a rising trend, firms are buying more inputs and rebuilding inventories, adding to the signs of improvement.

"Some caution is needed, as these improved survey numbers merely translate into very subdued growth in comparable official gauges of manufacturing production and factory payrolls. Business sentiment also remains worryingly subdued, with expectations about future output growth well down on earlier in the year and running at one of the lowest levels seen since comparable data were first available in 2012.

"Firms remain very concerned about the disruptive effects of tariffs and trade wars in particular, both in terms of rising prices and weakened demand, though the survey also saw further worries among manufacturers that the economy could slow in the upcoming presidential election year as customers delay spending and investment decisions."

Services -- “With both services and manufacturing reporting stronger rates of expansion, the November PMI surveys indicate the fastest pace of economic growth for four months. The improvement is coming from a low base, however, and even at these higher levels the survey is merely indicative of annualized GDP growth in the region of 1.5%.

“Similarly, while reviving order book growth has encouraging more companies to take on extra staff after two months of net job losses being reported, the survey’s employment index continued to run at a level consistent with monthly jobs growth of only around 100,000.

"Weakened business activity and jobs growth compared to earlier in the year also led to widespread caution with respect to pushing up selling prices in the face of an uncertain outlook. Business expectations for the year ahead continue to run at one of the lowest levels recorded by the survey since 2012 with firms worried about trade wars, slowing economic growth at home and abroad, as well as the possibility of next year’s election cycle causing customers to postpone spending decisions.”

Commenting on the J.P.Morgan Global Composite PMI, Olya Borichevska, from Global Economic Research at J.P.Morgan, said:

“The rate of global economic expansion improved in November, according to the latest PMI surveys. The more encouraging aspect of the November report is the continued increase in the manufacturing PMI. While the services activity PMI also increased last month, the trend in the series remains down. We take comfort in the large jump in the employment PMI following more than six months of sharp declines. While the early signs are that the economy is positioned to strengthen, the drags provided by international trade and low confidence suggest progress will remain slow overall.”

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.