December 2019 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey showed that in December, U.S. manufacturing contracted at a marginally faster pace. The PMI registered 47.2%, down 0.9 percentage point (PP) from the November 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. Production (-5.9PP) and customer inventories (-3.9PP) were noteworthy negative changes, while the Input Prices index (+5.0PP) pushed back into positive 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 -- accelerated (+1.1PP, to 55.0%). Although the business activity index jumped (+5.6PP), the indexes for new orders (-2.2PP), order backlogs (-1.0PP) and exports (-1.0PP) all declined. 

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Of the industries we track, only Ag&Forestry did not contract. Respondent comments included the following:

Construction -- "Weather and the holiday season have had an impact on residential new construction sales and production. While demand is outstripping supply in the housing market, business is down due to global trade insecurity causing affordability, labor and cost pressures."

Relevant commodities:

Priced higher -- Fuel and oriented strand board.

Priced lower -- Corrugate, freight and natural gas.

Prices mixed -- None.

In short supply -- Construction contractors and subcontractors; and labor (general, 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 -- Manufacturing output continues to recover amid further new order growth

Key findings:

* Modest expansions in production and new business
* Inflationary pressures intensify
* Business confidence remains relatively subdued

Services -- Business activity growth accelerates to five-month high in December

Key findings:

* Output and new order expansions quicken, but remain only modest
* Fastest rise in employment since July
* Inflationary pressures pick up

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

Manufacturing -- "The U.S. manufacturing sector continued to recover from the soft patch seen in the summer, ending 2019 with its best quarter since the early months of 2019.

"The overall rate of expansion nevertheless faltered somewhat in December and remains well below that seen this time last year, suggesting producers are starting 2020 on a softer footing than they had enjoyed heading into 2019.

"Business sentiment about the outlook remains especially subdued compared to a year ago, reflecting ongoing worries about geopolitics and trade wars, especially the impact of tariffs, as well as fears that political and economic uncertainty surrounding the 2020 elections could dampen demand.

"The impact of tariffs was clearly evident via higher prices, while the relatively subdued level of business confidence manifested itself in a pullback in hiring, hinting at risk aversion and cost-cutting."

Services -- "Business activity in the vast service sector picked up pace at the end of last year as rising domestic demand and signs of reviving exports led to higher workloads. Combined with indications of manufacturing lifting out of its recent lull, the survey data suggest the overall pace of economic growth accelerated to its fastest since last April.

"However, while moving in the right direction, service sector growth remains well below that seen in the early months of 2019, and the overall survey results are indicative of GDP rising at a relatively modest annual rate of 1.8% in December.

"The missing ingredient compared to this time last year is optimism about the future, with business sentiment regarding prospects for the next 12 months running well below levels seen this time last year, and close to the lowest for at least seven years. Indeed, much of the recent improvement in demand has come from stronger sales to consumers, with business spending and investment remaining under pressure amid this anxiety about the economic and political outlook."

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

“The December global all-industry PMI came in positively at the end of the year reinforcing a view that activity will improve in the coming quarters. The all-industry activity PMI increased for the second month to an eight-month high. Improving trends in new order inflows, employment and business sentiment also suggest that further headway should be made at the start of the new year. International trade remains the main drag on efforts to lift growth further, so any moves that reduce tensions and barriers on this front will be especially beneficial.”

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.