January 2020 ISM and Markit Surveys

Click image for larger version

The Institute for Supply Management’s (ISM) monthly sentiment survey showed that U.S. manufacturing returned to expansion in January. The PMI registered 50.9%, up 3.1 percentage points (PP) from the revised December 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 (+9.5PP), exports (+6.0PP), new orders (+4.4PP) and imports (+2.5PP) all flipped into positive territory. 

Click image for larger version

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- accelerated (+0.6PP, to 55.5%). Imports (+7.1PP), business activity (+3.9PP) and new orders (+0.9PP) drove the increase. 

Click image for larger version

Of the industries we track, only Paper Products and Real Estate did not expand. Respondent comments included the following:

Construction -- "1Q sales are improving, which makes us more optimistic."

Real Estate -- "Customer inquiries are strong to start the new year."

Relevant commodities:

Priced higher -- Oil, propane, and labor (general and construction).

Priced lower -- Freight, natural gas, and fuel (including diesel)

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 January surveys were mixed relative to their ISM counterparts.

Manufacturing -- Manufacturing growth slows at start of 2020 as exports fall.

Key findings:

* PMI dips to three-month low as exports fall
* Employment rises at only a marginal rate
* Business confidence picks up to seven-month high

Services -- Business activity growth accelerates to 10-month high at start of 2020.

Key findings:

* Faster upturn in output amid sustained rise in new orders
* Rate of job creation quickest since last July
* Business confidence remains subdued

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

Manufacturing -- "U.S. manufacturing limped into 2020, with falling exports dampening output growth and causing a pullback in hiring. The survey data are consistent with factory production falling moderately, meaning the manufacturing sector looks set to act as a drag on the overall economy once again in 1Q.

“Weakness looks broad-based. Rising demand from households has helped support production in recent months, but January saw a marked slowing in new orders for consumer goods. Production of capital goods such as business equipment, plant and machinery meanwhile fell for the first time in almost four years, hinting at weakened business investment.

“More encouragingly, business expectations for the year ahead perked up, coinciding with an easing of trade tensions and the signing of new North American and Chinese trade deals. Companies are therefore expecting the soft patch to be short-lived, though fears surrounding the Wuhan coronavirus and any further potential escalation of trade tensions could erode this optimism.”

Services -- "The PMI data indicate that the U.S. economy is ticking along at a steady but unspectacular annualized rate of growth of approximately 2% at the start of 2020. Growth has gained some momentum from the lows seen in the fall as the service sector enjoys stronger growth and manufacturing has also shown signs of the trade-led downturn easing. However, factory activity remains worryingly subdued, and optimism about future growth across the business community as a whole continues to run at one of the lowest levels seen over the past decade.

“Business are concerned by the prospect of weaker economic growth at home and abroad in the coming year, especially with spending potentially being dampened in an election year. Fresh worries are also likely to appear. With the vast majority of the survey data having been collected prior to the 24th January, we’ve yet to see any impact from the Wuhan coronavirus outbreak, but the potential disruption to business and the associated financial market jitters pose additional downside risks to both the global and US economies in coming months."

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

“The global economy started 2020 on a stronger footing, with output growth rising for the third straight month to its highest since March [2019] suggesting global growth at an above-potential pace. However, we brace ourselves for a much weaker outcome this quarter as the outbreak of the nCoV virus disrupts activity in China and potentially around the world. Encouragingly, the gains in the PMI were not just confined to the Output Index, with trends in new orders, business sentiment and employment also firming.”

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.