February 2020 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey showed that U.S. manufacturing barely expanded in February. The PMI registered 50.1%, down 0.8 percentage point (PP) from the January 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. Slumps in imports (-8.7PP) and input prices (-7.4PP), declines in production (-4.0PP) and new orders (-2.2PP), and a surge in slow deliveries (+4.4PP) suggest weakening demand. 

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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 (+1.8PP, to 57.3%). New orders (+6.9PP), exports (+5.5PP) and employment (+2.5PP) were the main drivers behind the increase. 

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

Construction -- "[The] coronavirus has increased lead times for the critical items."

Real Estate -- "Construction activity appears to be getting off to a good start for 2020."

Relevant commodities:

Priced higher -- Construction contractors and labor (general and construction).

Priced lower – Gasoline, corrugate and natural gas.

Prices mixed -- Crude oil and diesel.

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 February surveys were mixed relative to their ISM counterparts.

Manufacturing -- Manufacturing output growth weakens amid slower upturn in new orders.

Key findings:

* Operating conditions improve at softest pace for six months
* New order growth slows to nine-month low
* Business confidence strongest since April 2019

Services -- Fastest contraction in business activity since October 2013.

Key findings:

* Marginal fall in output as demand conditions weaken
* Slower rise in employment amid reduced pressure on capacity
* Business confidence strengthens, but remains relatively muted

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

Manufacturing -- "Manufacturing production and order book trends deteriorated markedly in February as producers struggled against the double headwinds of falling export sales and supply chain delays, both in turn often linked to the coronavirus outbreak.

“Any growth in sales was once again largely driven by domestic consumers, though even here the rate of growth was weakened considerably compared to late last year.

“Historical comparisons against official data indicate that the survey is consistent with factory production and orders both falling at annualized rates of around 3%, with manufacturing jobs being lost at a monthly rate of roughly 20,000.

“While trade war fears have eased, helping push firms’ expectations for future growth to the highest since last April, coronavirus-related supply chain issues threaten to constrain production in coming months. At the same time, companies have become increasingly concerned that the COVID-19 outbreak will also hit demand, which is reportedly already cooling amid uncertainly leading up to the presidential election. Recent stock market volatility could also further dampen consumer spending and deter business investment.”

Services -- "The U.S. service sector took a knock from the coronavirus outbreak and growing uncertainty about the economic and political outlooks in February. The fall in the headline index measuring business activity levels was the second largest seen since the global financial crisis over a decade ago, exceeded only by the brief slump in activity during the 2013 government shutdown.

“Combined with a weak manufacturing survey in February, the data are consistent with annualized GDP growth slipping from around 2% at the start of the year to just 0.7% midway through the first quarter.

“Business sectors such as travel and tourism are reporting weakened activity due to the virus outbreak, most notably in terms of foreign visitors and overseas sales. However, other sectors such as financial services and business services are reporting virus-related hits to demand, suggesting a more broad-based weakening of demand across the economy, exacerbating the supply-shock that is constraining manufacturing.

“Companies have meanwhile grown increasingly concerned about client spending and investment being curbed ahead of the presidential election. Political and economic uncertainty, the coronavirus outbreak and financial market turmoil all risk building into a cocktail of risk aversion that has severely heightened downside risks to the economy in coming months. Much will depend of course on the speed with which the virus can be contained and how quickly business can return to normal.”

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

“The outbreak of COVID-19 disrupted global economic activity in February, with output and new business falling [by] the greatest extents since mid-2009. However, a lot of this owes to China where the composite PMI fell 24PP as rates of decline in activity and new orders accelerated to survey records at manufacturers and service providers alike. The rest of the world fell a bit more than two points to near stagnation though we expect further declines as long as the disruptions continue. Business sentiment held up better, staying close to January's nine-month high.”

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.