May 2020 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey showed that U.S. manufacturing contracted somewhat more slowly in May. The PMI registered 43.1%, up 1.6 percentage points (PP) from the April 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. All of the sub-indexes showed improvement except for imports, which contracted further (-1.4PP).

“Three months into the manufacturing disruption caused by the coronavirus (COVID-19) pandemic, comments from the panel were cautious (two cautious comments for every one optimistic comment) regarding the near-term outlook,” said Timothy Fiore, Chair of ISM’s Manufacturing Business Survey Committee. “As was the case in April, the PMI® indicates a level of manufacturing-sector contraction not seen since April 2009; however, the trajectory improved.” 

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The non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment – also contracted more slowly (+3.6PP, to 45.4%). Here, too, imports exhibited the most notable downturn (-5.6PP). “The non-manufacturing composite index indicated contraction for a second consecutive time,” said Anthony Nieves, Chair of ISM’s Non-Manufacturing Business Survey Committee. “Respondents remain concerned about the ongoing impact of the coronavirus. Additionally, many of the respondents' respective companies are hoping and/or planning for a resumption of business.” 

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Of the industries we track, Real Estate and Construction contracted. "Sales have slowed, but backlog has remained [at] 2019 levels,” observed one Construction respondent. “Several key commodities have seen radical up-and-down swings in pricing, specifically lumber. Some suppliers recognize the downturn and are beginning to voluntarily offer pricing concessions.”

Relevant commodities:

Priced higher. Crude oil, freight, lumber products and oriented strand board.

Priced lower. Fuel (diesel and gasoline) and natural gas.

Prices mixed. None.

In short supply. Paper products.

Findings of IHS Markit’s May surveys paralleled those of their ISM counterparts.

Manufacturing. Ongoing COVID-19 impact drags output down further in May.

Key findings:

* Production and new orders fall substantially due to weak client demand
* Employment drops markedly amid signs of excess capacity
* Steepest decline in output charges on record

Services. Business activity slumps further amid COVID-19 pandemic, but speed of downturn eases.

Key findings:

* Output and new business drops substantially as COVID-19 crisis continues
* Business confidence improves but remains negative
* Input costs and output charges fall further

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

Manufacturing. “Manufacturing remained in a deep downturn in May, as measures taken to contain the spread of COVID-19 continued to cause production losses, disrupt supply chains and hit demand. Job losses meanwhile continued to run at one of the highest rates in over a decade, and pricing power has collapsed.

“With increasing numbers of companies restarting production, we should see some improvements in the output trend in coming months, and it was reassuring to see signs of the downturn already starting to ease in May, suggesting April was the eye of the storm as far as the production collapse is concerned.

“There remains a high risk that any recovery will be frustratingly slow as ongoing social distancing measures, high unemployment, job insecurity and damaged balance sheets constrain consumer and business spending. The recovery will of course also fade quickly if virus infections start to rise again. For now, however, we focus on the good news that we may be past the worst in terms of the economic decline.”

Services. “The PMI numbers indicate that the US economy remained in a steep downturn in May. Encouragingly, the rate of contraction has eased considerably since the height of the lockdown in April as some firms get back to work and economic activity starts to resume.

“While views about prospects for the year ahead remained negative on balance, the degree of pessimism has also moderated considerably since April, to hint that sentiment is improving as increasing numbers of companies see the worst of the lockdown being behind them.

“A substantial part of the service sector nevertheless continued to be devastated by social distancing measures, and looks set to remain so for some months to come, limiting scope for a V-shaped recovery. The ongoing steep fall in employment remains a particular concern, pointing to a weakened consumer sector but also underscoring heightened risk aversion as companies seek to cut costs in the face of collapsing sales and an uncertain 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.