June 2020 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey showed U.S. manufacturing moving back into expansion during June. The PMI registered 52.6%, up 9.5 percentage points (PP) from the May 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: the drop in slow deliveries (-11.1PP) indicates firms are ramping up activity, and the tick downward in customer inventories (-1.6PP) is suggestive of a potential improvement in demand.

“June signifies manufacturing entering an expected expansion cycle after the disruption caused by the coronavirus (COVID-19) pandemic,” said Timothy Fiore, chair of ISM’s Manufacturing Business Survey Committee. “Comments from the panel were positive (1.3 positive comments for every one cautious comment), reversing the cautious trend which began in March. The manufacturing sector is reversing the heavy contraction of April, with the PMI increasing month-over-month at a rate not seen since August 1980, with several other indexes also posting gains not seen in modern times. 

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The non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment – also jumped back into expansion (by a record +11.7PP, to 57.1%). The most noteworthy changes in the NMI sub-indexes included business activity (+25.0PP), new orders (+19.7PP), and exports (+17.4PP). “Respondents remain concerned about the coronavirus and the more recent civil unrest,” said Anthony Nieves, chair of the Non-Manufacturing Business Survey Committee. “However, they are cautiously optimistic about business conditions and the economy as businesses are beginning to reopen.” 

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Of the industries we track, only Paper Products contracted. Comments from respondents included:

Wood Products. “The building industry continues to defy expectations, as we continue to rebound stronger from the previous month. Being an essential business across most states and a surge in DIY projects has fueled the industry forward. While the industry will follow the greater economy, we do believe it will be more resilient than most due to potential migration from larger cities and an undersupplied housing market.”

Construction. “Sales have picked up tremendously. Sporadic supply issues. Biggest concern for us is lumber shortages.”

Real Estate. “COVID-19 and the riots have disrupted the normal flow of business. There is no new normal yet.”

Relevant commodities:

Priced higher. Crude oil, lumber products and transportation.

Priced lower. Natural gas.

Prices mixed. Fuel (including diesel).

In short supply. Labor (general, construction and sub-contractors.

Findings of IHS Markit’s June surveys paralleled those of their ISM counterparts, although both Markit surveys remained in contraction.

Manufacturing. Record rise in manufacturing PMI amid looser COVID-19 restrictions.

Key findings:

* Contraction in output slows as new orders stabilize
* First increase in selling prices since February, albeit only fractional
* Job losses ease amid renewed optimism

Services. Business activity contraction slows in June as new business nears stabilization.

Key findings:

* Softest fall in output since February amid strengthening demand
* Renewed increases in cost burdens and selling prices
* Business confidence improves

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

Manufacturing. “U.S. manufacturers have reported a marked turnaround in business conditions through the second quarter, with collapsing production and demand in April at the height of the COVID-19 lockdown turning rapidly to stabilization by June. The PMI posted a record 10PP rise in June amid unprecedented gains in the survey’s output, employment and order book gauges.

“The record rise in the New Orders Index, coupled with low inventory holdings, bodes well for a further improvement in production momentum in July. A record upturn in business sentiment about the year ahead likewise hints that business spending and employment will start to revive.

“However, while the PMI currently points to a strong V-shaped recovery, concerns have risen that momentum could be lost if rising numbers of virus infections lead to renewed restrictions and cause demand to weaken again.”

Services. “June saw a record surge in the PMI’s main gauge of business activity in the U.S. as increasing numbers of companies returned to work and expanded their operations amid the reopening of the economy. The survey points to a strong initial rebound from the low point seen at the height of the pandemic lockdown in April, with indicators of output, demand, exports and employment all showing steep gains. Financial services and technology companies are now reporting improved demand, as are many consumer-facing companies. Many, however, remain constrained by social distancing measures.

“With business confidence in the outlook picking up again in June, a return to growth for the economy in the 3Q looks likely, though this will very much depend on the extent to which demand continues to strengthen. There remains a strong possibility that growth could tail off after the initial rebound due to weak demand and persistent virus containment measures. The need to reintroduce lockdowns to fight off second waves of coronavirus infections will pose a particular threat to recovery momentum, and could drive a return of the recession.”

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.