July 2020 ISM and Markit Surveys

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The Institute for Supply Management‘s (ISM) monthly sentiment survey showed U.S. manufacturing expanding more quickly during July. The PMI registered 54.2%, up 1.6 percentage points (PP) from the June 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 (-1.1PP) indicates firms are ramping up activity, and the declines in inventories (-3.5PP) and customer inventories (-3.0PP) suggest the potential for a future ramp-up of output.

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The services sector -- which accounts for 80% of the economy and 90% of employment – also expanded further -- albeit at a significantly slower rate (+1.0PP, to 58.1%). The most noteworthy changes in the services PMI (formerly known as NMI) sub-indexes included inventories (-8.7PP), and export orders (-9.6PP).

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Of the industries we track, only Paper Products did not expand. Comments from respondents included:

• Construction. “Sales have remained strong in homebuilding. We are experiencing longer lead times for lumber, interior trim components, appliances and light fixtures. Lumber prices are near all-time highs as lumber mills have yet to increase capacity as demand has increased.”
• Real Estate. “COVID-19 interruptions are changing the way business is done.”

 

Relevant commodities:

• Priced higher. Construction contractors and subcontractors; crude oil; fuel; lumber products; and OSB.
• Priced lower. None.
• Prices mixed. Diesel.
• In short supply. Labor (general, construction and sub-contractors.

 

Findings of IHS Markit‘s July surveys paralleled those of their ISM counterparts, although both Markit surveys either barely crossed the threshold into expansion (manufacturing) or stopped at the breakeven point (services).

Manufacturing. U.S. manufacturing operating conditions improve for the first time since February.

Key findings:

• Overall improvement driven by renewed upturns in output and new orders
• Quicker rise in input costs amid supplier shortages
• Business confidence picks up to five-month high

 

Services. Business activity stabilizes but demand conditions deteriorate.

Key findings:

• Reopening of firms leads to rise in Business Activity Index from June
• New orders continue to fall slightly amid subdued demand
• Input cost pressures intensify

 

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

Manufacturing. “Although indicating the strongest expansion of the manufacturing sector since January, the IHS Markit PMI remains worryingly weak. Much of the recent improvement in output appears to be driven merely by factories restarting work rather than reflecting an upswing in demand. Growth of new orders remains lackluster and backlogs of work continue to fall, hinting strongly at the build-up of excess capacity. Many firms and their customers remain cautious in relation to spending in the face of re-imposed lockdowns in some states and worries about further disruptions from the pandemic.

“Encouragingly, business optimism about the year ahead has revived to levels last seen in February, but many see the next few months being a struggle amid the ongoing pandemic, with a more solid-looking recovery not starting in earnest towards the end of the year or even into 2021. Further infection waves could of course derail the recovery, and many firms also cited the presidential elections as a further potential for any recovery to be dampened by heightened political uncertainty.”

 

Services. “The service sector is showing welcome signs of stabilizing after the unprecedented downturn seen during the second quarter, but many companies continue to struggle with virus-related constraints, especially in states where social distancing restrictions have been tightened again.

“The United States was the only major economy to see COVID-19 containment measures tighten again in July, and this is reflected in the data, with new business inflows falling at an increased rate to hint at the possible start of a double dip in business activity.

“More encouragingly, businesses have on balance become more optimistic about recovery in the year ahead, and took on extra staff to ensure capacity is sufficient to meet future growth. However, whether this optimism can be sustained and result in faster growth will of course depend on infection rates falling.”

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.