September 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 slowly during September. The PMI registered 55.4%, down 0.6 percentage point (PP) from the August 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. The sub-indexes reflected slower growth, except for order backlogs (+0.6PP) and exports (+1.0PP).

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The services sector -- which accounts for 80% of the economy and 90% of employment expanded at a somewhat faster rate (+0.9PP, to 57.8%). The most noteworthy changes in the services PMI (formerly known as NMI) sub-indexes included order backlogs (-6.5PP), imports (-4.2PP), and new orders (+4.7PP).

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All of the industries we track expanded. Comments from respondents included:

Paper Products. “We are seeing a marked increase in international demand in Q4 compared to Q2 and Q3. Still not at historical levels; however, a positive outlook.”

Wood Products. “Raw material shortages, especially of hardwood logs, are starting to impact overall supply. Domestic market demand is fragmented but remains sound. Export demand, especially to China, is robust.”

Construction. “Work orders are improving rapidly. Lack of available labor is having a significant impact on our ability to fulfill orders.”

 

Relevant commodities:

Priced higher. Gasoline, labor (general, construction and temporary), lumber and lumber products, OSB, and shingles.

Priced lower. Oil.

Prices mixed. Natural gas.

In short supply. Lumber, paper products, and labor (general, construction and temporary).

 

Findings of IHS Markit‘s September surveys generally agreed with their ISM counterparts.

Manufacturing. Strongest improvement in operating conditions since January 2019.

Key findings:

* Output growth accelerates to fastest in ten months

* Second-sharpest rise in employment since November 2019

* Business confidence moderates on election and virus uncertainty

 

Services. New business growth accelerates to fastest since March 2019.

Key findings:

* Business activity rises further amid stronger expansion in new sales

* Employment growth remains historically elevated

* Selling prices increase at sharpest pace for two years

 

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

Manufacturing. “U.S. manufacturers rounded off a solid quarter which should see the sector rebound strongly from the steep second quarter downturn.

“Encouragingly, companies reported a marked upturn in demand for plant and machinery, which suggests firms are increasing their investment spending again after expansion plans were put on hold during the spring. Similarly, fuller order books helped drive further job creation as firms continued to expand capacity.

“But it was not all good news. Supply shortages worsened as companies increasingly struggled to source enough inputs to meet production requirements. With demand often exceeding supply, prices rose sharply again across many types of inputs, especially metals.

“Growth of new orders for consumer goods also waned during the month, hinting at some cooling of demand from households, commonly blamed on Covid-19. Overall order book inflows consequently slowed compared to August.

“The outlook also darkened, as companies grew more concerned about the sustained economic disruption from the pandemic alongside uncertainty caused by the upcoming presidential election. The sector therefore looks to be entering the fourth quarter on a slower growth trajectory, adding to signs that fourth quarter GDP growth will wane considerably from the third quarter rebound.”

 

Services. “The U.S. economy continued to rebound in September from the deep contraction seen at the height of the Covid-19 pandemic, with business activity rising across both manufacturing and services to round off the strongest quarter since early 2019.

“Covid-19 worries and social distancing continued to impact many businesses, however, especially in consumer-facing sectors, where demand for services fell once again. However, business and financial services, healthcare and housing sectors all fared well as the economy continued to revive, and exports of services also picked up as other countries continued to open up their economies.

“Encouragingly, new orders for services grew at an increased rate in September, putting additional pressure on operating capacity and fueling another robust rise in employment. A further rise in backlogs of work bodes well for robust jobs growth to be sustained into October.

“Sentiment on prospects for the coming year darkened significantly, however, linked to growing worries about virus numbers, uncertainty regarding the presidential election and fears that the economy is susceptible to weakening unless more support measures are put in place soon.”

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.