October 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 October. The PMI registered 59.3%, up 3.9 percentage points (PP) from the September 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 that faster growth, including “too-low” customer inventories, and slowing supplier deliveries -- “which is typical as the economy improves and customer demand increases.”

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The services sector -- which accounts for 80% of the economy and 90% of employment -- expanded at a somewhat slower rate (-1.2PP, to 56.6%). The most noteworthy changes in the services PMI (formerly known as NMI) sub-indexes included a greater prevalence of businesses paying higher input prices (+4.9PP), and a jump in order backlogs (+4.3PP).

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

Construction. “Interesting business cycle: Labor is still in short supply, and work orders are picking up.”

Paper Products. “October order books are the strongest we have seen in the past six months.”

Furniture & Related Products: “Construction materials have leveled off but continue to be at an all-time high. Mills for board sheet stock have pushed out lead times citing increasing backlogs related to the pandemic and increased supply in the housing market.”

 

Relevant commodities:

Priced higher. Freight, labor (general and temporary), construction contractors, lumber and lumber products, wood pallets, and corrugate.

Priced lower. None.

Prices mixed. Fuel.

In short supply. Labor (construction and temporary), construction contractors and subcontractors, lumber, and paper products.

 

Findings of IHS Markit‘s October survey results were somewhat more positive than their ISM counterparts.

Manufacturing. PMI improves to highest since January 2019.

Key findings:

* Faster expansions in output and new orders drive overall improvement

* Employment growth slows amid dwindling pressure on capacity

* Cost burdens rise at sharpest pace since the start of 2019

 

Services. Business activity expands at fastest pace since April 2015.

Key findings:

* Stronger demand conditions drive faster upturn in output

* Business expectations show record jump to highest since April 2018

* Cost pressures and hiring ease

 

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

Manufacturing. “With clues being sought as to whether the economy can sustain its recovery after rebounding from lockdowns, the rise in the PMI in October is encouraging news. It’s inevitable that the pace of economic expansion will weaken after the surge seen in the third quarter, but the strength of the PMI hints at a recovery for which the underlying trend continues to strengthen at the start of the fourth quarter.

“Producers of investment goods such as business equipment and machinery are leading the upturn in a welcome sign of rising business confidence and corporate investment, but it was worrying to see consumer goods producers report weakened order book growth, reflecting rising virus-related worries. Going forward, much will naturally depend on the extent to which the economy can remain open and functioning in the face of rising virus case numbers.”

 

Services. “Growth of business activity accelerated markedly in October, indicating that the underlying health of the U.S. economy continued to recover at the start of the fourth quarter. While fourth quarter GDP will [inevitably] fail to match the strong rebound seen in the third quarter, the economy looks to be continuing to grow at an above-trend rate.

“Encouragingly, future business optimism showed a record surge, pulling prospects for the year ahead up to the highest for more than two years. Hopes of a brighter outlook were pinned on a vaccine ending the COVID-19 pandemic over the coming year and additional stimulus supporting the economy in the meantime.”

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.