December 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 December. The PMI registered 60.7%, up 3.2 percentage points (PP) from the November 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. Rising values in the new orders (+2.8PP), production (+4.0PP) and employment (+3.1PP) supported that acceleration. An increase in slow deliveries likely also contributed to the headline increase, but we think the signal sent by that metric is being misinterpreted: Whereas slow deliveries often reflect pent-up demand in a healthy economy, in this case the metric reflects supply chain disruptions in the context of still-meager demand. The jump in input prices is perhaps the most disconcerting takeaway. 

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The services sector -- which accounts for 80% of the economy and 90% of employment -- also expanded at a marginally faster rate (+1.3PP, to 57.2%). The most noteworthy changes in the services PMI (formerly known as NMI) sub-indexes included jumps in slow deliveries (+5.8PP), inventories (+8.9PP, another indication of anemic demand) and order backlogs (-3.7PP), and exports (+6.9PP).

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Of the industries we track, only Real Estate contracted. Comments from respondents included:

Construction. “Lack of labor continues to be a significant drag on the business. We have plenty of work but are now considering rejecting some orders due to shrinking capacity.”

 

Relevant commodities:

Priced higher. Crude oil; diesel; gasoline; freight; corrugate; corrugate boxes; linerboard; paper products;  lumber; wood pallets; construction contractors; labor (general, temporary and construction); OSB; and shingles.

Priced lower. None.

Prices mixed. None.

In short supply. Construction contractors; labor; corrugate boxes.

 

Findings of IHS Markit‘s December survey results were about on par with their ISM counterparts.

Manufacturing. Operating conditions improve at fastest pace since September 2014.

Key findings:

* Expansions in output and new orders remain marked
* Supply chain disruptions most severe on record
* Sharpest rise in cost burdens since April 2018

 

Services. Business activity growth slowest for three months amid rise in virus cases.

Key findings:

* Output and new order growth ease from November's peaks
* Cost burdens rise at survey-record pace
* Business expectations moderate amid pandemic uncertainty

 

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

Manufacturing. “Manufacturers reported a strong end to 2020, with production and order books continuing to grow, albeit with the rates of expansion slowing as a result of rising virus case numbers and related restrictions. Producers of consumer goods reported a marked downturn in orders and production, reflecting weakened consumer expenditure amid the resurgence of COVID-19.

“More encouragingly, producers of machinery and equipment reported sustained strong demand, suggesting companies are increasing their investment spending. Producers of inputs to other factories also fared well, as manufacturers sought to restock their warehouses.

“However, the survey also highlights how manufacturers are now not only facing weaker demand conditions due to the pandemic, but are also seeing COVID-19 disrupt supply chains further, causing shipping delays. These delays are limiting production capabilities as well as driving producers’ input prices sharply higher, adding to the sector’s woes.

“Firms nevertheless remain highly positive about the outlook for the year ahead, anticipating that vaccine rollouts will help drive a further recovery in 2021, although some of November’s post-election exuberance has been tamed by the recent rise in virus case numbers, suggesting the near-term outlook will remain challenging."

 

Services. "Rising virus case numbers took an increasing toll on the US economy in December, with business activity, order books and employment all growing at much reduced rates. The slowdown was especially steep in the service sector, where stricter social distancing measures hit consumer-facing businesses in particular.

“While the survey data remained sufficiently resilient to indicate that GDP continued to expand at a relatively robust rate in the fourth quarter, the near-term outlook has deteriorated. Business expectations for the coming year fell considerably compared to November, as some postelection exuberance waned and companies grew more anxious about the ongoing impact of the pandemic. Rising case numbers represent an increased risk to the economy in the coming weeks, and hopes rest to a large extent on pandemic stimulus lifting the economy to prevent another downturn.

“More encouragingly, businesses remain much more confident about the outlook in a year’s time than before the successful vaccine developments, reflecting greater optimism for prospects of life returning to normal in the second half of 2021.”

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.