January 2020 ISM and Markit Surveys

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The Institute for Supply Management‘s (ISM) monthly sentiment survey showed a smaller preponderance of U.S. manufacturers reporting expansion in January. The PMI registered 58.7%, down 1.8 percentage points (PP) from December’s revised 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 were a mixed bag, with declines in new orders (-6.4PP), production (-4.0PP) and customer inventories (-4.8PP), but a 4.5PP increase in input prices (to the highest reading since April 2011).

“Suppliers continue to struggle to deliver, with deliveries slowing at a faster rate compared to the previous month. Transportation challenges and challenges in supplier-labor markets are still constraining production growth -- and to a greater extent compared to December,” remarked Timothy Fiore, Chair of ISM’s Manufacturing Business Survey Committee. “The Supplier Deliveries Index reflects the difficulties suppliers continue to experience due to COVID-19 impacts combined with strong growth in economic activity. Since stable manufacturing began in August 2020, the index has gone up every month, indicating that suppliers are experiencing greater difficulties in meeting factory needs. Supplier labor and transportation constraints are not expected to diminish in the near-to-moderate term due to COVID-19 impacts.”

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The services sector -- which accounts for 80% of the economy and 90% of employment -- showed an uptick in service-sector respondents reporting expansion (+1.0PP, to 58.7%). The most noteworthy changes in the sub-indexes included jumps in new orders (+3.2PP) and employment (+6.5PP), improvement in slow deliveries (-5.0PP) and outright contractions in inventories (-9.0PP) and exports (-10.3PP).

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

Construction. “Orders for new business have picked up. Labor is still the major impediment to the business.”

Relevant commodities:

Priced higher. Lumber; oriented strand board; interior door slabs; wood pallets; corrugate; corrugated boxes; paper products; labor (general and temporary); crude oil; fuel (diesel and gasoline); natural gas; freight; and transportation.

Priced lower. None.

Prices mixed. None.

In short supply. Lumber; oriented strand board; corrugated boxes; corrugate; labor (general, construction and temporary); construction contractors; and road freight.

 

Findings of IHS Markit‘s January survey results were at least as upbeat as their ISM counterparts.

Manufacturing. January PMI hits record high amid strong client demand.

Key findings:

* Marked improvement in operating conditions as PMI climbs to survey high
* Near-record supply chain disruptions push up input costs
* Prices charged rise at steepest pace since July 2008

 

Services. Sharp upturn in business activity amid stronger client demand.

Key findings:

* Output and new order growth regain momentum
* Fastest increase in cost burdens on record
* Slowest rise in employment since July 2020

 

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

Manufacturing. “US manufacturing started 2021 on an encouragingly strong footing, with production and order books growing at the fastest rates for over six years.

“Demand from both domestic and export customers picked up sharply in January, buoyed by several driving forces. Consumer demand has improved while businesses are investing in more equipment and restocking warehouses, preparing for better times ahead as vaccine roll outs allow life to increasingly return to normal over the course of 2021.

“Manufacturers are encountering major supply problems, however, especially in relation to sourcing inputs from overseas due to a lack of shipping capacity. Lead times are lengthening to an extent not previously seen in the survey’s history, meaning costs are rising as firms struggle to source sufficient quantities of inputs to meet production needs. These higher costs are being passed on to customers in the form of higher prices, which rose in January at the fastest rate since 2008. These price pressures should ease assuming supply conditions start to improve soon, but could result in some near-term uplift to consumer goods price inflation.”

 

Services. “A strong start to the year for manufacturing was accompanied by a marked upturn in the service sector, driving business activity growth to the fastest rate for almost six years during January. The improving data set the scene for a strong first quarter, and a rise in business expectations for the year ahead bodes well for the recovery to gain traction as the year proceeds. Companies have become increasingly upbeat amid news of vaccine roll-outs and hopes of further stimulus.

“The downside is that prices have risen sharply. Rising costs have fed through to higher prices charged for goods and services, which rose in January at a rate not seen since at least 2009. Inflation therefore looks likely to be pushed higher in the near-term. However, some of these price pressures reflect short-term supply constraints, which should ease in coming months as the recovery builds and more capacity comes online.”

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.