February 2020 ISM and Markit Surveys

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The Institute for Supply Management‘s (ISM) monthly sentiment survey showed a rebound in the preponderance of U.S. manufacturers reporting expansion in February. The PMI registered 60.8%, up 2.1 percentage points (PP) from January’s 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 but three of the sub-indexes posted higher readings, with backlogged orders (+4.3PP), input prices (+3.9PP, to the highest reading since July 2008), slow deliveries (+3.8PP), and new orders (+3.7PP) being the most notable.

“Aluminum, copper, chemicals, all varieties of steel, soy, petroleum-based products including plastics, transportation costs, electrical and electronic components, corrugate, and wood and lumber products all continued to record price increases,” observed Timothy Fiore, Chair of ISM’s Manufacturing Business Survey Committee.

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The services sector -- which accounts for 80% of the economy and 90% of employment -- showed a pullback in service-sector respondents reporting expansion (-3.4PP, to 55.3%). The most noteworthy changes in the sub-indexes included exports (+10.6PP), inventories (+9.7PP), input prices (+7.6PP) and new orders (-9.9PP).

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Of the industries we track, only Real Estate contracted. The vast majority of respondents mentioned paying higher prices, including:

Construction. “Sales of residential real estate continue to be strong, even outstripping supply. Cost inflation in building materials seen as shortages develop from sporadic COVID-19 closures at manufacturing facilities. Port congestion on the West Coast [and] winter weather in Canada closing mills and restricting truck shipping are contributing to product shortages nationwide.”

Wood Products. “Prices are rising so rapidly that many are wondering if [the situation] is sustainable. Shortages have the industry concerned for supply going forward, at least deep into the second quarter.”

Relevant commodities:

Priced higher. Corrugate; corrugated boxes; paper products; wood products (lumber, plywood, OSB, and wood pallets); crude oil; natural gas; fuel (diesel and gasoline); freight (including ocean-going); and labor (general and temporary).

Priced lower. None.

Prices mixed. None.

In short supply. Corrugate; corrugated boxes; paper products; packaging; OSB; labor (general, construction and temporary); construction contractors; appliances (including refrigerators); freight (ocean); shipping containers.

 

Findings of IHS Markit‘s February survey results were mixed versus their ISM counterparts, but all agreed on higher prices.

Manufacturing. Production growth near six-year peak but price gauge highest since 2011

Key findings:

* Steep expansions in output and new orders
* Costs rise at steepest rate since April 2011 amid record supplier shortages
* Selling prices increase at sharpest pace since July 2008

 

Services. Steepest expansion in business activity since July 2014, but costs rise at record rate.

Key findings:

* Upturns in output and new business accelerate
* Cost burdens rise at steepest rate since survey began in 2009
* Employment growth moderates

 

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

Manufacturing. “Another month of strong production growth suggests that the US manufacturing sector is close to fully recovering the output lost to the pandemic last year, and a renewed surge in optimism suggests the recovery has much further to run. Business expectations about the year ahead jumped to a level only exceeded once over the past six years, buoyed by a cocktail of stimulus and post-COVID recovery hopes as life continues to return to normal amid vaccine roll outs.

“Particularly encouraging is a marked improvement in demand for machinery and equipment, hinting strongly at strengthening business investment spending. However, new orders for consumer goods showed the strongest back-to back monthly gains since the pandemic began, suggesting higher household spending is also feeding through to higher production.

“A concern is that shortages of raw materials have become a growing problem, with record supply chain delays reported in February, contributing to the steepest rise in material costs seen over the past decade. Prices charged for a wide variety of goods coming out of factories are consequently rising, which will likely feed through to higher consumer inflation.”

 

Services. “US business activity is growing at the fastest rate for six-and-a-half years, setting the economy up for a strong start to 2021. Although consumer-facing sectors, notably hospitality, travel, and tourism, continue to be adversely affected by COVID-19 restrictions, and will be for some time to come, other parts of the economy are springing back into life. Financial services and business services are faring well, accompanying a strong manufacturing recovery. Even some hard hit consumer-facing sectors are enjoying some loosening of restrictions or adapting to life with the virus.

“A wide variety of costs are rising, however, putting additional pressure on companies across the board. Many materials prices are sharply higher, transport costs are increasing and wage pressures are building as firms struggle to hire suitable staff, resulting in the largest monthly rise in service sector costs since comparable data were first available in 2009.

“Some of these higher costs will inevitably prove transitory as pandemic-related disruptions to supply start to ease, but it remains unclear how long these price pressures will persist for due to uncertainties over the duration of social distancing requirements and the strength of demand over the coming months.”

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.