August 2021 ISM and Markit Surveys

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The Institute for Supply Management‘s (ISM) monthly sentiment survey showed a slight increase in the proportion of U.S. manufacturers reporting expansion in August. The PMI registered 59.9%, a rise of 0.4 percentage point (PP) from the July 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 for input prices (-6.3PP) and inventories (supplier: +5.3PP; customer: +5.2PP) exhibited the largest changes.

“Companies and suppliers continue to struggle at unprecedented levels to meet increasing demand. All segments of the manufacturing economy are impacted by record-long raw-materials lead times, continued shortages of critical basic materials, rising commodities prices and difficulties in transporting products,” said Timothy Fiore, chair of the Manufacturing Business Survey Committee. “The new surges of COVID-19 are adding to pandemic-related issues -- worker absenteeism, short-term shutdowns due to parts shortages, difficulties in filling open positions and overseas supply chain problems -- that continue to limit manufacturing-growth potential.”

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The services sector -- which accounts for 80% of the economy and 90% of employment -- retreated from July’s all-time high of service-sector respondents reporting expansion (-2.4PP, to 61.7%). The most noteworthy changes in the sub-indexes included business activity (-6.9PP), input prices (-6.9PP), and exports (-5.2PP).

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All of the industries we track expanded. Respondent comments included the following:

Ag & Forestry. “There is a shortage of available workers which is challenging our business operations.”

Construction. “Material and labor shortages continue to hinder productivity. Price increases are ever-present and repetitive. Large, multinational manufacturers have had multiple price increases in the last three months.”

 

Findings of IHS Markit‘s August survey headline results were mixed relative to their ISM counterparts. Manufacturing: Markit’s headline decelerated while ISM rose slightly; services: Markit tumbled further while ISM also retreated.

Manufacturing. Marked improvement in operating conditions amid strong demand conditions

Key findings:

* Substantial rise in new orders…
* …but output growth is constrained by material shortages
* Inflationary pressures reach fresh series high

 

Services. Slowest rise in activity so far this year as demand recovery slows during August

Key findings:

* Output growth moderates amid slower upturn in new business
* Staff shortages contribute to record rise in backlogs of work
* Inflationary pressures pick up

 

Commentary from Markit:

Manufacturing. “U.S. goods producers continued to register marked upturns in output and new orders in August, as demand flourished once again,” wrote Siân Jones, Senior Economist at IHS Markit. “That said, constraints on production due to material shortages exerted further pressure on capacity as backlogs of work rose at a near-record rate.

“Not only were firms facing difficulties trying to clear outstanding work, they also faced further hikes in supplier costs. The pace of cost inflation exceeded the previous series record amid a pervasive scarcity of inputs. Favorable demand conditions allowed finished goods prices to also rise at an unprecedented rate, as firms sought to protect their margins.

“Delivery times lengthened at the second-sharpest rate in over 14 years of data collection, with purchasing activity still rising markedly. It was not only producers who highlighted stockpiling, however, as reports of customers shoring up their holdings of finished items resulted in a substantial drop in post-production inventories. Challenges rebuilding such stocks, including material and labor shortages, and ever-burgeoning levels of incomplete work are likely to remain a feature for some time to come.”

 

Services. “Growth slowed sharply in the U.S. service sector in August, joining the manufacturing sector in reporting a marked cooling in demand and encountering growing problems finding staff and supplies,” wrote Chris Williamson, Chief Business Economist at IHS Markit. “Jobs growth almost stalled among the surveyed companies in August and supplier lead times are lengthening at a near record rate.

“While the resulting overall pace of economic growth signaled is the weakest seen so far this year, backlogs of uncompleted work are rising at a rate unprecedented in at least 12 years, underscoring how supply and labor shortages are putting the brakes on the recovery. The inevitable upshot is higher prices, with firms’ input costs and selling prices rising at increased rates again in August, continuing the steepest period of price growth yet recorded by the survey by a wide margin.

“Encouragement comes from a rise in business expectations about the year ahead, though optimism in the service sector in particular remains off the high seen in the second quarter, to a large extent reflecting concerns over the spread of the Delta variant.”

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.