October 2021 ISM and Markit Surveys

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The Institute for Supply Management‘s (ISM) monthly sentiment survey showed a slight decrease in the proportion of U.S. manufacturers reporting expansion in October. The PMI registered 60.8%, a decline of 0.3 percentage point (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 for new orders (-6.9PP), input prices (+4.5PP) and imports (-5.8PP) exhibited the largest changes. 

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The services sector -- which accounts for 80% of the economy and 90% of employment -- jumped to a record high (+4.8PP, to 66.7%). Input prices (+5.4PP), slow supplier deliveries (+6.9PP), and order backlogs (+5.4PP) all posted record-high readings while inventory sentiment (-9.0PP) dropped to a record low. These outcomes are expressed in the survey's headline as expansionary because such moves typically occur when demand is strong; in this case, however, they are associated with supply chain disruptions.

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Of the industries we track, only Wood Products contracted. Respondent comments included the following:

Construction. “Supply chain disruptions continue to roil new residential construction. Material and skilled labor shortages are lengthening cycle times and forcing substitutions.”

Real Estate. “Construction remains quite strong, although material supply issues persist.”

 

Findings of IHS Markit‘s October survey headline results were largely consistent with their ISM counterparts.

Manufacturing. Output growth hampered further by material shortages, but expansion in new orders remains sharp

Key findings:

* Upturn in production slowest for 15 months
* Severe supplier delays drive marked increase in input costs
* Output charge inflation hits fresh series high

 

Services. Business activity growth quickens to three-month high amid stronger client demand

Key findings:

* Faster expansions in output and new orders
* Backlogs of work rise at survey-record rate
* Sharpest increase in output charges in series history

 

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

Manufacturing. “October saw US manufacturers report yet another near-record lengthening of supply chains, with shortages of components constraining production growth to the lowest since July of last year. Around half of all companies reporting lower production in October attributed the decline to a lack of supplies. However, a further one-in-ten cited a lack of labor, and one-in-four reported that demand had fallen, often as a result of customers either lacking other inputs or pushing back on higher prices.

“Although production growth has now slipped below the pre-pandemic long-run average due to the supply and labor constraints, demand growth -- as measured by new order inflows -- remains well above trend despite easing in October, hence producers saw another steep rise in backlogs of uncompleted work. This shortfall of production relative to demand was the principal driving force behind a survey record rise in manufacturers’ selling prices, suggesting that inflationary pressures continue to build and look unlikely to abate to any significant degree any time soon.”

 

Services. “The final PMI data add to indications that the US economy has picked up speed again in the fourth quarter. After the Delta variant caused growth to slow in the third quarter, the easing of virus case numbers has been followed by a strong revival of economic activity, notably in the service sector, which looks set to be the driving force of the economy as we head towards the end of the year.

“While the service sector is seeing a waning impact from the pandemic, it’s a different story in manufacturing, where the supply crisis continues to cause havoc and dampen production growth. Supply delays worsened in October, which has in turn fed through to a further intensification of inflationary pressures.

“Going forward, the big questions will revolve around the extent to which manufacturers can overcome their supply chain bottlenecks, which look set to worsen as we head towards the busy holiday period, and whether the service sector can sustain its current resilience as the rebound from the pandemic starts to fade and incomes are squeezed by higher prices.”

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.