December 2021 ISM and Markit Surveys

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The Institute for Supply Management‘s (ISM) monthly sentiment survey ended the year on a less positive note, with a smaller proportion of U.S. manufacturers reporting expansion in December. The PMI registered 58.7%, a decrease of 2.4 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. The sub-indexes for input prices (-14.2PP), slow deliveries (-7.2PP), and customer inventories (+6.6PP) exhibited the largest changes. 

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The services sector -- which accounts for 80% of the economy and 90% of employment -- slumped in December (-7.1PP, to 62.0%). The retreat was widespread, including business activity (-7.0PP), new orders (-8.2PP), slow deliveries (-11.8PP); also noteworthy, the input-price subindex hovered near its recent all-time high. 

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Of the industries we track, Wood Products and Paper Products contracted while Real Estate and Construction expanded. Respondent comments included the following:

Construction. “The escalation in costs for materials, fuel, labor, lodging and the like continues to negatively impact margins in an unsustainable direction.”

 

IHS Markit‘s survey headline results loosely paralleled their ISM counterparts.

Manufacturing. Manufacturing production growth remains constrained by shortages in December

Key findings:

* Output expansion muted, as firms register slower upturn in new orders
* Rate of cost inflation remains marked despite easing to softest since June
* Backlogs of work rise at slowest pace for ten months

 

Services. Demand conditions strengthen in December, but labor shortages exacerbate cost pressures

Key findings:

* Output growth softens, but new order expansion regains momentum
* Labor shortages stymie pace of job creation
* Rate of cost inflation accelerates to series record high

 

Commentary by Siân Jones, Markit’s senior economist:

Manufacturing. “December saw another subdued increase in US manufacturing output as material shortages and supplier delays dragged on. Although some reprieve was seen as supply chains deteriorated to the smallest extent since May, the impact of substantially longer lead times for inputs thwarted firms’ ability to produce finished goods yet again.

“Adding to the sector’s challenges was an ebb in client demand from the highs seen earlier in 2021, with new orders rising at the slowest pace for a year, largely linked to a reluctance at customers to place orders before inventories were worked through. Alongside a slight pick-up in hiring, softer demand conditions contributed to the slowest rise in backlogs of work for ten months.

“While shortages remained significant, the end of the year brought with it some signs that cost pressures have eased. The uptick in input prices was the slowest for six months, and firms recorded softer increases in selling prices amid efforts to entice customer spending.”

 

Services. “Service sector business activity growth remained strong in December, supporting indications of a solid uptick in economic growth at the end of 2021. Although the expansion in output softened slightly, the flow of new orders picked up, with buoyant client demand rising at the fastest pace for five months.

“The service sector continued to aid overall growth, as the manufacturing sector saw output hampered again by material and labor shortages. The impact of the latter, however, had a burgeoning effect on service providers as job creation rose at only a marginal pace amid challenges keeping hold of staff and enticing new starters.

“Subsequently, soaring wage bills and increased transportation fees drove the rate of cost inflation up to a fresh series high.

“Business confidence strengthened at the end of the year to the highest since November 2020, as firms were hopeful of more favorable labor market and supply-chain conditions going into 2022. The swift spread of the Omicron variant does lace new downside risks into the economic outlook heading into 2022, however. Any additional headwinds or disruption faced by firms are likely to temper sentiment.”

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.