February 2022 ISM and Markit Surveys

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The Institute for Supply Management‘s (ISM) monthly sentiment survey for February 2022 reflected a slightly larger proportion of U.S. manufacturers reporting expansion. The PMI registered 58.6%, an increase of 1.0 percentage point (PP). (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 subindexes for order backlogs (+8.6PP), new orders (+3.8PP), and exports (+3.4PP) exhibited the largest changes. 

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The services sector -- which accounts for 80% of the economy and 90% of employment -- retreated further in February (-3.4PP, to 56.5%). Exports (+7.1PP) order backlogs (+6.8PP), and new orders (-5.6PP) saw the largest changes. Input prices again pushed higher (+0.8PP).

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

Construction. “We are getting price increases with no notice. For example, our engineered wood products supplier gave us a 10-to-20%...increase, effective immediately. We are also struggling to get materials. Suppliers cite poor employee attendance, elevated employee turnover and positions open longer than normal as they struggle to fill them.”

 

IHS Markit‘s survey headline results were mixed relative to their ISM counterparts -- manufacturing: ISM and Markit both rose; services: ISM fell while Markit rose.

Manufacturing. Output growth picks up amid stronger demand and easing supply disruption

Key findings:

* Sharper new sales growth supports upturn in output
* Deterioration in supplier performance the least marked since May 2021
* Cost pressures soften but output charges rise at faster pace

 

Services. Sharp upturn in activity amid stronger demand conditions, but selling price inflation reaches new high

Key findings:

* New business growth accelerates to seven-month high
* Output charges rise at fastest pace on record
* Rate of job creation quickens to sharpest since May 2021

 

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

Manufacturing. “The U.S. manufacturing sector rebounded in February after the Omicron wave brought production close to a standstill in January. However, output remains heavily constrained both by ongoing raw material supply bottlenecks and labor shortages, albeit with some signs that the supply chain crisis has continued to ease. The decline in virus case numbers should also help alleviate labor shortages as we head into the spring.

“Demand is clearly continuing to run well ahead of supply, meaning it is a sellers’ market for a wide variety of goods. Although the survey’s price gauges covering companies’ costs and selling prices are off the peaks seen last year, they remain very high by historical standards and point to persistent elevated inflation in coming months. With rising oil prices adding further to soaring costs, and the Ukraine crisis likely to add to global supply disruptions, the inflation outlook is an increasing concern.

“With the survey data collected prior to the escalation of the conflict in Ukraine, the full impact of the situation is yet to appear in the data. Supply chains are likely to be further disrupted, with existing shortages exacerbated by safety stock building, and prices will likely come under further upward pressure. Perhaps most important will be the effect on business optimism and whether the improvement in prospects seen in February will be reversed, which could lead to reduced spending and investment.”

 

Services. “U.S. service sector companies reported a strong rebound in business activity during February as virus containment measures were eased to the loosest since November. The data add to evidence from manufacturing surveys that the Omicron wave appears to have had only a modest and short-lived impact on the economy.

“February’s PMI surveys are broadly consistent with GDP rising at an annualized rate of 3.5%, representing a substantial improvement on the 0.9% rate signaled by the January surveys. First quarter GDP growth is therefore currently averaging just over 2%.

“Supply chain bottlenecks and poor labor availability remain widespread constraints on output, however, limiting economic growth in manufacturing and services, meaning demand continues to rise faster than output, resulting in unprecedented price pressures.

“The Ukraine conflict is leading to further upward movements in energy and broader commodity prices, which will add further to U.S. inflationary pressures. More uncertain will be the extent to which business confidence is being affected by the war. Business optimism about the year ahead had surged across manufacturing and services in February to the highest for 15 months, as firms looked ahead to looser COVID-19 restrictions and saw signs of easing supply constraints. However, the resilience of this optimism will be tested by the conflict in Europe and will need to be monitored in the coming weeks as a barometer of risk appetite in terms of both spending and investment.”

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.