May 2022 ISM and Markit Surveys

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The Institute for Supply Management‘s (ISM) monthly sentiment survey for May 2022 reflected a slightly larger proportion of U.S. manufacturers reporting expansion. The PMI registered 56.1%, an increase of 0.7 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 customer inventories (-4.4PP), inventories (+4.3PP), and order backlogs (+2.7PP) exhibited the largest changes. Input price increases decelerated slightly (-2.4PP).

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The services sector -- which accounts for 80% of the economy and 90% of employment -- declined in May (-1.2PP, to 55.9%). Order backlogs (-7.4PP), business activity (-4.6PP) and slow deliveries (-3.8PP) saw the largest changes. Service input-price increases also decelerated (-2.5PP).

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Of the industries we track, Wood Products and Ag & Forestry did not expand. Respondent comments included the following:

Construction. “Demand seems to be very high for all of the high-voltage electric products we purchase. Lead times are quadruple what they normally are.”

Paper Products. “We’ve continued to transition to North American sales to avoid ocean vessels, and we are apprehensive about the West Coast ports’ labor contract negotiations. A challenge of doing more business by rail is the backlog of rail cars and embargos.”

 

IHS Markit‘s survey headline results were mixed relative to their ISM counterparts -- manufacturing: ISM rose while Markit fell; services: both ISM and Markit retreated. Perhaps the biggest divergence was in input prices; ISM reflected decelerating price increases while Markit reported “soaring” prices.

Manufacturing. Manufacturing upturn slows amid cooling demand, surging costs and material shortages.

Key findings:

* Production and new orders increase at slower rates
* Cost inflation fastest since November 2021’s series peak
* Business confidence drops to lowest since October 2020

 

Services. Business activity growth eases amid series-record rise in costs and softer demand conditions.

Key findings:

* Output expansion softens amid slower growth in new business
* Input prices rise at fastest pace on record
* Sharp increase in employment

 

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

Manufacturing. “A solid expansion of manufacturing output in May should help drive an increase in GDP during the second quarter, with production growth running well above the average seen over the past decade. However, the rate of growth has slowed as producers report ongoing issues with supply chain delays and labor shortages, as well as slower demand growth.

“A cooling in new orders growth was in part linked to customers pushing back on high prices, though also reflected shortages and growing concern about the outlook.

“Input cost pressures meanwhile intensified further during the month. Although delivery delays were the least widespread for 16 months, pricing power remained firmly in the hands of the supplier, with rising energy, wage and transportation costs adding to firms’ cost burdens. The result was the steepest rise in costs since November, feeding through to yet another near-record factory gate price increase and serving as a reminder that inflationary pressures remain worryingly elevated.”

 

 Services. “Alongside the slowing in the manufacturing sector, the cooling pace of expansion in the service sector takes the pace of US economic growth down to the weakest so far in the pandemic recovery with the sole exception of January’s slowdown at the height of the Omicron wave. While the survey readings are consistent with GDP growing at an annualized rate of just under 2%, supporting the view that GDP will return to growth in the second quarter, it is worrying that growth momentum is being lost so quickly. Businesses report ongoing difficulties finding staff and souring raw materials, while demand growth measured by inflows of new orders for goods and services is expanding at the slowest rate for almost one-and-a-half years, as spending power is reduced by soaring inflation.

“The inflation surge meanwhile shows no signs of abating, with firms’ costs soaring higher at yet another survey record rate in May, reflecting rising energy, materials and staff costs.”

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.