July 2022 ISM and Markit Surveys

 

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The Institute for Supply Management‘s (ISM) monthly sentiment survey for July 2022 reflected a smaller proportion of U.S. manufacturers reporting expansion. The PMI registered 52.8%, a decrease of 0.2 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. Changes among the subindexes seem to reflect continued improvement in supply-chain bottlenecks (but, also a slowing economy). Input prices (-18.5PP), customer inventories (+4.3PP), imports (+3.7PP), and slow deliveries (-2.1PP) exhibited the largest changes. 

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Activity in the services sector -- which accounts for 80% of the economy and 90% of employment -- accelerated slightly in July (+1.4PP, to 56.7%). Input-price increases (-7.8PP), new orders (+4.3PP) and slow deliveries (-4.1PP) saw the largest changes.

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Of the industries we track, only Real Estate and Construction expanded. Respondent comments included the following:

Construction. “Interest rates have significantly impacted the homebuilding market. Cancellation rates have increased, as homebuyers can no longer afford the monthly payment. Traffic to our communities is down. Inflation has sidelined many would-be buyers.”

 

IHS Markit‘s survey headline results were mixed relative to those of their ISM counterparts. Both reported weaker manufacturing activity. For services, ISM accelerated whereas Markit fell into contraction.

Manufacturing. PMI at lowest for two years as output and new orders fall in July.

Key findings:

* Production falls as demand conditions weaken
* Inflationary pressures ease further
* Labor and material shortages persist

 

Services. Business activity declines for first time in over two years amid soft demand conditions.

Key findings:

* Fastest fall in output since May 2020
* Cost pressures ease further
* Business confidence slumps to lowest in almost two years

 

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

Manufacturing. “With the exception of pandemic lockdown periods, July saw US manufacturers report the toughest business conditions since 2009. A growth spurt in the spring has quickly gone into reverse, with new orders for factory goods down for a second straight month in July, leading to the first drop in production for two years and sharply reduced employment growth.

“The rising cost of living is the most commonly cited cause of lower sales, as well as the worsening economic outlook.

“Companies are also taking an increasingly cautious approach to purchasing and inventories amid the gloomier outlook, and likewise appear to be cutting back on investment, with new orders falling especially sharply for business equipment and machinery in July.

“Supply chain problems remain a major concern but have eased, taking some pressure off prices for a variety of inputs. This has fed through to the smallest rise in the price of goods leaving the factory gate seen for nearly one and a half years, the rate of inflation cooling sharply to add to signs that inflation has peaked.”

 

Services. “US economic conditions worsened markedly in July, with business activity falling across both the manufacturing and service sectors. Excluding pandemic lockdown months, the overall fall in output was the largest recorded since the global financial crisis and signals a strong likelihood that the economy will contract for a third consecutive quarter.

“Tightening financial conditions mean the financial services sector is leading the downturn, with a further steep rise in interest rates from the FOMC since the survey data were collected likely to intensify the downturn. Higher interest rates, alongside the ongoing surge in inflation, have meanwhile spilled over to the consumer sector, meaning the surge in household spending on goods and activities such as travel, tourism, hospitality and recreation seen in the spring has now moved into reverse as household spending is diverted to essentials.

“Although employment continued to rise in July, the rate of job creation has also slowed sharply since the spring and looks set to weaken further in the coming months as firms cut operating capacity in line with weakening demand.

“The flip side of deterioration in demand is a welcome alleviation of price pressures, which hint at a peaking of inflation.”

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.