September 2022 ISM and Markit Surveys

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The Institute for Supply Management‘s (ISM) monthly sentiment survey of U.S. manufacturers for September 2022 narrowly avoided contraction. The PMI registered 50.9%, down 1.9 percentage points (PP) from August. (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. Subindexes with the largest changes include employment (-5.5PP), new orders (-4.2PP), slow deliveries (-2.7PP), and customer inventories (+2.7PP). 

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Activity in the services sector -- which accounts for 80% of the economy and 90% of employment -- decelerated slightly in September (-0.2PP, to 56.7%). Exports (+3.2PP), imports (+3.1PP), employment (+2.8PP), and input prices (-2.8PP) exhibited the largest changes.

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Of the industries we track, Wood Products and Paper Products both contracted. Respondent comments included the following:

Construction. “Sales have slowed significantly. Very challenging market. Trying to build through backlog. Manufacturers, distributors and installation trades are still busy and passing on price increases, while we are discounting homes to stimulate sales. Margins are compressing.”

Agriculture. “General slowdown in sales. We believe high commodity prices and inflation have impacted consumers’ desire for fertilizer from our turf and ornamental division. Farmers have already cut back on consumption due to pricing and weather-related issues.”

 

IHS Markit‘s survey headline results were mixed relative to their ISM counterparts – Markit’s manufacturing PMI inched higher while ISM’s declined; also, Markit’s services PMI contracted more slowly while ISM’s reflected modest expansion.

Manufacturing. Renewed expansions in output and new orders as cost pressures soften.

Key findings:
* Production and new orders rise, albeit only marginally
* Input cost inflation eases further as some inputs fall in price
* Employment growth fastest since March

Services. Business activity declines at slower pace amid renewed rise in client demand.

Key findings:
* Fall in output only marginal overall
* Cost pressures softest since January 2021
* Challenges hiring new staff drive increase in backlogs of work

 

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

Manufacturing. “With US manufacturers reporting a return to growth of order books for the first time in four months, as well as improved job gains, the September survey brings welcome news that business conditions are starting to improve again. However, even with the latest improvement, the weakness of the data in recent months still point to manufacturing acting as a drag on the economy in the third quarter, and demand will need to revive further if any meaningful positive contribution to GDP is going to be seen in the rest of the year.

“The brightest signs of life are coming from the domestic market, with producers of both consumer goods and, most notably, business equipment reporting improved sales to the home market. Manufacturers across the board are, however, reporting further export losses, linked to weaker economic growth abroad and the dollar’s strength.

“While the strong dollar is curbing exports, a beneficial effect from the greenback’s strength is being seen via lower import costs. With supply chain delays also easing substantially again in September and shipping costs falling, upwards pressure on firms’ costs has moderated sharply, which will feed through to lower goods prices to consumers.”

 

Services. “With service sector activity declining for a third straight month in September, businesses have faced a tough third quarter. Economic growth has come under pressure from falling output in both the manufacturing and service sectors, though in both cases September has seen some encouraging signals that business conditions may be starting to improve.

“Driving this improvement is a cooling of inflationary pressures in manufacturing supply chains, which is in turn alleviating cost growth for goods and energy in both manufacturing and service sectors, helping stimulate demand and allaying some concerns about the economic outlook.

“The worry is that tightening financial conditions, and notably higher borrowing costs, are exerting increased cost pressures on households and businesses, as well as hitting growth in the vast financial services sector, which has seen the steepest downturns in both demand and business activity in recent months and saw yet another marked worsening of business conditions in September.

“Furthermore, despite easing, inflationary pressures in terms of firms’ costs and average selling prices for goods and services remain elevated. With companies also reporting staffing issues and rising wages due to very tight labor market conditions, persistent inflation remains a concern at the same time that the economy appears to be struggling to regain momentum.”

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.