October 2022 ISM and Markit Surveys

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The Institute for Supply Management‘s (ISM) monthly sentiment survey of U.S. manufacturers for October 2022 virtually stalled. The PMI registered 50.2%, down 0.7 percentage point (PP) from September’s 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. Subindexes with the largest changes include order backlogs (-5.6PP), slow deliveries (-5.6PP), and input prices (-5.1PP). 

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Activity in the services sector -- which accounts for 80% of the economy and 90% of employment -- decelerated further in October (-2.3PP, to 54.4%). Exports (-17.4PP), new orders (-4.1PP), employment (-3.9PP), and inventories (+3.1PP) 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. “Customers are starting to delay projects and/or entering smaller-scale scopes of work. We believe this is a continuation of an uncertain economic environment.”

Real Estate. “Prices seem to continue increasing for commodities, including plumbing, flooring materials, floor adhesives, door locks, and bedroom and bathroom doors. Delays in delivery have increased after leveling off in the middle of the year.”

Electrical Equipment, Appliances & Components. “Housing market is down, so our business is affected. Capacity has increased over the last two years due to high orders of consumer goods and appliances, so now we’re trying promotions to get our orders up to where we can use all our capacity.”

Wholesale Trade. “We are experiencing a bullwhip of oversupply on some goods … while still desperately short on other goods. The market is recovering very inconsistently.”

 

Changes in S&P Global‘s survey headline results were at least directionally consistent with those of ISM: For manufacturing both surveys barely avoided contraction; for services, ISM expanded more slowly while S&P contracted more quickly. Details from S&P Global’s surveys follow --

Manufacturing. Manufacturing output continues to rise, but weak demand conditions dampen growth.

Key findings:
* Easing supply chain issues support output growth...
* ...but new orders fall at sharpest rate since May 2020
* Inflationary pressures soften further

 

Services. Service sector output decline gathers pace amid renewed drop in new business.

Key findings:
* Solid contraction in activity amid weak client demand
* Near-stagnation in employment
* Inflationary pressures soften

 

Commentary by Siân Jones, S&P Global’s senior economist:

Manufacturing. “October PMI data signaled a subdued start to the final quarter of 2022, as US manufacturers recorded a renewed and solid drop in new orders. Domestic and foreign demand weakened due to greater hesitancy among clients as prices rose further and amid dollar strength. As such, efforts to clear backlogs of work, rather than new order inflows, drove the latest upturn in production.

“Confidence in the outlook waned as underlying data also highlighted efforts to cut costs and adjust to more subdued demand conditions in the coming months. Input buying fell sharply and resilience in employment stumbled, as the pace of job creation eased to only a marginal rate.

“On a more positive note, input costs rose at the slowest pace in almost two years amid signs of reduced disruption in supply chains. Lower demand for inputs was a contributing factor to this, however. Nevertheless, softer hikes in costs were reflected in a slower uptick in output charges, as firms sought to pass on cost savings where possible to try and boost sales.”

 

Services. “Service sector firms faced a challenging start to the final quarter of 2022, as a renewed contraction in new business dragged output down further. Demand conditions were hampered by tighter financial conditions and elevated rates of inflation, leading to reports of postponements and the delayed placement of orders as customers assess their spending.

“Subdued demand and weaker confidence in the outlook for output led to a near-stagnation in employment. Reports of the non-replacement of voluntary leavers brought signs that firms were evaluating costs and future demand more closely before advertising vacancies and expanding staffing levels.

“Nonetheless, momentum in previously soaring inflation slowed again. Hikes in costs softened, as service providers and manufacturers saw slower upticks in supplier and input prices. Meanwhile, private sector firms sought to boost demand through a slower increase in selling prices. Although softening, further elevated rises in prices paid by consumers present obstacles to firms in an already challenging demand environment and paint a concerning picture as we head towards the end of the year.”

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.