December 2022 ISM and Markit Surveys

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The Institute for Supply Management‘s (ISM) monthly sentiment survey of U.S. manufacturers for December 2022 contracted further. The PMI registered 48.4%, down 0.6 percentage point (PP) from November’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 included prices paid (-3.6PP), production (-3.0PP), employment (+3.0PP), and exports (-2.2PP). 

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Activity in the services sector -- which accounts for 80% of the economy and 90% of employment -- fell into contraction in December (-6.9PP, to 49.6%). Inventory sentiment (+11.7PP), new orders (-10.8PP), and exports (+9.3PP) exhibited the largest changes.

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Of the industries we track, only Ag & Forestry did not contract. Respondent comments included the following:

Construction. “Residential new construction continues to be hindered by higher interest rates, slowing sales dramatically. A shift to rental projects seems to be a trend for all builders.”

Real Estate. “We are optimistic, although concerned, about continued inflation pressures, lead times that remain well above typical and supply chain issues that just won't go away. Increasing interest rates are dampening the residential housing construction market, which only adds to the concerns.”

 

Changes in S&P Global’s survey headline results were consistent with those of ISM. Details from S&P Global’s surveys follow --

Manufacturing. US manufacturing operating conditions deteriorate at fastest rate since May 2020.

Key findings:
* Output falls at sharper rate amid faster drop in new orders
* Inflationary pressures ease notably
* Employment rises only fractionally

 

Services. Decline in business activity gains pace in December, as demand conditions worsen.

Key findings:
* Activity and new orders fall at sharper rates as demand wanes
* Cost burdens rise at softest pace for over two years
* Employment growth only marginal

 

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

Manufacturing. “The manufacturing sector posted a weak performance as 2022 was brought to a close, as output and new orders contracted at sharper rates. Demand for goods dwindled as domestic orders and export sales dropped. Muted demand conditions also led to downward adjustments of stock holdings, as excess inventories built earlier in the year were depleted in lieu of further spending on inputs. With the exception of the initial pandemic period, stocks of purchases fell at the steepest rate since 2009.

“Concerns regarding the outlook for demand weighed on hiring decisions. Job creation was only slight, and largely linked to skilled hires, as firms displayed caution.

“Sinking demand for inputs and greater availability of materials at suppliers led to a further easing of inflationary pressures. In fact, the rate of input price inflation fell below the series trend. Selling price hikes also eased, albeit still rising steeply. Slower upticks in inflation signal the impact of Fed policy on prices, but growing uncertainty and tumbling demand suggest challenges for manufacturers will roll over into the new year.”

 

Services. “U.S. private sector firms brought 2022 to a close signaling marked obstacles to overcome with relation to the health of the economy. Contractions in output and new business were broad-based and gathered pace in December as customer unease led to dwindling demand and order postponements.

“Despite weak demand conditions, firms continued to hire staff. Nonetheless, the pace of job creation was only slight as some firms turned their focus to filling temporary worker and long-held skilled jobs vacancies, whilst others reported instances of employees being laid off.

“A notable development through the month was a stark easing in inflationary pressures across the private sector. Muted demand for inputs led to the least marked uptick in costs for over two years, while companies also saw a slower increase in selling prices in a bid to entice customers and boost sales. The pass through of cost savings in the form of customer discounts will likely signal further adjustments to inflation as we enter 2023.”

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.