April 2023 ISM and S&P Global Surveys

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The Institute for Supply Management‘s (ISM) monthly sentiment survey of U.S. manufacturers reflected slower erosion in the sector during April. The PMI registered 47.1%, up 0.8 percentage point (PP) from March’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 (+4.0PP), employment (+3.3PP), and customer inventories (+2.4PP).

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Concurrent activity in the services sector -- which accounts for 80% of the economy and 90% of employment -- expanded at a marginally faster pace (+0.7PP, to 51.9%). Exports (+17.2PP), inventory sentiment (-9.0PP), and imports (+7.7PP) exhibited the largest changes.

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Of the industries we track, Real Estate and Construction expanded, Wood Products and Ag & Forestry contracted, and Wood Products was unchanged. Respondent comments included the following --

Construction. “High mortgage rates continue to weigh on new residential construction. With demand down, material suppliers are curtailing production to maintain pricing levels. Labor continues to be constrained, but some negotiation room is developing as the slowdown drags on.”

 

Changes in S&P Global‘s survey headline results were generally consistent with ISM’s. Both manufacturing headline indexes rose, although ISM’s reflected slower contraction while S&P Global nudged back into expansion; both services reports exhibited faster expansion. Details from S&P Global’s surveys follow --

Manufacturing. PMI signals expansion for first time in six months, but improvement sparks higher price pressures.

Key findings:
* Output and employment rise amid renewed upturn in new sales
* Rates of input cost and selling price inflation quicken...
* ...despite unprecedented improvement in vendor performance

 

Services. Output growth quickens on stronger demand conditions, but price hikes intensify in April.

Key findings:
* Business activity and new orders rise at faster rates
* Faster input cost and output charge inflation
* Employment growth strongest since August 2022

 

Commentary by Chris Williamson, S&P Global’s chief business economist --

Manufacturing. “US manufacturing output has regained some encouraging momentum at the start of the second quarter, having stabilized in March after four months of decline.

“While the upturn is in part linked to greatly improved supply chains, helping reduce backlogs of orders, April also saw a welcome upturn in new order inflows for the first time since last September.

“Although only modest, the rise in new orders hints at a tentative revival of demand, notably from consumers, but there are also signs that fewer customers are deliberately winding down their inventory levels.

“The brightening demand picture was accompanied by a lifting of business confidence about the outlook and increased hiring. The downside was a reigniting of inflationary pressures, with a stronger order book encouraging more firms to pass through higher costs to customers.”

 

Services. “April saw an encouraging acceleration of service sector growth which, combined with indications of a renewed upturn in manufacturing, suggests the economy has regained some momentum at the start of the second quarter.

“Companies have reported an improvement in confidence compared to the gloomier picture seen late last year, with service sector companies also benefiting from a post-pandemic tailwind of spending shifting from goods to services, notably among consumers.

“However, there are indications that resurgent demand for services is reigniting inflationary pressures. Average rates charged for services are now rising at the sharpest rate for eight months, as firms report a greater ability to pass increased costs on to customers. This upturn in the service sector selling price gauge hints at a concerningly stubborn stickiness of core inflation.

“Much of course depends on whether this recovery in demand can persist. Headwinds from higher interest rates and the increased costs of living, combined with the winding down of household savings, suggest the upturn could lose steam in the months ahead.”

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.