September 2023 ISM and S&P Global Surveys

Click image for larger version

The Institute for Supply Management‘s (ISM) monthly sentiment survey of U.S. manufacturers reflected slower contraction in the sector during September. The PMI registered 49.0%, up 1.4 percentage points (PP) from August’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. Only the production and employment subindexes popped above 50; the largest changes occurred among prices paid (-4.6PP), employment (+2.7PP), and employment (+2.7PP). 

Click image for larger version

Concurrent activity in the services sector -- which accounts for 80% of the economy and 90% of employment -- decelerated (-0.9PP, to 53.6%). Order backlogs (+6.8PP), inventory sentiment (-6.7PP), and new orders (-5.7PP) exhibited the largest changes.

Click image for larger version

Of the industries we track, only Real Estate expanded. Respondent comments included the following --

Construction. “Conditions remain favorable for mechanical contractors. New construction projects continue to launch. We are still seeing opportunities for cost reductions across many commodities. Inventory levels on finished goods remain strong.”

 

Changes in S&P Global‘s headline index results paralleled those of ISM. Details from S&P Global’s surveys follow --

Manufacturing. Output returns to growth, but prices also rise at increased rate.

Key findings:

• Contraction in new orders slows, with output rising marginally
• Inflationary pressures strengthen but remain historically muted
• Further modest rise in employment as confidence improves

Services. Service sector stagnates in September, as demand conditions wane further.

Key findings:

• Fastest fall in new orders in 2023 so far
• Employment growth quickens
• Selling prices rise at sharper pace

 

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

Manufacturing. “September saw a welcome near-stabilization of business conditions in manufacturing, but a further increase in price pressures is a concern on the inflation front.

“Output reversed some of the loss seen in August as higher employment and improved supply availability helped factories fulfil backlogs of orders.

“Although the pace of production growth remains disappointingly subdued thanks to a further decline in new orders received during the month, notably from weak export markets, there are signs that the situation will improve as we head through to the end of the year.

“Manufacturers’ expectations of future output have jumped to their highest for nearly one and a half years, supply conditions continue to improve, and the rate of order book decline has moderated considerably in recent months, in part due to fewer producers and customers reporting deliberate cost-focused inventory reduction policies.

“Less encouraging was the news on the inflation outlook, as producers’ costs rose at the fastest rate for five months, largely on the back of higher oil prices. These increased costs are already feeding through to higher prices to customers, which will inevitably result in some renewed upward pressure on inflation.”

 

Services. “The final PMI data for September add to indications that the US economy has started to cool again after a resurgence of growth earlier in the summer. Inflationary pressures in the service sector meanwhile remain uncomfortably sticky.

“The biggest change in recent months has been the waning in demand for consumer services, such as travel, tourism and recreation, along with a slump in financial services activity.

“Providers of consumer-oriented services report that a revival of demand in the spring has gradually lost momentum amid the ratcheting up of interest rates and increased cost of living at a time of diminishing savings. In the financial services sector, financial conditions are tightening and uncertainty about the outlook is subduing confidence. Both sectors are now reporting falling activity levels, taking away a major source of support to the wider economy’s expansion.

“The economy therefore looks to be moving into the fourth quarter on a weak footing, hinting at slower GDP growth as we head toward the end of the year.

“Average prices charged for goods and services meanwhile continue to rise at a rate well above the pre-pandemic average, with service sector charge inflation remaining especially stubborn, in part due to recent oil price hikes.”

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.