November 2018 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey showed that in November the expansion in U.S. manufacturing regained some of the ground lost in October. The PMI registered 59.3%, up 1.6 percentage points (PP) from the October 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. Perhaps most notable, input price pressure relaxed in November. 

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The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- also accelerated (+0.4PP) to 60.7%. Input price growth accelerated.

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Of the industries we track, only Wood Products and Ag & Forestry did not expand. "Commercial construction is strong,” commented a Construction respondent. “Employment is struggling due to lack of qualified talent."

Relevant commodities:
* Priced higher -- Labor (general and construction); and paper.
* Priced lower -- Lumber and lumber products; and fuel.
* Prices mixed -- None.
* In short supply -- Construction subcontractors; labor (general, construction and temporary); and trucking.

IHS Markit’s November survey headlines were less positive than ISM’s, but the internal details were generally consistent.

Manufacturing -- Output expands at joint-weakest rate since September 2017

Key findings:
* Production growth eases but remains strong
* New orders rise at fastest rate for six months
* Employment increases solidly

Services -- Slowest new business growth since October 2017

Key findings:
* New order expansion remains solid
* Strong upturn in business activity
* New export orders increase at fastest rate since May

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

Manufacturing -- "Despite the headline PMI slipping to a three-month low, November saw manufacturers enjoy another encouragingly solid month of improving business conditions.

“Dig deeper behind the headline number and the picture brightens further. New orders rose at the fastest rate for six months, prompting manufacturers to continue to expand capacity to meet demand. The pace of job creation remained among the highest seen over the past decade.

“The survey acts as a reliable guide to the official manufacturing data, and suggests that factory output is growing at an annualized rate of around 1.5% so far in the fourth quarter, providing a material but by no means impressive contribution to GDP. As such, the data corroborate the flash PMI’s signal that the economy will likely see growth slow to a 2.5% rate in the fourth quarter.

“In a further sign that growth has peaked, business optimism about the year ahead waned to the lowest for over a year, albeit with the proportion of companies expecting output to be higher in a year’s time outnumbering those expecting a decline by 36% to 3%.”

Services -- “The [combined] surveys paint a picture of an economy growing at a solid annual rate of 2.5% so far in the fourth quarter, and continuing to add jobs in impressive numbers. Although some cooling in the rate of job creation was seen in November, the surveys are still pointing to payrolls growing at monthly rate of around 185,000.

“The surveys therefore add to evidence that the domestic economy remains in good health, generating balanced growth across both manufacturing and services and increasingly outperforming other major economies.

“However, while new business growth remained encouragingly resilient, it has eased to the lowest in over a year as demand showed some signs of softening, linked partly to growing concerns over trade wars, slower global demand growth, rising political uncertainty and tighter financial conditions. Such concerns have also dampened business expectations about the year ahead, adding to signs that growth may have peaked, though any slowing in growth looks likely to be only modest.”

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.