December 2018 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey showed that in December the expansion in U.S. manufacturing decelerated. The PMI registered 54.1%, down 5.2 percentage points (PP) from the November 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. The only sub-indexes with higher December values were customer inventories and export orders. 

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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 decelerated (-3.1PP) to 57.6%. Only new orders and exports exhibited higher index values. 

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Of the industries we track, Paper Products contracted and Real Estate was unchanged; the rest expanded. Respondent comments included:

* Construction -- "New residential home sales have slowed significantly. Tariff delay has slowed material cost increases, but all indications are that January will bring price increases."

* Real Estate, Rental & Leasing -- "Business is exceeding expectations. 2019 should [equal] or exceed 2018."

Relevant commodities:

* Priced higher -- Construction subcontractors; freight; labor (general and construction).

* Priced lower -- Crude oil; lumber products.

* Prices mixed -- Fuel (diesel and gasoline).

* In short supply -- Construction subcontractors; labor (general, construction and temporary); hardwood.

IHS Markit’s December survey headlines also showed decelerating activity.

Manufacturing -- PMI slips to 15-month low in December

Key findings:
* Weakest improvement in operating conditions since September 2017
* New order growth eases to 15-month low
* Business confidence lowest since October 2016

Services -- New business growth weakest since October 2017

Key findings:
* New orders expand at solid, albeit slower rate
* Business activity growth softens to three-month low
* Business confidence dips to lowest in a year

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

Manufacturing -- "Manufacturers reported a weakened pace of expansion at the end of 2018, and grew less upbeat about prospects for 2019. Output and order books grew at the slowest rates for over a year and optimism about the outlook slumped to its gloomiest for over two years. The month rounds of a fourth quarter in which manufacturing production is indicated to have risen at only a modest annualized rate of about 1%.

“Some of the weakness is due to capacity constraints, with producers again reporting widespread difficulties in finding suitable staff and sourcing sufficient quantities of inputs. However, the survey also revealed signs of slower demand growth from customers, as well as rising concerns over the impact of tariffs. Just over two thirds of manufacturers reporting higher costs attributed the rise in prices to tariffs.

“Growth was led by strengthening demand for consumer goods, and robust growth was also reported for investment goods such as plant and machinery. But producers of intermediate goods -- who supply inputs to other manufactures -- reported the weakest rise in new orders for over two years, hinting at increased destocking by their customers. “A shift to inventory reduction was highlighted by purchasing activity in the manufacturing sector rising at the weakest rate for one and a half years in December, providing further evidence that companies have become increasingly cautious about spending amid rising uncertainty about the outlook.”

Services -- “Service sector business activity grew at a reassuringly solid rate in December, though like the manufacturing economy has seen the pace of expansion moderate somewhat since the strong rates enjoyed earlier in the year. Despite the slowing, the December surveys remain consistent with GDP growing at a healthy annualized rate of about 2.5% in the fourth quarter, with momentum easing only very slightly as the quarter proceeded.

"Hiring also remains encouragingly buoyant. The December survey is indicative of non-farm payrolls growth of approximately 190,000, driven mainly by increased service sector job gains as firms boosted capacity in line with rising demand. Domestic markets remained the main source of business growth, though the weaker dollar was also reported to have helped boost exports.

"Growth may continue to moderate in coming months, however, as backlogs of unfinished work across the manufacturing and service sectors failed to rise for the first time since June 2017, reflecting the recent slowing in growth of new business. Firms’ expectations of growth in the coming year also deteriorated markedly, down to the second-lowest in over two years, adding to the gloomier outlook.

"Inflationary forces meanwhile cooled during the month as lower oil prices helped to alleviate upward cost pressures from tariffs and, to a lesser extent, wages. Average prices charged for goods and services rose at the slowest rate for a year as a result, which should feed through to lower consumer inflation in coming months, with PCE inflation dipping below 2%.”

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.