August 2020 ISM and Markit Surveys

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The Institute for Supply Management‘s (ISM) monthly sentiment survey showed U.S. manufacturing expanding more quickly during August. The PMI registered 56.0%, up 1.8 percentage points (PP) from the July 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. All of the sub-indexes reflected increased activity, although the pickup in slow deliveries and shrinking inventories suggest producers are struggling to bring product to market.

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The services sector -- which accounts for 80% of the economy and 90% of employment -- also expanded further, albeit at a marginally slower rate (-1.2PP, to 56.9%). The most noteworthy changes in the services PMI (formerly known as NMI) sub-indexes included new orders (-10.9PP), input prices (+6.6PP) and export orders (+6.5PP).

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All of the industries we track expanded. Comments from respondents included:

Wood Products. "Homebuilder business continues to be robust, with month-over-month gains continuing since May. Business remains favorable and will only be held back by supply issues across the entire industry."

Paper Products. "We are starting to see parts of our business rebound in August, while other parts remained weak. Some of our export business has come back for the first time since the start of COVID-19; however, domestic portfolios remain mixed."

Construction. "Overall, we are seeing improvement in the level of activity in the short term. Backlog of orders is inconsistent."

Real Estate. "Business recovery continues as the country reopens."

 

Relevant commodities:

Priced higher. Crude oil, freight, lumber, OSB, natural gas, labor, and paper products.

Priced lower. Gasoline.

Prices mixed. Diesel.

In short supply. Lumber, and labor (general, construction and temporary).

 

Findings of IHS Markit‘s August surveys generally agreed with their ISM counterparts.

Manufacturing. Fastest manufacturing expansion since January 2019.

Key findings:

* Faster upturn in new orders as export growth hits four-year high

* Quickest rise in employment since November 2019

* Cost pressures strongest since early-2019

 

Services. Strongest expansion in business activity since March 2019.

Key findings:

* Output growth quickens amid renewed upturn in new business

* Employment rises at the fastest pace since June 2014 as backlogs of work show largest rise for over a decade

* Input cost pressures remain steep

 

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

Manufacturing. “The manufacturing upturn gained further ground in August, adding to indications that the third quarter should see a strong rebound in production from the steep decline suffered in the second quarter.

“Encouragingly, new order inflows improved markedly, outpacing production to leave many companies struggling to produce enough goods to meet demand, often due to a lack of operating capacity. Backlogs of uncompleted work consequently rose at the fastest rate since the early months of 2019, encouraging increasing numbers of firms to take on more staff.

“Key to the upturn was a jump in new export orders, which rose at the fastest rate for four years, reflecting improving demand in many foreign markets, and benefitting larger companies in particular. Disappointingly, new orders and export sales at smaller manufacturers continued to fall, highlighting an unbalanced recovery in favor of larger firms.”

 

Services. “Surging inflows of new business helped propel service sector activity higher in August, with the sector growing at its fastest rate for almost one and a half years. Firms were often left struggling to meet demand and, despite taking on extra staff at a pace not seen for over six years, backlogs of uncompleted work accumulated at a rate exceeding anything recorded since 2009. The increase in backlogs of work bodes well for robust output growth to persist into September.

“Combined with the stronger picture emerging from manufacturing in August, the improved performance of the vast service sector adds to signs that the third quarter will see an impressive rebound in the economy from the collapse seen in the second quarter. “However, the survey also highlights how the rebound is very uneven and the recovery path remains highly uncertain.

“August’s growth was driven by financial and business services as well as tech firms, but consumer-facing sectors such as travel, tourism and recreation remained firmly in decline due to the need for ongoing social distancing.

“Companies across the board also remain concerned about resurgent virus infections and the durability of demand in the coming months after the initial rebound potentially fades, with uncertainty over the Presidential election adding further risks to the outlook for many companies.”

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.