May 2021 ISM and Markit Surveys

Click image for larger version

The Institute for Supply Management‘s (ISM) monthly sentiment survey showed a slight increase in the proportion of U.S. manufacturers reporting expansion in May. The PMI registered 61.2%, a rise of 0.5 percentage point (PP) from the April 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 sub-indexes for new orders (+2.7PP), slow deliveries (+3.8PP) and backlogged orders (+2.4PP) all exhibited small increases.

“The manufacturing economy continued expansion in May,” observed Timothy Fiore, Chair of ISM’s Manufacturing Business Survey Committee. “Business Survey Committee panelists reported that their companies and suppliers continue to struggle to meet increasing levels of demand. Record-long lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments of the manufacturing economy. Worker absenteeism, short-term shutdowns due to part shortages, and difficulties in filling open positions continue to be issues that limit manufacturing-growth potential.”

Click image for larger version

The services sector -- which accounts for 80% of the economy and 90% of employment -- rebounded to a new all-time high of service-sector respondents reporting expansion (+1.3PP, to 64.0%). The most noteworthy changes in the sub-indexes included slow deliveries (+4.3PP), input prices (+3.8PP) and imports (-5.3PP).

Click image for larger version

All of the industries we track expanded. Respondent comments included the following:

Construction. “We are still busy and adding employees. One of the biggest concerns now is shortages of crucial material and equipment… Equipment and material suppliers have been raising prices since the first of the year. We hear of a new increase almost daily.”

Real Estate. “Business is very strong, and customer orders continue to increase at a rapid pace. Material shortages, increased prices and qualified personnel shortages are becoming a much larger concern.”

 

Findings of IHS Markit‘s May survey results were generally consistent with their ISM counterparts.

Manufacturing. Production growth accelerates amid stronger client demand, but supply chain disruption remains marked

Key findings:

* Output expands at faster rate as growth in new order inflows strengthens
* Supply chain disruption leads to soaring cost pressures
* Backlogs of work rise at quickest pace on record

 

Services. Business activity growth rate accelerates to record high in May

Key findings:

* Stronger client demand spurs sharper output expansion
* Cost burdens rise at quickest pace on record
* Further steep increase in employment despite hiring

 

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

Manufacturing. “US manufacturers are enjoying a bumper second quarter, with the PMI hitting a new high for the second month running in May. Inflows of new orders are surging at a rate unsurpassed in 14 years of survey history, buoyed by reviving domestic demand and record export sales as economies reopen from COVID-19 restrictions. However, elevated levels of other survey indicators are less welcome: prices charged by manufacturers are also rising at an unprecedented rate, linked to soaring input costs and unparalleled capacity constraints.

“Not only is operating capacity being curbed by record supply chain delays so far in the second quarter, but firms have also been increasingly unable to hire sufficient staff. Hence backlogs of work are building up at an unprecedented rate, as firms struggle to meet demand.

“These backlogs of orders should support further production growth in the next few months, adding to signs of impressive economic expansion over the summer. But manufacturers’ expectations further ahead have moderated, hinting that the growth rate is peaking, linked to worries about capacity limits being reached, rising prices hitting demand and a peaking of stimulus measures.”

 

Services. “The US economic recovery shifted up a gear in May, with output of the combined manufacturing and service sectors surging past all prior peaks by an impressive margin. The strong correlation between the PMI and GDP means the economy looks set to enjoy rapid -- potentially double-digit -- growth in the second quarter.

“Further robust expansions are indicated for the summer months, with an improving order book situation accompanied by elevated levels of business confidence and the further easing of virus restrictions both at home and abroad. But the survey’s price gauges have also climbed to unsurpassed levels, which will add to inflation worries. These unprecedented output and price growth rates will inevitably lead to speculation about an earlier than previously expected tapering of Fed policy.”

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.