August 2023 ISM and S&P Global Surveys

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The Institute for Supply Management‘s (ISM) monthly sentiment survey of U.S. manufacturers reflected slower contraction in the sector during August. The PMI registered 47.6%, up 1.2 percentage points (PP) from July’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. All subindexes remained at or below 50; the largest changes occurred among prices paid (+5.8PP), employment (+4.1PP), and slow deliveries (+2.5PP). 

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Concurrent activity in the services sector -- which accounts for 80% of the economy and 90% of employment -- accelerated (+1.8PP, to 54.5%). Order backlogs (-10.3PP), inventories (+7.3PP), and inventory sentiment (+4.9PP) exhibited the largest changes.

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

Construction. “Sales on a national level have been strong. Commodity material prices remain stable, and we are finding areas for cost reductions. Material availability has returned to pre-COVID-19 levels.”

Paper Products. “The manufacturing sector continues to be slow, and the low market prices make it difficult to stay profitable. On the positive side, laborers are showing enthusiastic employment interest. Rising energy and fuel prices are of concern to our company.”

Real Estate, Rental & Leasing. “Overall conditions seem quite good, although there is definite slowdown in residential construction driven by rapidly increasing interest rates.”

 

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

Manufacturing. Sharper contraction of U.S. manufacturing sector in August.

Key findings:
* Faster decline in new orders pulls output lower
* Slowest rise in employment since January
* Inflationary pressures remain modest despite ticking higher

 

Services. Service sector demand falters sparking weakest growth in activity for seven months.

Key findings:
* Renewed decline in new business
* Cost burdens rise at faster pace but selling price inflation slows
* Employment growth weakest since October 2022

 

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

Manufacturing. “U.S. manufacturers reported another tough month of trading in August. Output has fallen back into decline after a brief respite in July amid an increasingly steep deterioration in order books. Orders are in fact falling faster than factories are cutting output, suggesting firms will need to continue scaling back their production volumes into the near future.

“An increasing sense of gloom about the near-term outlook has meanwhile hit hiring and led to a further major pullback in purchasing activity.

“The survey meanwhile adds to evidence that the deflationary impact of improving supply chains has peaked, with prices starting to rise at an increased rate again in August. However, falling demand is clearly continuing to dampen pricing power and is keeping overall inflationary pressures in the manufacturing sector very subdued.

“Policy initiatives such as the CHIPS and Science Act and IRA should start to help buoy production in the medium term as capacity in U.S. manufacturing is expanded. A shifting of the inventory cycle toward restocking should also be evident by the end of the year, given improvements in some survey metrics such as the orders-inventory ratio. However, such rays of hope remain currently overshadowed by business confidence turning lower, which indicates that producers anticipate some further near-term headwinds to any manufacturing revival.”

 

Services. “The survey data send a hint of rising stagflation risks, as stubborn price pressures are accompanied by a near-stalling of business activity.

“The PMI numbers for the third quarter so far point to a faltering of economic growth after a robust second quarter, as a renewed manufacturing downturn is accompanied by a deteriorating picture in the service sector.

“While a post-pandemic revival of travel, recreation and hospitality spend contributed to an improved economic performance in the spring and early summer, this tailwind is losing momentum. Companies increasingly report customers to have become reticent to spend amid gloomier prospects as higher interest rates and the increased cost of living take their toll. However, financial services and business services providers are also increasingly feeling the pinch from weakening demand.

“Persistent wage growth is meanwhile being accompanied by renewed upward pressure on energy, fuel and transport costs, as well as some broader firming of materials prices, driving cost growth higher. Competitive forces have kept a lid on selling price inflation, but the rate of increase of service sector charges remains elevated to the extent that consumer price inflation is likely to remain stubbornly above the Fed’s target in the coming months.

“The key data to watch in the coming months will be the degree to which any further waning of demand for services translates into lower pricing power and reduced inflation.”

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.