July 2018 ISM and Markit Surveys

Click image for larger version

The Institute for Supply Management’s (ISM) monthly sentiment survey showed that the expansion in U.S. manufacturing decelerated in July. The PMI registered 58.1%, down 2.1 percentage points (PP) from the June 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. “This indicates strong growth in manufacturing for the 23rd consecutive month, led by continued expansion in new orders, production and employment. Inventories are expanding at a faster rate as a result of supplier deliveries improving compared to the prior month,” said Timothy Fiore, Chair of ISM’s Manufacturing Business Survey Committee. The only sub-indexes with higher July values included employment and inventories. 

Click image for larger version

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- also slowed (-3.4PP) to 55.7%. Only employment, input prices and imports exhibited significant increases. 

Click image for larger version

All of the industries we track expanded in July. Respondent comments included the following --

* Wood Products: "The so-called trade war is now taking its toll on business activity, resulting in substantial reductions to new export orders. China has all but stopped taking orders, causing inventories to build up in the U.S. Domestic business is steady. However, it is too small to carry the load that export markets have retreated from. As a result, we will be meeting as a corporation next week to recast our second-half sales and revenue projections."

* Construction: "Business is strong in both our commercial-construction and residential-service areas."

* Wholesale Trade: "Import tariffs on wood and steel. Shortages of rail cars, truck drivers and skilled labor. High-priced construction materials."

Relevant commodities --
* Priced higher: Caustic soda; corrugate and corrugated boxes; oil; fuel (diesel and gasoline); natural gas; paper; lumber; transportation and trucking services.
* Priced lower: None.
* Prices mixed: None.
* In short supply: Construction subcontractors; labor (construction and temporary); and truck drivers.

IHS Markit’s July surveys presented a mixed view.

Manufacturing -- PMI dips to five-month low in July
Key findings:
* Manufacturing growth remains strong, despite easing slightly
* Output expands at softest pace for eight months
* Inflationary pressures intensify

Services -- Service sector business activity growth remains sharp, but prices charged rise at fastest rate in almost four years
Key findings:
* Business activity upturn one of the strongest in last three years
* New business expands at weakest rate for six months
* Input price inflation eases, but charges rise at accelerated pace

Markit commentary --

Manufacturing: “The U.S. manufacturing sector continued to expand in July, but shows increasing signs of struggling against headwinds of supply shortages, rising prices and deteriorating exports.

"The latest survey showed output rising at a rate roughly equivalent to an annualized 1% pace of expansion, which is the weakest since late last year. While a weakening of new export orders for a second successive month suggested foreign demand has waned compared to earlier in the year, the slowdown can be also in part attributed to increased difficulties in sourcing sufficient quantities of inputs. Suppliers’ delivery delays were more widespread than at any time in the survey’s history. With producers often scrambling to buy enough raw materials, suppliers enjoyed greater pricing power. Not surprisingly, with tariffs also kicking in, cost pressures spiked higher again.

"Some relief for manufacturers came from strong domestic demand, which meant firms were increasingly able to pass higher costs on to customers. Average prices charged for goods consequently rose at the steepest rate for seven years, which is likely to feed through to higher consumer prices in coming months."

Services: “U.S. service providers experienced strong growth conditions at the start of the third quarter, with business activity rising at only a slightly softer pace than in June. Strong domestic demand helped to support another improvement in new order levels and a solid expansion of payroll numbers in July.

“However, business expectations across the service economy edged down to a six-month low. Survey respondents cited concerns about rising costs and trade frictions, alongside difficulties sustaining the tempo of new business growth seen in the second quarter of 2018.

”Rising operating expenses continued to place pressure on margins in the service economy, partly reflecting higher wages and fuel bills in July. There were signs that higher input costs have started to shift through to consumers, as service providers recorded the fastest increase in their average prices charged since September 2014.”

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.

June 2018 ISM and Markit Surveys

Click image for larger version

The Institute for Supply Management’s (ISM) monthly sentiment survey showed that the expansion in U.S. manufacturing accelerated in June. The PMI registered 60.2%, up 1.5 percentage points (PP) from the May 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. "This indicates strong growth in manufacturing for the 22nd consecutive month, led by continued expansion in new orders, production and employment,” said Timothy Fiore, Chair of ISM’s Manufacturing Business Survey Committee. “However, inventories continue to struggle to maintain expansion levels as a result of supplier deliveries slowing further."

“The price increases across all industry sectors continue,” said Fiore, including metals (all steels, steel components, aluminum and copper), chemicals, corrugate, freight, electronic components, fuels, plastics and wood products. 

Click image for larger version

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- also rose further (+0.5PP) to 59.1%. Most sub-indexes exhibited significant changes, although changes overall were mixed. 

Click image for larger version

All of the industries we track except Ag & Forestry expanded in June. Respondent comments included the following --

* Construction: "Tariffs, freight [issues] and labor shortages continue to have an inflationary influence on costs."

Relevant commodities --
* Priced higher: Caustic soda; corrugate and corrugated boxes; oil; diesel; natural gas; paper and paper products; wood pallets; and lumber.
* Priced lower: Gasoline.
* Prices mixed: None.
* In short supply: Construction subcontractors; and labor (construction and temporary).

IHS Markit’s June surveys presented a generally upbeat view.

Manufacturing -- U.S. manufacturing growth remains strong despite hitting four-month low.
Key findings:
* Output expands at slower, but still solid, rate
* New orders increase at softest rate since November 2017
* Suppliers¡¦ delivery times lengthen to the greatest extent in series history

Services -- Business activity growth remains sharp in June.
Key findings:
* Output expansion the second-strongest since April 2015
* Steep, but slower upturn in new orders
* Rate of input price inflation joint-quickest since September 2013

Commenting on the data, Chris Williamson, Markit’s chief business economist said --

Manufacturing: “The PMI for June rounds off the best quarter for manufacturing [in] almost four years, but also fires some warning shots about what lies ahead. As such, the second quarter could represent a peak in the production cycle.

“The survey has a good track record of accurately anticipating changes in the official manufacturing output data, and suggests the goods-producing sector is growing at an annualized rate of around 2.5%.

“On the downside, new orders inflows were the weakest for seven months, with rising domestic demand countered by a drop in export sales for the first time since July of last year. Business optimism about the year ahead also fell to the lowest since January, with survey respondents worried in particular about the potential impact of trade wars and tariffs.

“Tariffs were widely blamed on a further marked rise in input costs, and also linked to worsening supply chain delays -- which hit the highest on record, exacerbating existing tight supply conditions.”

Services: “Another month of solid business activity growth means the second quarter saw the strongest performance from the service sector [in] three years. Coming on the heels of a robust manufacturing expansion in the second quarter, the survey data add to indications that the economy has picked up considerable growth momentum since the first quarter.

“June also saw further impressive job gains, with the manufacturing and services surveys indicating that the last two months have seen business hiring increase at the steepest rate for just over three years. At this level, the survey’s employment indices are historically consistent with a non-farm payroll rise on the order of 230,000.

“On the downside, price pressures remained elevated, and are likely to feed through to higher consumer price inflation in coming months. There are also signs that growth could weaken in the third quarter: business expectations about future growth have pulled back from recent highs, and new order flows have slowed for two successive months. However, all indicators remain at sufficiently high levels to suggest that any slowdown may only be 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.

May 2018 ISM and Markit Surveys

Click image for larger version

The Institute for Supply Management’s (ISM) monthly sentiment survey showed that the expansion in U.S. manufacturing accelerated in May. The PMI registered 58.7%, up 1.4 percentage points (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 PMI reading] indicates strong growth in manufacturing for the 21st consecutive month, led by continued expansion in new orders, production and employment. However, inventories are struggling to maintain expansion levels, and suppliers continue to deliver at essentially the same rate as the previous month, relative to production,” said Timothy Fiore, Chair of ISM’s Manufacturing Business Survey Committee.

Also, the Prices Index inched up to its highest level since May 2011; 62.2% of respondents reported paying higher prices, 3.1% reported paying lower prices, and 34.7% of supply executives reported paying the same prices as in April. 

Click image for larger version

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- also rebounded (+1.8PP) to 58.6%. Services’ price index was less of an outlier; still, 41% of respondents reported higher prices whereas 54% indicated no change in prices paid. 

Click image for larger version

All of the industries we track except Wood Products expanded in May. Respondent comments included the following --

·     Construction: "Material prices have been difficult to predict this year, and suppliers have struggled to hold prices for any extended period on quotes, specifically on lumber and lumber-related products. The instability has proven frustrating, but a larger problem is that we are starting to see longer lead times in many of the same areas that could start impacting timelines if they continue to get worse as we get into the main building season."

Relevant commodities --
* Priced higher: Caustic soda; corrugate and corrugated boxes and cartons; fuel (diesel and gasoline); paper and paper products; wood; and construction labor.
* Priced lower: None.
* Prices mixed: None.
* In short supply: Construction subcontractors and labor.

IHS Markit’s May surveys presented an equally upbeat view.

Manufacturing -- May PMI signals further steep improvement in business conditions
Key findings:
* Sharp increases in output and new orders
* Staffing levels expand at quicker pace
* Inflationary pressures remain elevated

Services -- Services business activity growth accelerates to fastest since April 2015
Key findings:
* Output growth quickens to strongest in over three years
* Capacity pressures intensify
* Input price inflation fastest since October 2013

Commenting on the data, Chris Williamson, Markit’s chief business economist said --

Manufacturing: “The U.S. manufacturing sector enjoyed another bumper month in May, though continues to run hot.

“The past two months have seen the strongest back-to-back improvements in order books since the fall of 2014, fueled by strengthening domestic demand. New orders have in fact now grown at a faster rate than output in each of the past five months, highlighting how producers have struggled to boost production to meet sales. In the words of one manufacturer, “we’re selling more than we can make”.

“The upturn has stretched supply chains to the extent that May saw the greatest lengthening of delivery times in the near-ten year history of the survey. Producers are also finding it difficult to find suitable staff.

“With sales growing faster than production, backlogs of work are accumulating at the fastest rate for nearly four years, which should support further production growth in coming months. Business expectations regarding future production in fact picked up again to one of the highest levels seen over the past three years, adding to signs that strong growth will persist through the summer months.”

Services: “The U.S. economy kicked up a gear in May. A markedly improved service sector performance takes the final composite PMI reading above the flash estimate and to its highest for over three years. The composite PMI is a reliable leading indicator of GDP, and has risen to a level which is consistent with the economy growing at an annualized rate of approximately 3.5%.

“With business optimism about the year ahead running at one of the highest levels seen over the past three years, it looks likely that good growth momentum will be sustained in coming months.

“However, the survey also reveals increased concerns regarding rising costs and the impact of tariffs. Across both manufacturing and services, companies’ costs are now rising at one of the strongest rates seen over the past seven years, which will likely feed through to higher consumer prices in coming months.”

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.

April 2018 ISM and Markit Surveys

Click image for larger version

The Institute for Supply Management’s (ISM) monthly sentiment survey showed that the expansion in U.S. manufacturing decelerated noticeably in April. The PMI registered 57.3%, down 2.0 percentage points from the March 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. Only 2.6% of respondents reported paying lower prices; 61.2% reported paying higher prices. "The increases in prices across all industry sectors continues," said ISM’s Timothy Fiore, noting “price increases in metals (all steels, steel components, aluminum and copper), corrugate, wood, wood products and plastics.” Moreover, the Prices sub-index is at its highest level since April 2011. 

Click image for larger version

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- also slowed (-2.0 percentage points) to 56.8%. Price increases were somewhat more subdued in the service sector: 33% reported higher prices; 4% lower prices. 

Click image for larger version

All of the industries we track expanded in April. Respondent comments included the following --

·     Construction: "The trade tensions are impacting purchasing of steel and are causing suppliers to send letters of concern regarding contracted purchases for this year and the future based on these proposed tariffs."

·     Finance & Insurance: "Economy is humming along. [Activity in] both residential and commercial construction [is] apparent. Agriculture sector seems to be moderating at these commodity price levels. The international trade situation appears to be shifting on a minute-by-minute basis, which has folks nervous."

·     Public Administration:  "Construction activity continues to remain strong in the region, resulting in capacity issues and shortages of labor, materials and subcontractors."

Relevant commodities --
* Priced higher: Caustic soda; corrugate and corrugated boxes; fuel (diesel and gaoline); and wood.
* Priced lower: None.
* Prices mixed: None.
* In short supply: Construction subcontractors and labor.

IHS Markit’s April surveys presented a much more upbeat view than did ISM’s.

Manufacturing -- U.S. manufacturing operating conditions improve at fastest rate since September 2014.
Key findings:
* PMI rises to highest level in over three-and-a-half years
* Output grows at quickest pace since January 2017
* Inflationary pressures intensify

Services -- New business growth fastest since March 2015.
Key findings:
* New orders increase at accelerated and sharp pace
* Upturn in business activity quickens
* Business confidence highest since May 2015

Commenting on the data, Chris Williamson, Markit’s chief business economist said --

Manufacturing: “April saw US manufacturers reporting the strongest monthly improvement in business conditions since September 2014. The survey suggests the economy has started the second quarter on a solid footing and sends an encouraging signal for GDP growth to accelerate after the modest 2.3% rate of expansion seen in the first quarter.

“With inflows of new orders rising at an accelerated pace, greater input buying and business expectations regarding future production levels running at one of the highest levels seen over the past three years, there’s plenty of evidence to suggest strong growth will persist through May.

“The upturn is being led by large firms, with smaller companies trailing behind but nonetheless also seeing some of the best business conditions for three years.

“Warning lights are being flashed in relation to inflation, however, with factories reporting the strongest rise in prices for nearly seven years. Suppliers are hiking prices in response to surging demand, while tariffs and higher oil prices are also exerting upward pressure on costs. With the average price of goods leaving factories rising at the fastest rate since 2011, consumer price inflation looks set to accelerate.”

Services: “The improved service sector performance comes on the heels of news of faster manufacturing growth, pointing to a welcome broad-based strengthening of the economy at the start of the second quarter.

“As such, the data support the view that second quarter GDP growth will come in stronger than the 2.3% rate seen at the start of the year.

“The two surveys also collectively point to another month of solid job gains, commensurate with the official measure of non-farm payrolls rising by approximately 200,000 in April.

“Perhaps the most important development, however, is the upturn in price pressures. Survey evidence indicates that rising demand has allowed increasing numbers of companies to raise prices for both goods and services in recent months. Higher oil prices are also pushing up costs. Measured across both manufacturing and services, input costs are rising at the fastest rate since 2013, which will inevitably put greater pressure on consumer prices in coming months, all of which makes for a hawkish policy outlook.”

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.

March 2018 ISM and Markit Surveys

Click image for larger version

The Institute for Supply Management’s (ISM) monthly sentiment survey showed that the expansion in U.S. manufacturing decelerated slightly in March. The PMI registered 59.3%, down 0.5 percentage point from the February 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 except perhaps customer inventories were consistent with lessened activity; all industries reported paying higher input prices. 

Click image for larger version

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- slowed for a second month (-0.7 percentage point) to 58.8%. Sub-indexes with higher values were offset by an equal number of decliners; as with manufacturing, all service industries reported paying higher prices. 

Click image for larger version

All of the industries we track expanded in March. Respondent comments included the following:
* "The unbelievable amount of market volatility in construction-related materials that started with lumber continues with the tariffs on steel and aluminum. Accurate, long-term planning has become incredibly difficult, as distributors that historically held costs for at least 30 days are now, in some cases, committing to only seven days, as prices can change drastically in that time." (Construction)

* "Housing market [is] still strong, despite a shortage of construction workers." (Public Administration)

Relevant commodities --
* Priced higher: Caustic soda; corrugate; coated paper.
* Priced lower: None.
* Prices mixed: None.
* In short supply: Construction subcontractors and labor.

IHS Markit’s March surveys were mixed, with the manufacturing PMI rising but services falling

Manufacturing -- Manufacturing growth is strongest in three years.
Key findings:
* PMI rises to highest since March 2015
* Output and new orders continue to increase markedly
* Input costs rise to the greatest extent since November 2012

Services -- Growth remains strong.
Key findings:
* Service sector output and new order growth ease...
* ...but rates of expansion remain robust overall
* Upturn in employment reaches seven-month high.

Commenting on the data, Chris Williamson, Markit’s chief business economist said --

Manufacturing: “US factories reported a strong end to the first quarter, with the PMI advancing to a three-year high. The goods producing sector should therefore make a positive contribution to economic growth in the first quarter, as rising demand fueled further improvements in factory production.

“Optimism about the year ahead has meanwhile also risen to its highest for three years, generating yet another solid payroll gain and suggesting strong growth momentum will be sustained in the second quarter.

“Companies cited rising demand at home and abroad plus recent government policy announcements as helping shore up confidence in terms of their future production levels.

“However, recent tariff announcements were already reported to have added to inflationary pressures, and also led to the stockpiling of goods expected to rise further in price in coming months. Input cost inflation consequently hit the highest since 2012. Increased costs were often passed on to customers, meaning prices charged for goods at the factory gate showed the steepest rise in over four years.”

Services: “Measured across both manufacturing and services sectors, US business activity growth slowed in March compared to February's 27-month high, but remained encouragingly solid.

“The month rounds off a quarter in which the PMI surveys indicate that the economy grew at an annualized rate of approximately 2.5% (though official GDP data are likely to come in at least 0.5% weaker, due to seasonality issues).

“Strong inflows of new orders means growth looks set to accelerate into the second quarter. The past two months have seen the largest back-to-back increases in demand for almost three years.

“The strongest jobs gain since December 2016 further underscored the bullish outlook, as firms stepped up their hiring to meet the recent upturn in demand.

“Price pressures meanwhile eased slightly during the month, though remained elevated by standards of the past four years, linked in many cases to healthy demand boosting firms' pricing power, as well as recent tariff announcements adding to inflationary pressures in the manufacturing sector.

“Expectations about future growth were mixed: while recent protectionist announcements appear to have helped bolster confidence in parts of the domestic manufacturing sector, service sector optimism came off the boil.”

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.

February 2018 ISM and Markit Surveys

Click image for larger version

The Institute for Supply Management’s (ISM) monthly sentiment survey showed that the expansion in U.S. manufacturing accelerated in February. The PMI registered 60.8%, up 1.7 percentage points from the January 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 except new orders and production were consistent with heightened activity; moreover, no industries reported paying lower input prices. 

Click image for larger version

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- took a modest breather when decelerating slightly (-0.4 percentage point) to 59.5%. Employment and imports were the only sub-indexes with notable declines; as with manufacturing, no service industries reported paying lower prices. 

Click image for larger version

Of the industries we track, all except Wood Products expanded. Respondent comments included the following:
* "Lumber-related costs continue to increase as supply is also starting to become a problem. The market volatility of construction materials and the short supply of construction labor have added difficulty to long-term planning" (Construction).

Relevant commodities --
* Priced higher: Fuel (diesel and gasoline); labor (general, construction and temporary); lumber; OSB; natural gas; paper; caustic soda; corrugate; and crude oil.
* Priced lower: None.
* Prices mixed: None.
* In short supply: Construction subcontractors; labor (general, construction and temporary).

IHS Markit’s February surveys diverged slightly from ISM’s in terms of overall activity, but were consistent in showing higher input prices.

Manufacturing -- PMI close to three-year peak as new order inflows hit 13-month high.
Key findings:
* Growth in new business accelerates...
* ... but output expands at softer pace;
* Inflationary pressures intensify.

Services -- Business activity expansion accelerates to six-month high.
Key findings:
* Output growth quickens to sharp rate;
* Upturn in new business strongest since March 2015;
* Input price inflation accelerates to fastest since June 2015.

Commenting on the data, Chris Williamson, Markit’s chief business economist said --

Manufacturing: “U.S. factories are enjoying one of the best growth spells seen since 2014, boding well for the sector to make a solid contribution to GDP in the first quarter.

“The survey’s output index readings for the first two months of 2018 are indicative of the sector growing at an annualized rate of just under 3%.

“The most encouraging news was another surge in new order inflows, which helped boost optimism about the year ahead and drive further widespread job gains. Manufacturers are clearly in expansion mode, enjoying robust demand from home alongside rising export orders.

“Capacity is still being stretched, however, as indicated by widespread supply chain delays and the build-up of uncompleted orders at factories. Demand, in other words, is running ahead of supply, meaning pricing power is improving. Factory selling prices are consequently rising at the steepest rate for four years.”

Services: “A surge in service sector activity comes as welcome news after a disappointing couple of months, especially is it was accompanied by further robust manufacturing growth in February. So far, the two PMI surveys point to the economy expanding at a steady 2.5% annualized rate in the first quarter.

“With growth of new orders across the two sectors collectively growing at the fastest rate for three years, March could also prove to be a good month for business activity, rounding off a solid opening quarter or the year.

“Capacity is clearly being strained by the upturn in demand, as indicated by the largest build-up of uncompleted orders for nearly three years and reports of increasingly stretched supply chains.

“Encouragingly, business optimism about the year ahead has risen to one of the highest seen over the past three years, suggesting firms will remain in expansion mode to take advantage of the upturn. Hiring and business investment should therefore continue to rise in coming months.

“The concern is that prices continue to rise as demand outstrips supply. Average prices charged for goods and services showed the largest monthly rise since September 2014, which is likely to feed through to higher consumer price 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.

January 2018 ISM and Markit Surveys

Click image for larger version

The Institute for Supply Management’s (ISM) monthly sentiment survey showed that the expansion in U.S. manufacturing decelerated slightly in January. The PMI registered 59.1%, down 0.2 percentage point from the rebenchmarked and revised reading for December 2017. (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. New orders, production and employment exhibited lower values in January than in December. 

Click image for larger version

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- accelerated markedly (+3.9 percentage points) to 59.9%. Only inventories and inventory sentiment had lower sub-index values in January. 

Click image for larger version

Of the industries we track, Wood Products and Ag & Forestry contracted; Paper Products, Real Estate and Construction expanded. Respondent comments included the following:
* "Month-over-month steady growth, on average, [is] 3% on project volume and 1% on total revenue" (Construction).
* "Business continues to strengthen" (Paper Products).

Relevant commodities --
* Priced higher: Fuel (diesel and gasoline); construction labor; lumber (incl. hardwood); natural gas; pulp; paper; caustic soda; sulfuric acid; corrugate; and crude oil.
* Priced lower: None.
* Prices mixed: None.
* In short supply: Coated freesheet; construction subcontractors; labor (general, construction and temporary).

IHS Markit’s January surveys diverged from ISM’s.

Manufacturing -- January PMI signals strongest manufacturing growth since March 2015.
Key findings:
* Output and new orders expand at quickest rates for a year;
* Purchasing activity rises at steepest pace since September 2014;
* Input price inflation eases but remains sharp.

Services -- U.S. business activity growth eases to nine-month low.
Key findings:
* Upturn in output softens but remains solid;
* New business expands at fastest pace since September 2017;
* Backlogs increase at joint-strongest rate since March 2015.

Commenting on the data, Chris Williamson, Markit’s chief business economist said --

Manufacturing: “U.S. manufacturing started 2018 in fine fettle, with the PMI up to its highest for over two-and-a-half years. Output growth accelerated in response to fuller order books, the latter buoyed by the twin drivers of robust domestic demand and rising exports.

“Factory payroll growth remained among the highest seen over the past three years, underscoring the bullish mood evident across the manufacturing sector.

“Pricing power is also returning as a result of strengthening demand, which should help bolster profit margins, but is likely to also feed through to higher consumer prices.

“The acceleration of manufacturing growth and upward price trends are grist to the mill for Fed hawks, adding to the likelihood of interest rates rising in March.”

Services: “A slowdown in the service sector comes as a disappointment, though was partially offset by faster manufacturing growth during the month. Combined, the two PMI surveys point to the economy expanding at a reasonably solid, albeit not exciting, 2-2.5% annualized rate at the start of the first quarter.

“Beneath the headline numbers, the survey findings are more encouraging, and suggest the pace of economic growth could accelerate in coming months. Most importantly, growth of new orders jumped higher in both sectors in January, registering the largest upturn in new work since last August and one of the biggest gains seen over the past three years.

“Backorders also showed the biggest rise for almost three years as firms struggled to cope with rising demand.

“This upturn in client demand was a key factor behind another month of strong hiring, but also encouraged firms to hike prices. Selling price inflation accelerated in both manufacturing and services as pricing power continued to return.”

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.

December 2017 ISM and Markit Surveys

Click image for larger version

The Institute for Supply Management’s (ISM) monthly sentiment survey showed that the expansion in U.S. manufacturing accelerated in December. The PMI registered 59.7%, up 1.5 percentage points. (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 except employment exhibited higher values in December than in November. 

Click image for larger version

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- decelerated further (-1.5 percentage points) to 55.9%. Only employment, slow supplier deliveries, and input prices had higher sub-index values in December. 

Click image for larger version

Of the industries we track, Wood Products contracted while Ag & Forestry was unchanged; Paper Products, Real Estate and Construction expanded. Respondent comments included the following --
* Construction: "Lumber prices are increasing due to product [being] damaged in the recent wildfires. Duties on steel from Vietnam is expected to cause an increase in steel prices. Ongoing shortages in construction related [to] labor continue to be a problem."
* Paper Products: "All suppliers are reporting strong business activity and difficulties obtaining qualified employees." 

Relevant commodities --
* Priced higher: Caustic soda; corrugate; diesel fuel; construction labor; lumber products; natural gas; paper.
* Priced lower: None.
* Prices mixed: Gasoline; lumber products.
* In short supply: Construction contractors; groundwood; labor (general, construction and temporary); and lumber products.

IHS Markit’s December surveys were broadly consistent with ISM’s. Key findings from Markit’s surveys include the following:

Manufacturing --
* Output expands at quickest pace in 11 months...
* ...supported by steep increase in total new work.
* Rate of job creation fastest since September 2014.

Services --
* Slower expansion in business activity in December.
* Upturn in new orders remains relatively strong.
* Business confidence slips further to a 15-month low.

Commenting on the data, Chris Williamson, Markit’s chief business economist said --

Manufacturing: “U.S. manufacturers ended 2017 on a high. Output growth accelerated to its fastest since the start of the year on the back of a marked upswing in demand as the year came to a close.

“Prospects for the upturn also look good. With business optimism about the year ahead running at its highest for two years in the closing months of 2017, companies are clearly expecting to be busier in 2018.

“The upbeat mood is underscored by an increased appetite to hire new staff, with the survey indicating that factory payroll numbers are rising at a rate not seen for over three years.

“Indicators of backlogs of work and input buying likewise suggest production will continue to grow at a solid pace as we move into 2018. However, the strengthening of demand for raw materials has led to supply chain delays, which have in turn been increasingly linked to higher prices as a sellers’ market develops. Input price inflation accelerated to one of the highest rates seen over the past five years in December, as suppliers hiked prices for a wide range of inputs.

“The combination of strengthening growth, a solid labor market and rising prices will add to expectations that the Fed will remain on track for another rate hike in the near future, with March looking a likely possibility.”

Services: “The final services and manufacturing PMI surveys collectively signaled faster business activity growth than the earlier flash readings, though still indicated a moderation in the pace of expansion to the weakest since June. A welcome improvement in manufacturing output growth was countered by a slowdown in the comparatively larger services economy.

“However, while moderating, the overall rate of expansion remains relatively robust, with the PMIs running at levels consistent with the economy growing at a solid 2-2.5% annualized rate in 4Q.

“Similarly, hiring, while also slowing slightly at the end of the year, continued to run at a pace indicative of non-farm payrolls up by around 195,000 in December as firms boosted capacity in line with rising demand. Price pressures meanwhile moderated but remained elevated by standards seen over the past three years.

“The US economy therefore ends 2017 with an encouraging scoresheet of steady economic growth, solid hiring and firmer inflationary pressures, supporting the view that interest rates will continue to rise in 2018.

“A note of caution is sounded by a deterioration in optimism about the outlook in the service sector to the joint-weakest in the past 18 months. However, hopefully news of tax cuts and fiscal stimulus in 2018 will help revive business spirits and drive growth higher.”

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.

November 2017 ISM and Markit Surveys

Click image for larger version

The Institute for Supply Management’s (ISM) monthly sentiment survey suggested that the expansion in U.S. manufacturing decelerated further in November. The PMI registered 58.2%, down 0.5 percentage point. (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. Of the economically intuitive sub-indexes, only new orders, production and imports exhibited higher values in November than in October. 

Click image for larger version

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- also decelerated (-2.7 percentage points) to 57.4%. Inventories and imports were the only sub-indexes with higher values in November. 

Click image for larger version

Of the industries we track, Wood Products and Ag & Forestry contracted; Paper Products, Real Estate and Construction expanded. Respondent comments included the following --
* Construction: "Construction labor continues to be constrained in the West."

Relevant commodities --
* Priced higher: Paper and paper products; corrugate and corrugated boxes; fuel, including gasoline and diesel; lumber products, including pallets; natural gas; caustic soda; construction labor.
* Priced lower: None.
* Prices mixed: None.
* In short supply: Labor (construction and temporary).

IHS Markit’s November surveys also exhibited deceleration. Key findings from Markit’s surveys include the following:

Manufacturing --
* Production and new orders increased solidly
* Output prices accelerated by the largest amount since December 2013

Services --
* Service sector output expansion softened to a five-month low
* New business accelerated further
* Combined (i.e., manufacturing and services) business confidence slipped to its weakest since February

Commenting on the data, Chris Williamson, Markit’s chief business economist said --

Manufacturing: “US manufacturers reported further solid growth in November. The rate of expansion settled slightly after October’s rebound from the hurricanes, but still leaves the sector on course for its best quarter since the opening months of 2015.

“What’s especially encouraging is that growth is being led by producers of business equipment and machinery, indicating investment spending is on the rise.

“Jobs growth in the sector has also picked up in recent months compared with the subdued hiring earlier in the year, suggesting that an expansionary mood is beginning to prevail in the goods producing sector. Business optimism is now at its highest since the start of 2016, underscoring how firms believe the upturn has further to run as we move into 2018.

“Prices continued to rise at an increased rate, linked to higher costs, though in many cases the price hikes were linked to ongoing supply chain disruptions since the hurricanes, suggesting inflationary pressures should start to cool soon, at least in terms of manufacturing costs.”

Services: “The slowest growth of service sector business activity since June, alongside a slight dip in the pace of manufacturing expansion, means the November PMI surveys registered a modest cooling in the overall rate of business growth. Mid-way through the fourth quarter, the surveys are still pointing to a reasonable GDP growth rate of approximately 2.5%.

“The surveys’ employment indices are meanwhile pointing to solid non-farm payroll growth of [around] 200,000 as companies continue to take on staff in encouraging numbers to meet rising order books.

“Disappointingly, optimism about the year ahead deteriorated as companies grew increasingly cautious about the outlook for 2018, suggesting risk aversion may start to rise, which could hit hiring and investment. However, for now, businesses generally remain in expansion mode and the upturn shows few signs of losing momentum to any significant extent.

“In terms of prices, the upturn continues to show signs of gradually feeding through to higher inflationary pressure. Average selling prices for goods and services showed one of the largest increases recorded over the past four years, linked to rising cost pressures.”

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.

October 2017 ISM and Markit Surveys

Click image for larger version

The Institute for Supply Management’s (ISM) monthly sentiment survey suggested that the expansion in U.S. manufacturing decelerated in October. The PMI registered 58.7%, down 2.1 percentage points. (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. Only the customer-inventory sub-index value was higher in October than in September. 

Click image for larger version

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- accelerated (+0.3 percentage points) to 60.1%, the highest NMI reading since that index was created in 2008. Sub-indexes with lower values in October included new orders, input prices and order backlogs. 

Click image for larger version

All of the industries we track expanded. Respondent comments included the following --
* Construction: "The current hurricane damage will result in a shortage of some building materials and draw labor forces away from our area."
* Real Estate, Rental & Leasing: "Business levels increased due to hurricane recovery efforts."

Relevant commodities --
* Priced higher: Corrugate and corrugated boxes; paper; lumber; fuel (diesel, and gasoline); labor (general and construction); and construction contractors and services.
* Priced lower: None.
* Prices mixed: None.
* In short supply: Labor (general, construction and temporary); construction contractors.

ISM’s and IHS Markit’s October surveys were consistent insofar as both pairs reported expansion of their respective sectors; rates of (de)acceleration differed, however, as is customary. Key findings from Markit’s surveys include the following:

Manufacturing --
* Production and new orders both increase at steeper rates
* Supplier performance deteriorates at quickest pace since February 2014
* Growth in employment picks up to 28-month record

Services --
* Output growth in line with that seen in September
* Upturn in new business softens to six-month low
* Input price inflation eases to seven-month low

Commenting on the data, Chris Williamson, Markit’s chief business economist said --

Manufacturing: “US manufacturing stepped up a gear at the start of the fourth quarter, boding well for higher factory production to support robust economic growth in the closing months of 2017.

“Production volumes jumped higher on the back of a substantial improvement in order book inflows, in part due to supply chains returning to normal after the hurricanes but also reflecting a combination of strong underlying demand.

“Factory jobs growth has also picked up to one of the strongest since the global financial crisis, underscoring the improvement in optimism about future trading among manufacturers.

“An important change in October was the broadening out of the expansion to smaller firms, which have lagged behind the strong growth reported by larger rivals throughout much of the year to date but under-performed to a lesser extent in October.”

Services: “The services PMI survey highlights the dilemma facing the Fed as it seeks to determine the right policy course amid signs of solid growth but soft inflation.

“Together with the manufacturing PMI, which rose higher in October as hurricane-related supply chain disruptions eased, the latest services survey is consistent with underlying growth in the economy of approximately 3%, as well as buoyant jobs growth.

“With the data for October setting the scene for another robust GDP increase in the fourth quarter, a December rate hike is very much on the cards.

“However, a drop in inflationary pressures adds an element [of] uncertainty to the picture. Having been buoyed by supply chain disruptions in prior months, input cost pressures eased at the start of the fourth quarter, and the rate of increase of average prices charged for goods and services dropped markedly.

“While the Fed may likely tilt towards hiking in December on the back of robust economic growth, much may depend on the data flow in coming weeks for signs that stronger growth is feeding through to higher prices.”

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.

September 2017 ISM and Markit Surveys

Click image for larger version

The Institute for Supply Management’s (ISM) monthly sentiment survey suggested that the expansion in U.S. manufacturing accelerated in September. The PMI registered 60.8% (the highest reading since May 2004), up 2.0 percentage points. (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. Only the producer-inventory and import sub-index values were lower in September than in August. 

Click image for larger version

The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- also accelerated (+4.5 percentage points) to 59.8% (the highest NMI reading since that index began being reported). The only sub-index of economic consequence with a noticeably lower value was inventories. 

Click image for larger version

Of the industries we track, only Ag & Forestry contracted. Respondent comments included the following:
* Construction: "Overall, consistent growth in construction/office renovation jobs. Eight percent more jobs and 6 percent more revenue."
* Paper Products: "We are closely watching the Houston events as many of our production chemicals are produced in the Gulf region. Some tightening of supply and/or price increases expected."
* Wood Products: "Lumber prices starting to drop, and log prices starting to increase. Not the best combination."

Relevant commodities --
* Priced higher: Corrugate and corrugated boxes; paper; lumber and plywood; fuel (diesel, and gasoline); natural gas; labor (general and construction); caustic soda.
* Priced lower: None.
* Prices mixed: None.
* In short supply: Diesel; labor (general, construction and temporary).

ISM’s and IHS Markit’s September surveys were directionally consistent. Key findings from Markit’s surveys include the following:

Manufacturing --
* Production rises modestly but new order growth softens
* Employment expands at quickest rate for nine months
* Input prices increase at fastest pace since December 2012

Services --
* Robust expansion in business activity
* Upturn in new business remains steep despite easing since August
* Inflationary pressures intensify

Commenting on the data, Chris Williamson, Markit’s chief business economist said:

Manufacturing -- “While the headline PMI remained resiliently elevated in September, despite disruption from hurricanes Harvey and Irma, the details of the survey are more worrying. Output growth was unchanged on August’s 14-month low, and translates into stagnation at best in terms of the official manufacturing output data. Firms’ expectations of future output growth also slipped to a four-month low.

“There was better news on the hiring front, with job creation perking up to a nine-month high. However, with employment rising faster than output, productivity may be slipping.

“Although the hurricanes appear to have made little overall impact on production, supply delays were widely reported and prices for many inputs rose, suggesting some near-term upward pressure on inflation.”

Services -- “Given the disruption caused by recent hurricanes, some pull-back in business activity was understandable, so the resilient reading of the September services PMI makes for encouraging reading.

“Looked at alongside the manufacturing PMI, the survey data point to GDP rising at an annualized rate of just over 2% in the third quarter. Growth is largely reliant on the services economy, however, as manufacturing lags behind, struggling in part due to the strong dollar.

“While rebuilding and a return to normal business conditions after the hurricanes will hopefully boost growth in the fourth quarter, it’s worrying to see business expectations about activity levels over the coming year drop in September. Measured across both manufacturing and services, future optimism is at its lowest since February, suggesting companies have become increasingly cautious about the outlook.

“However, while optimism has slipped, the ‘hard’ survey data on recent output, new orders and hiring trends remain solid. Combined with the further upturn in price pressures seen in September, the survey data will further fuel expectations that the Fed will be keen to hike interest rates again before the year is out. Average prices charged for goods and services rose at the fastest rate for three years in September, though it’s not yet clear how much of the rise reflected short-term hurricane effects.”

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.