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Purchasing Managers Index — Nonmanufacturing

March 4, 2019

The Institute for Supply Management not only publishes an index of manufacturing activity each month, they publish two days later a survey of non-manufacturing firms — which largely consists of services. The business activity index jumped 5.0 points in February to 64.7 after having declined 1.5 points in January.  This puts it right back to within an eyelash of its highest level for the cycle which was 65.2 set in November of last year.  That level, in turn, was the highest level for this index since January 2004.    While first quarter GDP growth may be weak because of what happened in December and January, it seems clear that the economy is rebounding nicely.   In February all 18 service-sector  industries  reported expansion.  Good, solid, broad-based growth.  At its February level the non-manufacturing index equates to GDP growth of 3.9%.

Typically, large changes in the overall index are led by orders which, in this case, jumped 7.5 points to 65.2 which is the highest level for the cycle and portends robust growth in services in the months ahead.

The ISM non-manufacturing index for employment fell 2.6 points in February to 55.2. after having risen 1.2 points in January.   Jobs growth should continue in upcoming months at about the same pace we  have seen of roughly 200 thousand per month.

Finally,  the price component fell 5.0 points in February to 54.4 after having risen  1.4 points in January.   That is the lowest reading for prices since June 2017.  At its current level of 54.4, prices are still rising but at a slower pace than in other recent months.

Stephen Slifer

NumberNomics

Charleston, SC


Purchasing Manager’s Index

March 1, 2019

The Institute for Supply Management’s index of conditions in the manufacturing sector fell 2.4 points in February to 54.2 after having risen 2.3 points in January.   Clearly the stock market decline, combined with slower growth from China and continuing concern about tariffs, is making manufacturers nervous.  However, weather may have played a role in the softer-than-executed reading for February.  But while the PMI may have fallen, the decline in recent months was from a very high level late last year.    The PMI for January still corresponds to a 3.3% increase in GDP growth.

Timothy R. Fiore,  Chair of the ISM’s Manufacturing Business Survey Committee indicated that “Comments from the panel reflect continued expanding business strength, supported by notable demand and output, although both were softer than the prior month.”

It is important to recognize that the overall index is the compilation of a number of different components — production, orders, employment, supplier deliveries, inventories, prices, the backlog of orders, exports, and imports.

The orders component declined 2.9 points in February to 55.3 after having jumped 7.1 points in January.  Customer demand softened quite notably late last year as stock market volatility, slower growth in China and concern about tariffs took a toll, but  demand returned in January and February with readings in the mid 50’s.    An orders index above 52.4  is, over time, consistent with an increase in the Census Bureau’s series on factory orders.

In addition to orders, the production component declined 5.7 points in February to 54.8 after having jumped 6.4 points in January.    A level above 51.5 is consistent with an increase in the Federal Reserve’s industrial production figure.  The ISM reported noted that, “Production expansion continued in February, but at a slower pace compared to January. Production was not able to keep pace with customer-inventory demand and was not able to prevent a growth in backlog orders. Weather conditions causing factory shutdowns may have contributed to the weaker expansion performance.”

The employment index declined 3.2 points in February to 52.3 after having fallen 0.7 point in January.  The ISM report said the following:  “Employment continued to expand, but at the lowest level since November 2016, when the index registered 51.6 percent,”   While the economy is currently cranking out about 190 thousand jobs per month, the factory sector thus far accounts for only about 20 thousand of them.  Most of the jobs are coming from services and construction.  An ISM employment index above 50.8 is consistent with an increase in the Bureau of Labor Statistics data on manufacturing employment.

The backlog of orders rose 2.0 points in February to 52.3 after having risen 0.3 points in January.  Fiore said “Backlogs expanded during February despite the softening of growth in new orders, indicating production struggled to keep up with incoming demand.”

The prices paid component edged lower to 49.4 after having declined 5.3 points in January.   ISM officials noted that, “Prices contracted for the second straight month.”  The Business Survey Committee noted a mix of increases and decreases. This reflects price turbulence, especially in the steel markets.”  A price index level above 52.4 is consistent with an increase in the BLS producer prices index for intermediate materials.  Hence, it appears the PPI may have held steady in February.

We believe that the economy is  expanding at a relatively robust pace.  We expect GDP growth of 2.7% in 2019 after having risen 3.1% last year.  During that period of time the manufacturing sector will continue to expand at a moderate pace.

Stephen Slifer

NumberNomics

Charleston, SC