ISM Services PMI Falls & Markit PMI Rises

Services PMI Déjà vu (ISM Falls)

November ISM services PMI fell and the Markit PMI rose. This is just like the manufacturing sector. One difference is the ISM manufacturing PMI was below the Markit reading. This time the ISM reading was higher (the gap just narrowed). It's more normal as the Markit PMI is usually below the ISM PMI. 

Let’s look at the ISM reading first. ISM services report was a mixed bag as there were some positives and one big negative. Headline PMI reading fell 0.8 to 53.9. It missed estimates for 54.5. As you can see, estimates were for a slight decrease, but this one was a bit larger. 

It’s tough to fully grasp how the service sector has been doing in the past few months. It appears the service sector has been outperforming the manufacturing sector just like it did in the prior 2 slowdowns. But a few Markit readings in the past this year have blurred the picture.

A slight decline in the services PMI, brought the ISM composite down to 53.3. It's below the long term average of 54.4 as you can see in the chart above. At least it’s above the recent trough of 52.1. That’s because the services PMI was 52.6 in September. Individual components of this report were mixed as the new orders and employment indexes were up. But the business activity index cratered sharply. 

New orders index was up 1.5 to 57.1 which is pretty strong for this PMI. Employment index was up 1.8 to 55.5 which is the highest reading since July. It has been up 2 straight months after bottoming in September. Remember, the service sector employs most workers. This report was an early signal that the BLS labor report was going to be strong. It’s consistent with the strong jobless claims report and the decent job cuts report.

Business activity index fell 5.4 points to 51.6 which was the biggest decline out of any category. Specifically, the percentage of firms saying business activity was higher fell 6 points to 24 and the percentage saying it was lower, rose 2 points to 20%. The overall index is down from 55.2 in September even though the PMI is up 1.3 in that period. 9 industries stated business activity increased and 7 said it decreased. In the comments section, 3 firms mentioned the trade war out of 9 quotes.

A management of companies & support services firm stated, “Tariffs are impacting prices for a broad array of products used in the delivery of services and completion of projects for our clients. Upward pressure is impacting suppliers and their pricing to customers. We are seeing no relief from our customers, so we’re being negatively impacted by tariff-driven price increases. Numerous suppliers report looking for alternative manufacturing/supply locations outside of China, but with limited or no success so far.” 

This firm would be helped by a trade deal that includes tariffs being lowered, but it’s tough to see that happening by December 15th.

Markit Services PMI Rises Slightly

Markit services PMI rose. It was up 1 point to 51.6. This puts it below the manufacturing PMI. It helped push the composite PMI up from 50.9 to 52. Composite PMI is consistent with 1.5% GDP growth which is lower than the Atlanta Fed’s estimate of 2%. 

It’s consistent with monthly job creation of 100,000 which is way below the November headline reading. Markit report has been way too bearish on the labor market in the last few months. It’s weird to read this because how relatively optimistic the Markit manufacturing PMI has been.

Unlike the manufacturing reading, the Markit services PMI was in line with the flash reading. It is much below its long term average. New business expanded instead of contracting; this was the quickest pace of expansion since August. There was an increase in new clients and stronger domestic demand. 

New international business fell for the 4th straight month. Just like the manufacturing reading, the outlook on output in the next year fell because of economic uncertainty. Most firms expected no change in business activity. The employment index showed jobs were added for the first time since August. 

This is drastically different from the previous few labor reports. Backlogs increased in November after falling sharply in September. Prices paid increased for the 2nd straight month; prices received rose after being stagnant in October.

Global services PMI increased as well. Output index was up 0.6 to 51.6 which was a 3 month high. New business and employment indexes were up 0.4 and 1.1 to 51.5 and 51.2. Strongest expansions were in Russia and China. 

As you can see in the chart below, the percentage of firms with services PMIs above 50 increased to 85.7% which is the highest reading since August. That’s out of 14 nations. China’s PMI increased to the highest level since April and India’s was the best since July. You can see the only time this percentage fell below 50 in this expansion was in 2012 when the European economy was in a recession.

Since the global manufacturing and services PMIs increased, it’s no surprise the composite was up. It increased 0.7 to 51.5 which was the highest reading in 4 months. It appears the global economy is starting to turnaround. Because of the slight increase in the services future output index, the composite index stayed at 57.8.

Conclusion

Services ISM PMI has always been above the manufacturing PMI this year. Manufacturing PMI has fallen below 50. This is what slowdowns normally look like as the manufacturing sector is more cyclical and more impacted by the global economy. 

Services Markit PMI has been below the manufacturing PMI and its manufacturing PMI has never fallen below 50. That makes it confusing to know what is generating the weakness. I think the weakness is in manufacturing, but it’s not as bad as the ISM report indicates. 

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