Weakest ISM Non-Manufacturing PMI Since July 2017

Weakest ISM Non-Manufacturing PMI - Weak Factory Orders

May ended up having the Weakest ISM Non-Manufacturing PMI in nearly two years. May factory orders fell 0.7% monthly which missed estimates for a 0.5% decline. That’s pretty bad.

Especially when you consider that the April reading was revised to show a 1.2% monthly decline instead of a 0.8% decline. The comp got much easier, but orders growth still missed estimates in May.

As you can see from the chart below, yearly new orders growth was negative and shipments growth was barely positive; both growth rates have been in decline since the second half of last year.

Most of the decline was in durable goods orders as they fell 1.3% monthly; non-durable goods orders fell 0.2%. The weakness was centered in petroleum and coal.

The best part of this May report is that core capital goods orders were up 0.5% monthly. That's a 0.1% increase from the initial reading. Unfilled orders fell 0.5% in May on top of a 0.2% decline in April. Boeing’s 737 Max drove weakness.

ADP Report Improves, But Misses Estimates

Weakest ISM Non-Manufacturing PMI - Since we’ve already seen the monthly BLS reading, we can see the weakness in the June ADP report didn’t correlate with the BLS report.

Some say the ADP report is better at measuring small business job creation. That’s relevant because the ADP report has showed weakness in small business job creation for 2 months. The market trades off the BLS number though.

June ADP report improved from May and May’s reading was revised higher. However, the June reading still missed estimates. Specifically, the May reading was revised up 14,000 to 41,000. Investors expected job creation in May to be revised higher in both reports.

There is little indication that the labor market fell off a cliff in May.

Weakest ISM Non-Manufacturing PMI - June reading improved to 102,000. It missed estimates for 140,000 and the low end of the estimate range which was 130,000.

Weakness in the ADP report was in small business job creation. Small businesses hemorrhaged 23,000 jobs. If you delve deeper, the weakness was in the smallest firms. Those with 1-19 employees lost 37,000 jobs, while those with 20-49 employees gained 14,000 jobs.

This report is just like the May one in that the larger the segment, the more job creation there was. Very small firms had weakness in both goods producing and service sector jobs. There was weakness throughout this report in good producing jobs. But the weakness in service sector jobs was unique to very small firms.

Specifically, very small firms lost 16,000 goods producing jobs and a whopping 20,000 service providing jobs.

The chart above compares the 6 month moving average of small business job creation with the average of medium and large firms. As you can see, small firms have created about 0 jobs in the past 6 months. Most of that weakness has been in the past 2 months.

Weakest ISM Non-Manufacturing PMI - Some say small businesses lead larger firms.

They are certainly more volatile. Mid-sized firms, which is firms with 50 to 499 employees, added 60,000 workers. Large firms added 65,000 workers.

In the overall report, goods producing jobs were down 15,000. This was driven by construction which lost 18,000 jobs. Service providing jobs were up 117,000.

Biggest gainer here was education and healthcare as it added 55,000 jobs. I’m very interested to see how the next recession unfolds. Education and healthcare aren’t cyclical.

There would need to be a huge breakdown in the economy for that sector to stop creating jobs. Main source of weakness in the next recession will be professional and business. It added 32,000 jobs in June.

Weakness in the goods producing sector alone can’t cause the labor market to stop creating jobs.

Nice Improvement In Final Markit Services PMI

Weakest ISM Non-Manufacturing PMI - Just like the manufacturing Markit PMI, the service sector PMI improved in the 2nd half of the month. This makes the report better than it looks.

PMI improved from 50.9 to 51.5. That’s a nice sized improvement from the flash reading which was 50.7. That means the reading in the 2nd half of the month was 52.3. That’s not amazing, but it’s a nice improvement.

On the negative side, business confidence fell to the lowest level since June 2016. June composite PMI improved from 50.9 to 51.5. With all the Markit composite PMIs in for the quarter, the final estimate for Q2 GDP growth is 1.5%. That’s right in line with most estimates as the median of 11 estimates is for 1.7% growth.

Weakest ISM Non-Manufacturing PMI - ISM Non-Manufacturing Falls

Unlike the Markit PMI, the ISM non-manufacturing PMI fell in June. It went from 56.9 to 55.1 which was the lowest reading since July 2017 as you can see from the chart below.

PMI missed estimates for 55.8 and the 1 year average which is 57.9. Production index fell 3 points to 58.2. Unlike the manufacturing PMI, this prices index rose. It was up 3.5 points to 58.9.

At least the nominal PMI rose. New orders index fell 2.8 points to 55.8. Employment index’s decline of 3.1 points to 55 is consistent with the subdued ADP report.

This PMI is consistent with 2.3% GDP growth.

Weakest ISM Non-Manufacturing PMI - It’s no surprise the PMI is consistent with a GDP growth rate that’s higher than the consensus. These ISM PMIs have been optimistic for the past few quarters.

6 of 10 comments referred to tariffs or trade. It’s very clear that the tariffs are having a big negative impact on business sentiment.

One firm that referred to the Mexican tariffs will be more positive in July when it realizes there was a trade deal with Mexico.

A retail trade firm stated, “The largest business condition impacting general purchasing operations is the increased cost of goods due to the tariffs placed on China.” This PMI actually had its prices index improve.

Cyclical weakness is overwhelming the tariffs’ effect on prices. That means even with the trade war, inflation is falling.  

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