ISM-Houston Business Report – January 2020

For release February 10, 2020

Services and Goods Producing Industries Rebound

Employment Index Moves Significantly Higher

 

By Ross S. Harvison, CPSM

(Houston, Texas) – According to Houston area supply chain executives, goods producing industry activity in Houston expanded this month for the first time since September. Services producing industry activity also returned to expansion after two months reporting contraction. Overall economic activity is now expanding at a moderate pace.

The January Houston Purchasing Managers Index rose significantly to 52.5 from last month's level of 47.4. Two of the three underlying indicators that have the strongest direct correlation with economic activity, employment and lead times, are now pointing to expansion. The third underlying indicator with a strong positive correlation, sales/new orders, remains below neutral. The employment index rose 11.1 points to 58.3. The lead times index rose 0.7 points to 51.2. The sales/new orders index rose 3.6 points to 47.7. The underlying indicator that has the largest inverse correlation, finished goods inventory, rose 7.9 points to 55.3.

The three-month forecast for the Houston PMI rose 1.5 points to 51.2. Strengthening of the sales/new orders, prices paid, and lead times indices drove most of this increase. These indices have a strong direct correlation with economic activity at the three-month forecast horizon.

On an industry specific basis, construction, manufacturing, mid-stream operations, utilities, professional services, and health care reported expansion. Oil & gas and wholesale trade reported further contraction. From a three-month forecast standpoint, modest improvement is predicted.

 

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Indices at a Glance

Houston PMI Trend

Overall economic activity in Houston has grown for 42 months. HPMI readings over 50 generally indicate goods producing industry expansion; readings below 50 show contraction. An HPMI above 45 generally correlates with expansion of the Houston-The Woodlands-Sugar Land Business Cycle Index (H-BCI).

Commodities Reported to have Notable Price Changes or to be in Short Supply

Up in Price: Precious metals for catalysts, especially Rhodium; bulk chemicals; ready mix concrete; transformers electrical equipment, copper wire and cable; heat exchangers, alloy pipe; ocean freight

Down in Price: Crude oil and motor fuels; natural gas, ethane, propane, natural gas liquids; carbon steel materials; ocean freight

In Short Supply: Craft labor, welders; bulk chemicals

Respondent Comments and Sector Summaries

Oil and Gas Exploration, and Key Support Services:
  • U.S. and Texas rig counts are still falling, but at much slower rate than they did last year
  • This sector reported contraction again this month with the sales index joining the employment, purchases, and prices paid indices pointing to significant slowing
Engineering and Construction:
  • Big projects continue to be delayed; more inquiry activity on mid size projects
  • Lagging replacement of retiring experienced professionals in the oil and gas industry has created a knowledge gap
  • This sector reported expansion this month; the employment and prices paid indices continue to point to expansion; new orders were flat
Manufacturing - Durable Goods:
  • Manufacturing for the oil and gas Industry remains weak domestically, but International orders helped keep us busy
  • New orders are down; backlog is declining.
  • This sector moved back to expansion this month with the sales, production, employment, purchases, and prices paid indices point to growth; the lead times index fell back below neutral
Manufacturing - Non-Durable Goods:
  • Ethylene and propylene prices have stabilized after falling during the 4th quarter; polymer prices have also stabilized
  • This sector moved back to expansion during the month with significant improvement in the employment index; while the production index remained flat, the sales index continued to indicate contraction
Transportation and Utilities (including mid-stream operations):
  • This sector remained strong this month, primarily driven by strength in the sales and employment indices
Professional Services:
  • Starting to see some movement to fill in positions
  • After a strong start in early January most O&G companies paused later in the month as oil prices declined
  • The coronavirus and a multitude of geopolitical issues are causing concern
  • With new budgets and plans, the view for O&G hiring and capital expenditures was promising until the price of oil fell
  • This sector returned to indicating expansion during the month with both the sales and employment indices showing significant strength
Health Care:
  • This sector reported strength again this month; the employment index remained well above neutral

Trend of Underlying Indicators

The Houston PMI is based on diffusion indices for eight underlying indicators. The net value of each indicator is simply the percentage of respondents who cite a positive shift from the previous month minus the percentage who cite a negative shift. The diffusion index is calculated based on the percent of respondents reporting higher results plus one-half of those responding the same with a seasonal adjustment based on an X13 ARIMA forecast. Values above 50 for Sales/New Orders, Production, Employment, Prices Paid, and Lead Times generally point towards expansion and values below 50 signal contraction. Note that the Prices Paid Index may not follow this trend late in an economic expansion. The Inventory measures have an inverse correlation at most forecast horizons, meaning that values below 50 point to expansion and values above point to contraction. The Purchases index is inversely correlated with economic activity at the three-month forecast horizon.

Sales/New Orders

The sales/new orders index remained below neutral. Durable goods manufacturing, health care, and mid-stream operations reported strength. Oil & gas, non-durable goods, and wholesale trade reported weakness.

Higher Same Lower Net Index
Aug/19 7% 90% 3% 4% 51.3
Sep/19 14% 84% 2% 12% 55.6
Oct/19 10% 87% 3% 7% 53.9
Nov/19 1% 80% 19% -18% 42.6
Dec/19 4% 77% 19% -15% 44.1
Jan/20 14% 71% 15% -1% 47.7
Production

The production index remained relatively flat. Durable goods manufacturing joined utilities in reporting strength. All other industries responded near neutral.

Higher Same Lower Net Index
Aug/19 4% 95% 1% 3% 51.1
Sep/19 6% 90% 4% 2% 50.8
Oct/19 2% 97% 1% 1% 49.6
Nov/19 2% 93% 5% -3% 47.5
Dec/19 6% 89% 5% 1% 52.4
Jan/20 9% 87% 4% 5% 52.3
Employment

The employment index rose significantly. Manufacturing, construction, mid-stream operations, health care and professional services reported strength. Only oil & gas responded that this index was contracting.

Higher Same Lower Net Index
Aug/19 7% 86% 7% 0% 50.7
Sep/19 13% 84% 3% 10% 54.4
Oct/19 8% 85% 7% 1% 50.0
Nov/19 9% 79% 12% -3% 47.7
Dec/19 8% 78% 14% -6% 47.2
Jan/20 22% 74% 4% 18% 58.3
Purchases

The purchases index rose modestly, but remained below neutral. Oil & gas, construction, non-durable goods reported this index as contracting. Durable goods manufacturing and utilities reported it as expanding.

Higher Same Lower Net Index
Aug/19 8% 89% 3% 5% 50.7
Sep/19 13% 84% 3% 10% 52.1
Oct/19 11% 88% 1% 10% 55.1
Nov/19 7% 72% 21% -14% 42.1
Dec/19 8% 68% 24% -16% 44.0
Jan/20 4% 88% 8% -4% 46.5
Prices Paid

The prices paid index rebounded to above neutral with construction and manufacturing reporting significant increases in this index. Only oil & gas reported prices as falling.

Higher Same Lower Net Index
Aug/19 3% 89% 8% -5% 47.3
Sep/19 1% 92% 7% -6% 45.9
Oct/19 6% 88% 6% 0% 49.2
Nov/19 2% 85% 13% -11% 45.2
Dec/19 2% 80% 18% -16% 43.7
Jan/20 4% 95% 1% 3% 51.5
Lead Times

The lead times index rose marginally. Oil & gas and non-durable goods manufacturing reported this index as rising again this month. Transportation and durable goods manufacturing reported lead times as falling.

Higher Same Lower Net Index
Aug/19 15% 81% 4% 11% 53.9
Sep/19 5% 94% 1% 4% 51.1
Oct/19 6% 89% 5% 1% 51.0
Nov/19 5% 89% 6% -1% 49.9
Dec/19 5% 90% 5% 0% 50.5
Jan/20 5% 92% 3% 2% 51.2
Purchased Inventories

The purchased inventory index fell to neutral with only non-durable goods manufacturing reporting an increase in this index. All other sectors reported near neutral overall.

Higher Same Lower Net Index
Aug/19 5% 87% 8% -3% 48.0
Sep/19 1% 95% 4% -3% 50.0
Oct/19 2% 96% 2% 0% 53.6
Nov/19 4% 94% 2% 2% 52.4
Dec/19 2% 95% 3% -1% 52.4
Jan/20 8% 88% 4% 4% 50.0
Finished Goods Inventories

The finished goods inventory index rose significantly to end well above neutral. Oil & gas, durable goods manufacturing, and wholesale trade reported this index as expanding, while all other sectors reported near neutral.

Higher Same Lower Net Index
Aug/19 4% 91% 5% -1% 48.8
Sep/19 2% 97% 1% 1% 51.8
Oct/19 1% 98% 1% 0% 52.1
Nov/19 2% 97% 1% 1% 49.3
Dec/19 2% 94% 4% -2% 47.4
Jan/20 16% 80% 4% 12% 55.3

Background on the ISM-Houston Business Report and HPMI Calculation Methods

The Houston Purchasing Managers Index has been included as an integral part of the ISM-Houston Business Report since the Houston chapter of the Institute for Supply Management started publication of this document in January 1995. The report and index are published monthly as the primary deliverables from a survey of Houston area Supply Chain leaders regarding the status of key activities believed to provide insight into the strength of the economy. The respondents come from diverse organizations including construction, energy, engineering, health care, durable and non-durable goods manufacturing, financial and business services, wholesale and retail trade, and utilities related companies.

The Houston Purchasing Managers Index is determined from diffusion indices of the eight indicators of economic activity covered by the ISM-Houston Business Survey and Report. These underlying indicators are sales or new orders, production, employment, purchases, prices paid for major purchases, lead times from sellers, purchased materials inventory (raw materials and supplies), and finished goods inventories. The respondents to the survey report the direction of each these activities as either up, the same or down in comparison to the previous month. An index for each of these areas is then calculated by subtracting the percentage of respondents that sight a negative shift from the percentage that sight a positive shift. For indicators that are positively correlated with economic growth, this results in an underlying index that points to expansion when it is above zero. Indicators that are negatively correlated with growth point to expansion when they are below zero.

The final Houston PMI is calculated by applying optimal regression factors to each of the eight underlying indicators noted above. These regression factors are determined using standard regression techniques comparing these underlying indicators to the Houston-The Woodlands-Sugar Land Business Cycle Index (Houston BCI), which is reported on a monthly basis by the Federal Reserve Bank of Dallas. This top-level index is converted to a 0 to 100 scale to match that of the national Purchasing Managers Index® (PMI®) which is published monthly by the Institute for Supply Management® (ISM®). Readings over 50 for the HPMI generally indicate manufacturing expansion in the Houston in the near term and readings below 50 show coming manufacturing contraction.

It is important to note that the manufacturing breakeven HPMI does not equate to the breakeven point for the overall Houston economy.  ISM-Houston periodically reviews the capability of its correlations and adjusts the regression factors when appropriate. The most recent revision occurred as a result of a review undertaken during the third quarter of 2018, which determined that changes in the Houston economy over the last decade have shifted the intercept of the correlation, causing a neutral Houston PMI to no longer align with a neutral Houston BCI. A Houston PMI of 45 points now equates to a neutral Houston economy as measured by the Houston BCI. A similar offset between the National PMI and the National economy has existed for some time.

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