ISM-Houston Business Report – October 2021

For release November 10, 2021

October 2021 ISM-Houston Business Report

Houston PMI at 61.0

 

Sales/New Orders at 63.2

Employment at 58.2

Prices Paid at 67.1

Lead Times at 68.0

Finished Goods Inventories at 49.1

 

(Houston, Texas) – According to Houston area supply chain executives, overall economic activity in Houston expanded at a strong pace again in October. The overall ISM-Houston PMI diffusion index rose modestly led by service sector activities which reported stronger growth. Manufacturing activities expanded at a moderately slower pace.

The Houston Purchasing Managers Index rose 1.5 points to 61.0 during the month. Significant improvement in the sales/new orders index and a relatively unchanged lead times index, partially offset a lower employment index, drove this improvement. These three indicators have the strongest direct correlation with the economic activity in Houston. The sales/new orders index rose 6.5 points to 63.2. The employment index fell 0.7 points to 58.2.  The lead times index rose 0.1 points to 68.0. The Finished goods inventory index, the underlying indicator that has the strongest inverse correlation with economic activity, rose 2.1 points to 49.1, continuing to point to modest economic expansion.

The three-month forecast for the Houston PMI rose 0.9 points to 57.2. Higher sales/new orders and production indices were partially offset by a lower prices paid index to account for this gain. These indices have a strong direct correlation with economic activity at the three-month forecast horizon.

On an industry specific basis, oil & gas, construction, manufacturing, wholesale trade, transportation, healthcare, new and existing home sales, professional and management services, and leisure and hospitality reported strong expansion. The three-month forecast continues to predict expansion, primarily due to the strength of the sales/new orders, production, and prices paid indices.

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Indices at a Glance

Houston PMI Trend

Overall economic activity in Houston expanded in October. 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: PPE and other clinical supplies; craft and skilled labor; crude oil, gasoline, diesel, jet fuel, natural gas, natural gas liquids; ethane, propane, normal-butane, iso-butane, butadiene, styrene, xylene, ethylene glycol, propylene glycol, triethylene glycol, glycol ethers, industrial gases; lumber, concrete, carbon and alloy steel piping, lined pipe, electrical bulk materials; bulk and containerized ocean freight, rail and truck freight; software and computer hardware

Down in Price: Propylene; PVC, polyethylene and polypropylene resins

In Short Supply: Basic and skilled labor, truck drivers, IT talent; steel, tubing, plastic, paint; glycols, amines, alcohols, surfactants, diatomaceous earth, caustic soda, acids; ocean and truck freight; computer hardware and other electronics

What our Respondents are Saying

Oil and Gas Exploration, and Key Support Services:
  • Continued price inflation across almost all categories
  • US and Texas rig counts continue to rise
  • This sector improved significantly further this month; the production, employment, purchases, prices paid, and lead times indices are all pointing to stronger expansion
Construction:
  • Not seeing anything in short supply, but lead times have increased across nearly all commodities
  • There are general supply chain concerns about impacts related to COVID and the pending vaccine mandate
  • This sector reported growth at a strong pace again this month; the employment, prices paid, and lead times indices continue to point to significant growth
Durable Goods Manufacturing:
  • A national energy policy that really addresses the energy needs of our country would be very helpful
  • This sector, while showing growth, weakened during the month; the employment, prices paid, and lead times indices remained strong; the sales/new orders index fell to well below neutral and the production index fell to near neutral
Non-durable Goods Manufacturing:
  • Hard work in improving cybersecurity
  • This sector reported growth again this month with the sales/new orders, purchases, prices paid, lead times, and inventory indices remaining strong; the production index stayed below neutral
Trade, Transportation, and Warehousing:
  • Containerized ocean freight costs aFreight rates and lead times continue to increase
  • US Customs is now shutting down imports from countries using child labor
  • This sector expanded at a faster pace during the month; the employment, purchases, prices paid, and lead times indices continue to show strength; the sales/new orders index strengthened to well above neutral
Real-Estate Services:
  • New and existing homes listings and sales were flat month to month but continue to be above last year’s levels
  • Apartment occupancy rates and prices continue to rise
  • This sector expanded at a moderate pace similar to last month; the sales/new orders, prices paid, lead times, and inventory indices remain strong; all other indices reported near neutral
Professional and Business Services:
  • If the price of oil remains above $75 it will inspire more capital spending for 2022
  • The pandemic continues to have far reaching impact on the supply and demand for talent
  • Job openings exceed the availability of talent in the professional and technical space
  • Professional and technical talent resignations continue to rise as individuals leave the job market or look for more flexible work environments at other companies
  • Wages and salaries are rising as the demand for talent far exceeds the availability of talent.
  • This sector improved modestly during the month; the sales/new orders, employment, prices paid, and lead times indices remained strong; the purchases index joined all other indices near neutral
Leisure and Hospitality:
  • This sector reported growth at a This sector reported growth at a higher level this month; the sales/new orders index joined the employment, purchases, prices paid, and lead times indices pointing to strong growth
Health Care:
  • With the wide availability of the vaccine, many operations are moving to full capacity while maintaining safety protocols
  • The increase in operations has put some level of strain manufacturers to increase production to meet the new demand
  • This sector reported expansion at a higher rate than last month; most underlying indices for this sector improved

Trend of Underlying Indicators

Sales/New Orders

The sales/new orders index improved notably led by service related activities; particularly healthcare. Non-durable goods manufacturing improved modestly while durable goods manufacturing fell well below neutral.

 HigherSameLowerNetIndex
May/2120%79%1%19%57.9
Jun/2120%79%1%19%61.2
Jul/2119%81%0%19%58.7
Aug/2110%89%1%9%54.6
Sep/2115%84%1%14%56.7
Oct/2123%75%2%21%63.2

Production Index

The production index stayed near neutral. Oil & gas and mid-stream operations reported considerable strength. Non-durable goods remained below neutral. All other sectors reported near neutral.

 HigherSameLowerNetIndex
May/2115%85%0%15%57.2
Jun/219%89%2%7%54.8
Jul/214%95%1%3%51.4
Aug/216%94%0%6%53.3
Sep/2110%86%4%6%52.7
Oct/2110%86%4%6%52.9
Employment Index

The employment index fell minimally. Oil & gas, construction, durable goods manufacturing, transportation, health care, professional and business services, and leisure and hospitality reported above neutral.

 HigherSameLowerNetIndex
May/2115%76%9%6%52.4
Jun/2113%82%5%8%51.8
Jul/2113%79%8%5%53.1
Aug/2116%81%3%13%57.9
Sep/2119%80%1%18%58.9
Oct/2121%73%6%15%58.2
Purchases Index

The purchases index was relatively unchanged. Non-durable goods manufacturing joined oil & gas, wholesale trade, transportation, and leisure and hospitality reporting well above neutral.

 HigherSameLowerNetIndex
May/2121%71%8%13%57.1
Jun/2121%72%7%14%57.7
Jul/2117%77%6%11%57.1
Aug/213%94%3%0%49.2
Sep/2122%78%0%22%58.3
Oct/2120%78%2%18%58.6
Prices Paid Index

The prices paid index moderated but still shows strength. Most sectors continue to report this index as expanding at rapid pace.

 HigherSameLowerNetIndex
May/2133%66%1%32%63.3
Jun/2137%63%0%37%70.5
Jul/2132%68%0%32%67.6
Aug/2131%69%0%31%66.7
Sep/2142%58%0%42%71.1
Oct/2139%61%0%39%67.1
Lead Times Index

The lead times index stayed nearly the same. As with the prices paid index, most sectors reported this index as continuing to expand at rapid pace.

 HigherSameLowerNetIndex
May/2113%85%2%11%53.8
Jun/2124%75%1%23%61.8
Jul/2127%73%0%27%63.9
Aug/2126%74%0%26%63.1
Sep/2136%64%0%36%67.9
Oct/2135%64%1%34%68.0
Purchased Inventory Index

The purchased inventory index remained near neutral. Non-durable goods reported these inventories as falling. All other sectors that report these inventories reported near neutral.

 HigherSameLowerNetIndex
May/212%91%7%-5%46.8
Jun/210%95%5%-5%47.4
Jul/210%93%7%-7%45.4
Aug/210%95%5%-5%47.6
Sep/212%96%2%0%50.8
Oct/212%95%3%-1%50.4
Finished Goods Inventory Index

The finished goods inventory index rose modestly but remained below neutral. Non-durable goods manufacturing and new home construction reported these inventories a contracting at a rapid pace.

 HigherSameLowerNetIndex
May/213%91%6%-3%49.2
Jun/210%93%7%-7%47.4
Jul/210%92%8%-8%44.7
Aug/210%95%5%-5%46.6
Sep/210%92%8%-8%47.0
Oct/210%93%7%-7%49.1

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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