Economic activity in the U.S. manufacturing sector contracted in December for the second consecutive month, following a 29-month period of growth, the nation’s supply executives said in the latest Manufacturing Institute of Supply Management (ISM) “Report on Business.”
“The December Manufacturing PMI (Purchasing Managers’ Index) registered 48.4 percent, 0.6 percentage points lower than the 49 percent recorded in November,” Timothy R. Fiore, chair of the ISM Manufacturing Business Survey Committee, said. This is the lowest it’s been since May 2020, when it registered 43.5 percent. “Regarding the overall economy, this figure indicates contraction after 30 straight months of expansion,” he said.
Two manufacturing industries reported growth in December, while the 13 industries reporting contraction included apparel, leather and allied products.
“Manufacturing contracted again in December after expanding for 29 straight months. Panelists’ companies continue to judiciously manage hiring,” Fiore said. “The month-over-month performance of supplier deliveries was the best since March 2009. Average lead time remained 32 percent above previous trough for capital expenditures and 37 percent for purchased materials; both are too high. Managing head counts and total supply chain inventories remain primary goals as the sector closes the year. More attention will be paid to demand as we enter the first quarter to shore up order books for the next six to 12 months.”
The New Orders Index remained in contraction territory at 45.2 percent, 2 percentage points lower than the 47.2 percent recorded in November. Over time, a New Orders Index above 52.9 percent is generally consistent with an increase in the Census Bureau’s series on manufacturing orders.
Three of the 18 manufacturing industries reported growth in new orders in December, including textile mills. The remaining 15 reported a decline.
The Production Index reading of 48.5 percent is a 3-percentage point decrease compared to November’s figure of 51.5 percent, indicating contraction after 30 consecutive months of growth.
“Of the top six industries, only two expanded in December,” Fiore said. “The Production Index contraction is a strong indicator that backlog reduction is not sufficient to maintain production growth. Additionally, as customers inventories have reached ‘about right’ levels, panelists are now concerned about future production potential.”
Four industries reported growth, eight reported a decrease in production in December, and six reported no change in production—the latter including apparel, leather and allied products.
The Prices Index registered 39.4 percent, down 3.6 percentage points compared to the November figure of 43 percent; this is the index’s lowest reading since April 2020 (35.3 percent). This indicates raw materials prices decreased for the third straight month after a 28-month period in “increasing territory.” Over the past nine months, the index has decreased 47.7 percentage points, including a combined 26-percentage point plunge in July and August 2022.
“Price declines continue to be driven by relaxation in energy markets, steel, aluminum, chemicals, plastics, corrugate as well as lower freight costs,” Fiore said. “Notably, 86 percent of respondents reported paying the same or lower prices in December, compared to 87 percent in November, continuing the declining price trend.”
In December, only one industry reported increasing prices for raw materials: apparel, leather and allied products.
The Employment Index returned to expansion territory (51.4 percent, up 3 percentage points) after contracting in November (48.4 percent). An Employment Index above 50.5 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment.
“The index indicated employment expanded after contracting for one month. Of the six big manufacturing sectors, only two expanded. Labor management sentiment continued to shift, with a number of panelists’ companies reducing employment levels through hiring freezes, attrition—and since November—layoffs,” Fiore said. “In December, layoffs were mentioned in 11 percent of employment comments, down from 14 percent in November, likely due to the holiday period. Turnover rates improved marginally, recording their lowest level (27 percent of comments) since tracking began in June 2021. For those companies expanding their workforces, comments continue to support an improving hiring environment.”
Furniture and related products were second on the list of five manufacturing industries reporting growth in December, while textile mills led the list of the six industries reporting a decrease in employment.
The delivery performance of suppliers to manufacturing organizations was faster for a third straight month in December, as the Supplier Deliveries Index registered 45.1 percent, 2.1 percentage points lower than the 47.2 percent reported in November. This reading indicates the fastest supplier delivery performance in 165 months (March 2009, when the index registered 43.2 percent).
Three of 18 manufacturing industries reported slower supplier deliveries in December, led by textile mills.
The Inventories Index registered 51.8 percent, 0.9 percentage points higher than the November reading of 50.9 percent. An Inventories Index greater than 44.4 percent, over time, is generally consistent with expansion in the Bureau of Economic Analysis (BEA) figures on overall manufacturing inventories.
“Panelists’ companies continue their efforts to reduce their total supply chain inventories in preparation for a further economic slowdown, indicated by the contraction in new orders, slow expansion in manufacturing inventories and the ‘just right’ level of customers’ inventories,” Fiore said.
Of the 18 industries, the six reporting contracting inventories in December were led by apparel, leather and allied products.
ISM’s Customers’ Inventories Index registered 48.2 percent in December, 0.5 percentage points lower than the 48.7 percent reported for November.
“Customers’ inventory levels are considered ‘just right,’ Fiore said. “The current index level continues to no longer provide positive support to future manufacturing expansion.”
Six industries reported no change in customers’ inventories in December compared to November, including textile mills.
ISM’s Backlog of Orders Index registered 41.4 percent, 1.4 percentage points higher than the November reading of 40 percent, indicating order backlogs contracted for the third consecutive month after a 27-month period of expansion.
“Backlogs contracted again at a significant rate, as weak new order levels negatively impacted manufacturing books of business. Many panelists indicated that they were working off backlog (overdue orders) as new order rates continue to soften,” Fiore said. “The index recorded its lowest level since May 2020, when it registered 38.2 percent.”
Only two industries reported growth in order backlogs in December: textile mills and machinery. Twelve industries reported lower backlogs in December, including furniture and related products.
ISM’s New Export Orders Index reading of 46.2 percent is down 2.2 percentage points compared to November’s figure of 48.4 percent.
“The New Export Orders Index contracted in December for the fifth consecutive month after 25 straight months in expansion territory,” Fiore said. “Continued weakness in European economies and China’s economic sluggishness continued to constrain new export order activity, which negatively impacts new order rates.”
Five industries reported growth in new export orders in December, including apparel, leather and allied products. Textile and furniture were among the seven industries that reported no change in new export orders for the month.
ISM’s Imports Index fell 1.5 percent to 45.1 percent in December. Apparel, textiles and furniture reported no change in imports for the month.
“The index remained in contraction in December after a recent five-month period of expansion, dropping to its lowest level since May 2020 (41.3 percent),” Fiore said. “Panelists’ comments indicate that the index contraction is a combination of sluggish demand as well as effects from China’s zero-Covid policy. At present, there is little indication that the latter issue is affecting U.S. output.”