| Consensus | Consensus Range | Actual | Previous | |
|---|---|---|---|---|
| Index | 48.1 | 47.5 to 49.0 | 48.4 | 49.0 |
Highlights
US manufacturing activity slowed further in December as customer demand remained sluggish amid uncertainty over rising borrowing costs and economic growth prospects, after slipping into its first contraction since the initial stage of the pandemic in November, data from the Institute for Supply Management released Wednesday showed. The ISM monthly survey also indicated that prices pressures continued easing while employment expanded unexpectedly.
The sector index compiled by the ISM, which shows general direction, fell further to 48.4 in December (above the consensus call of 48.1) from 49.0 in November and 50.2 in October. Two manufacturing industries reported growth in December while 13 industries saw contraction.
"Regarding the overall economy, this figure indicates contraction after 30 straight months of expansion," Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement. The ISM noted last month that a manufacturing PMI reading above 48.7, over time, generally indicates an expansion of the overall economy.
The index has been on a gradual downtrend after holding at 52.8 in August 2021 and slipping in July from 53.0 in June. The latest figure remains the lowest since May 2020, when the index at 43.5 was recovering from a recent low of 41.6 the previous month during the first wave of the pandemic. The all-time low is 29.4 hit in May 1980.
ISM's Fiore: Not Steep Decline, in Adjustment Phase
Fiore told reporters that that the index decline in December was not so steep and that the overall business conditions were not so different from those in November."We are just in an adjustment period," he said.
"We are still in the 48 to 52 range that we've been talking about since September, October," he said."We are at the lower end of it and we could possibly break that floor and go a little bit lower, but it's not a real steep decline."
Fiore described the current situation as a temporary standoff between suppliers and buyers amid falling prices and softer demand. Average lead time remained 32 percent above previous trough for capital expenditures and 37 percent for purchased materials, both of which are too high, he added.
The new orders index remains in contraction territory at 45.2 in December, down sharply from 47.2 in November and 49.2 in October. It had slumped 4.2 points to 47.1 in September from 51.3 in August.
The prices index stood at 39.4, down 3.6 percentage points from November's 43 and hitting the lowest since 35.3 seen in April 2020.
The production index slump by 3-percentage points to 48.5 in December from 51.5 in November came as a"big surprise," Fiore said, adding,"We are still waiting for new orders to come back." The backlog orders index stood at 41.4, rising 1.4 percentage points from the November reading of 40.0.
Manufacturing Sector Hit by Softer Domestic Demand
Asked about shrinking international trade volumes, Fiore said the US manufacturing sector does not rely much on international markets, and that it is being affected more by softer domestic demand. China's reopening its economy may provide some benefit to the sector while there are no signs of improvement in the European economy, he added.
Fiore repeated his outlook based on the ISM's semiannual survey released last month that demand in the sector is likely to be"sluggish" in the first half of 2023 but should be"pretty strong" in the second half, possibly on the prospects for higher profitability on lower prices. But he warned about"so much uncertainty" over the Federal Reserve's tightening, currency exchange rates and overseas growth.
"The continued uncertainty in the economy has resulted in customers delaying their commitments for capital purchases, which is impacting our fourth quarter sales and lowering our forecast for the first quarter of 2023," a firm in the machinery industry told the ISM survey. A company in the chemical products industry said,"Customer demand continues to be depressed. While 2023 pipeline is looking very positive, current demand is significantly down."
The employment index unexpectedly returned to expansion territory, rising 3 points to 51.4 in December after slipping back into contraction in November, when it fell 1.6 points to 48.4 after rising 1.3 points to 50.0 in October. It had dipped into contraction for the first time in three months in September, when it plunged 5.5 points to 48.7.
"Many panelists' companies confirm that they are continuing to manage head counts through a combination of hiring freezes, employee attrition and layoffs," Fiore said in a statement.
The supplier deliveries index reading continued to show faster deliveries. It fell 2.1 percentage points to 45.1 December after edging up to 47.2 in November from 46.8 in October. The index remains at the lowest point since March 2009, when it was at 43.2.
The new export orders index is below the breakeven point of 50 for the fifth month amid slower demand from China and the European Union. It fell 2.2 points to 46.2 in December following a rise to 48.4 in November from 46.5 in October.
"Skilled labor shortages are huge, putting a lot of pressure on existing personnel," a firm in the computer and electronic products category told the ISM survey."Electronic components still a major supply chain issue, particularly if the component you need is not the current hot technology."
"New China technology trade restrictions have impacted our business and plans going forward," a company from the electrical equipment, appliances and components industry reported.
The manufacturing sector is in the sixth contracting phase in the past 20 years. Previously, the ISM manufacturing PMI posted contraction just before the pandemic hit the global economy, from August to December 2019 and from March to May 2020. The deepest slump in the past two decades was recorded from September 2008 until July 2009 (the bottom was 34.5 in December 2008) triggered by the U.S. credit crisis.
The sector index compiled by the ISM, which shows general direction, fell further to 48.4 in December (above the consensus call of 48.1) from 49.0 in November and 50.2 in October. Two manufacturing industries reported growth in December while 13 industries saw contraction.
"Regarding the overall economy, this figure indicates contraction after 30 straight months of expansion," Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement. The ISM noted last month that a manufacturing PMI reading above 48.7, over time, generally indicates an expansion of the overall economy.
The index has been on a gradual downtrend after holding at 52.8 in August 2021 and slipping in July from 53.0 in June. The latest figure remains the lowest since May 2020, when the index at 43.5 was recovering from a recent low of 41.6 the previous month during the first wave of the pandemic. The all-time low is 29.4 hit in May 1980.
ISM's Fiore: Not Steep Decline, in Adjustment Phase
Fiore told reporters that that the index decline in December was not so steep and that the overall business conditions were not so different from those in November."We are just in an adjustment period," he said.
"We are still in the 48 to 52 range that we've been talking about since September, October," he said."We are at the lower end of it and we could possibly break that floor and go a little bit lower, but it's not a real steep decline."
Fiore described the current situation as a temporary standoff between suppliers and buyers amid falling prices and softer demand. Average lead time remained 32 percent above previous trough for capital expenditures and 37 percent for purchased materials, both of which are too high, he added.
The new orders index remains in contraction territory at 45.2 in December, down sharply from 47.2 in November and 49.2 in October. It had slumped 4.2 points to 47.1 in September from 51.3 in August.
The prices index stood at 39.4, down 3.6 percentage points from November's 43 and hitting the lowest since 35.3 seen in April 2020.
The production index slump by 3-percentage points to 48.5 in December from 51.5 in November came as a"big surprise," Fiore said, adding,"We are still waiting for new orders to come back." The backlog orders index stood at 41.4, rising 1.4 percentage points from the November reading of 40.0.
Manufacturing Sector Hit by Softer Domestic Demand
Asked about shrinking international trade volumes, Fiore said the US manufacturing sector does not rely much on international markets, and that it is being affected more by softer domestic demand. China's reopening its economy may provide some benefit to the sector while there are no signs of improvement in the European economy, he added.
Fiore repeated his outlook based on the ISM's semiannual survey released last month that demand in the sector is likely to be"sluggish" in the first half of 2023 but should be"pretty strong" in the second half, possibly on the prospects for higher profitability on lower prices. But he warned about"so much uncertainty" over the Federal Reserve's tightening, currency exchange rates and overseas growth.
"The continued uncertainty in the economy has resulted in customers delaying their commitments for capital purchases, which is impacting our fourth quarter sales and lowering our forecast for the first quarter of 2023," a firm in the machinery industry told the ISM survey. A company in the chemical products industry said,"Customer demand continues to be depressed. While 2023 pipeline is looking very positive, current demand is significantly down."
The employment index unexpectedly returned to expansion territory, rising 3 points to 51.4 in December after slipping back into contraction in November, when it fell 1.6 points to 48.4 after rising 1.3 points to 50.0 in October. It had dipped into contraction for the first time in three months in September, when it plunged 5.5 points to 48.7.
"Many panelists' companies confirm that they are continuing to manage head counts through a combination of hiring freezes, employee attrition and layoffs," Fiore said in a statement.
The supplier deliveries index reading continued to show faster deliveries. It fell 2.1 percentage points to 45.1 December after edging up to 47.2 in November from 46.8 in October. The index remains at the lowest point since March 2009, when it was at 43.2.
The new export orders index is below the breakeven point of 50 for the fifth month amid slower demand from China and the European Union. It fell 2.2 points to 46.2 in December following a rise to 48.4 in November from 46.5 in October.
"Skilled labor shortages are huge, putting a lot of pressure on existing personnel," a firm in the computer and electronic products category told the ISM survey."Electronic components still a major supply chain issue, particularly if the component you need is not the current hot technology."
"New China technology trade restrictions have impacted our business and plans going forward," a company from the electrical equipment, appliances and components industry reported.
The manufacturing sector is in the sixth contracting phase in the past 20 years. Previously, the ISM manufacturing PMI posted contraction just before the pandemic hit the global economy, from August to December 2019 and from March to May 2020. The deepest slump in the past two decades was recorded from September 2008 until July 2009 (the bottom was 34.5 in December 2008) triggered by the U.S. credit crisis.
Market Consensus Before Announcement
After gradually slowing through the year and then entering sub-50 contraction in November at 49.0, the ISM manufacturing index for December is expected at 48.1, showing deepening decline.
Definition
The manufacturing composite index from the Institute for Supply Management is a diffusion index calculated from five of the eleven sub-components of a monthly survey of purchasing managers at roughly 300 manufacturing firms nationwide. The survey queries purchasing managers about the general direction (tracked in volumes) of production, new orders, order backlogs, their own inventories, customer inventories, employment, supplier deliveries, exports, and imports. Data on changes in input prices (prices paid) are also tracked. The five components of the composite index are new orders, production, employment, supplier deliveries, and inventories (their own, not customer inventories). The five components are equally weighted. The questions are qualitative rather than quantitative; that is, they ask about the general direction rather than the specific level of activity. Each question is adjusted into a diffusion index which is calculated by adding the percentage of positive responses to one-half of the unchanged responses.
Description
Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the ISM manufacturing index, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.
The ISM manufacturing data give a detailed look at the manufacturing sector, how busy it is and where things are headed. Since the manufacturing sector is a major source of cyclical variability in the economy, this report has a big influence on the markets. More than one of the ISM sub-indexes provide insight on commodity prices and clues regarding the potential for developing inflation. The Federal Reserve keeps a close watch on this report which helps it to determine the direction of interest rates when inflation signals are flashing in these data. As a result, the bond market is highly sensitive to this report.
Importance
The ISM manufacturing composite index indicates overall factory sector trends. The relevance of this indicator is enhanced by the fact that it is available very early in the month and is not subject to revision.
Interpretation
The bond market will rally (fall) when the ISM manufacturing index is weaker (stronger) than expected. Equity markets prefer lower interest rates and could rally with the bond market. However, a healthy manufacturing sector, indicated by rising ISM index levels, bodes well for corporate earnings and is bullish for the stock market.
The level of the ISM manufacturing index indicates whether manufacturing and the overall economy are growing or declining. Historically, readings of 50 percent or above are associated with an expanding manufacturing sector and healthy GDP growth overall. Readings below 50 indicate a contracting manufacturing sector but overall GDP growth is still positive until the ISM index falls below 42.5 (based on statistics through January 2011). Readings in between these two levels suggest that manufacturing is declining while GDP is still growing but only very slowly.
In addition to the ISM manufacturing composite index, the various sub-components contain useful information about manufacturing activity. The production component is related to industrial production, new orders to durable goods orders, employment to factory payrolls, prices to producer prices, export orders to merchandise trade exports and import orders to merchandise imports.
Vendor (supplier) deliveries are an important component of report. The more slowly orders are filled and delivered, the stronger the economic growth and the greater the potential for inflation. When orders are filled quickly, it means that producers don't have as many to fill.
The ISM manufacturing composite index and its sub-components can be subject to some monthly volatility, making the three-month average of the monthly levels more indicative of the trend.
The ISM manufacturing data give a detailed look at the manufacturing sector, how busy it is and where things are headed. Since the manufacturing sector is a major source of cyclical variability in the economy, this report has a big influence on the markets. More than one of the ISM sub-indexes provide insight on commodity prices and clues regarding the potential for developing inflation. The Federal Reserve keeps a close watch on this report which helps it to determine the direction of interest rates when inflation signals are flashing in these data. As a result, the bond market is highly sensitive to this report.
Importance
The ISM manufacturing composite index indicates overall factory sector trends. The relevance of this indicator is enhanced by the fact that it is available very early in the month and is not subject to revision.
Interpretation
The bond market will rally (fall) when the ISM manufacturing index is weaker (stronger) than expected. Equity markets prefer lower interest rates and could rally with the bond market. However, a healthy manufacturing sector, indicated by rising ISM index levels, bodes well for corporate earnings and is bullish for the stock market.
The level of the ISM manufacturing index indicates whether manufacturing and the overall economy are growing or declining. Historically, readings of 50 percent or above are associated with an expanding manufacturing sector and healthy GDP growth overall. Readings below 50 indicate a contracting manufacturing sector but overall GDP growth is still positive until the ISM index falls below 42.5 (based on statistics through January 2011). Readings in between these two levels suggest that manufacturing is declining while GDP is still growing but only very slowly.
In addition to the ISM manufacturing composite index, the various sub-components contain useful information about manufacturing activity. The production component is related to industrial production, new orders to durable goods orders, employment to factory payrolls, prices to producer prices, export orders to merchandise trade exports and import orders to merchandise imports.
Vendor (supplier) deliveries are an important component of report. The more slowly orders are filled and delivered, the stronger the economic growth and the greater the potential for inflation. When orders are filled quickly, it means that producers don't have as many to fill.
The ISM manufacturing composite index and its sub-components can be subject to some monthly volatility, making the three-month average of the monthly levels more indicative of the trend.
