| Consensus | Consensus Range | Actual | Previous | Revised | |
|---|---|---|---|---|---|
| Index | 48.0 | 47.5 to 48.7 | 47.4 | 48.4 | 48.4 |
Highlights
US manufacturing activity was in contraction territory for the third straight month in January on lower new orders and production as sellers and buyers remained deadlocked over lead times and pricing, but firms are keeping headcounts for a pickup in the second half of 2023 and supply chain bottlenecks are easing, data from the Institute for Supply Management released Wednesday showed.
The sector index compiled by the ISM, which shows general direction, stood at 47.4, down from a revised 48.4 in December, 49.0 in November and a revised 50.0 in October and coming in below the median economist forecast of 48.0.
"Regarding the overall economy, this figure indicates a second month of contraction after a 30-month period of expansion," Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement."With Business Survey Committee panelists reporting softening new order rates over the previous nine months, the January composite index reading reflects companies slowing outputs to better match demand in the first half of 2023 and prepare for growth in the second half of the year."
The ISM has said 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 since the end of 2021. 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.
The new orders Index slumped 2.6 points to 42.5 in January from a revised 45.1 in December, staying in contraction territory for five months in a row. The production index slipped 0.6 point to 48.0 after posting an unexpectedly sharp drop to a revised 48.6 in December from a revised 50.9 in November.
"I think sellers and buyers still agree to disagree in terms of the lead times and pricing structure," Fiore told reporters, basically repeating his assessment made last month that the current situation is a temporary standoff between suppliers and buyers amid falling prices and softer demand.
"The interesting thing is that commodity markets were reversing at year-end and that's going to put more pressure on sellers actually to arrive at prices," he said.
The prices index rose to 44.5 in January from 39.4 in December but remained in contraction for the fourth straight month.
"Business is still strong, but we have begun to see softening in some pricing, and lead times seem to be improving," a firm among the makers of computer and electronic products told the ISM. A company in the miscellaneous manufacturing category said,"Customers are being quite aggressive in pursuing price decreases, far beyond the price relief we are actually receiving from our suppliers."
"Some business segments showing demand softening globally," said a firm in the electrical equipment, appliances and components industry."Many materials showing improved lead times as well as cost deflation."
Also on the upside, the new export orders index was still below the key 50 level, but improved 3.2 points to 49.4 in January after falling to 46.2 in December from 48.4 in November. Fiore noted more active Chinese demand.
The customers' inventories index contracted slightly from 48.2 to 47.4, a positive for future production. The backlog orders index at 43.4 versus 41.4 in the prior month posted a second straight rise but is still in strong contraction.
Fiore said firms are positive about a pickup in the economy in the second half of 2023, and that business conditions for manufacturers for the year are likely to be similar to those seen in 2022 based on projections in the latest corporate earnings reports.
"We have 25 percent of headline comments indicating that order rates are so soft, down from 31 percent in December, so we may have turned the corner on that and see what February says," Fiore said.
He also said about only 20 percent of the sector was reducing headcounts in the January survey.
"The only reason why they retain headcounts is in preparation for something in the future ... towards the second half of the year," he said."I think what's happened is that companies decided not to lay them (workers) off because it's hard to get them back and they are going to miss the upside in the second half."
Fiore noted that the US manufacturing sector relies about 80 percent on domestic demand but recovering Chinese demand is"positive" for the sector overall.
The employment index edged down to 50.6 in January after unexpectedly returning to expansion territory in December, surging to a revised 50.8 from a revised 48.9 in November.
The supplier deliveries index continued to show faster deliveries. It rose 0.5 point to 45.6 from 45.1 the previous month, which was the lowest since 43.2 seen in March 2009.
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 US credit crisis.
The sector index compiled by the ISM, which shows general direction, stood at 47.4, down from a revised 48.4 in December, 49.0 in November and a revised 50.0 in October and coming in below the median economist forecast of 48.0.
"Regarding the overall economy, this figure indicates a second month of contraction after a 30-month period of expansion," Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement."With Business Survey Committee panelists reporting softening new order rates over the previous nine months, the January composite index reading reflects companies slowing outputs to better match demand in the first half of 2023 and prepare for growth in the second half of the year."
The ISM has said 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 since the end of 2021. 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.
The new orders Index slumped 2.6 points to 42.5 in January from a revised 45.1 in December, staying in contraction territory for five months in a row. The production index slipped 0.6 point to 48.0 after posting an unexpectedly sharp drop to a revised 48.6 in December from a revised 50.9 in November.
"I think sellers and buyers still agree to disagree in terms of the lead times and pricing structure," Fiore told reporters, basically repeating his assessment made last month that the current situation is a temporary standoff between suppliers and buyers amid falling prices and softer demand.
"The interesting thing is that commodity markets were reversing at year-end and that's going to put more pressure on sellers actually to arrive at prices," he said.
The prices index rose to 44.5 in January from 39.4 in December but remained in contraction for the fourth straight month.
"Business is still strong, but we have begun to see softening in some pricing, and lead times seem to be improving," a firm among the makers of computer and electronic products told the ISM. A company in the miscellaneous manufacturing category said,"Customers are being quite aggressive in pursuing price decreases, far beyond the price relief we are actually receiving from our suppliers."
"Some business segments showing demand softening globally," said a firm in the electrical equipment, appliances and components industry."Many materials showing improved lead times as well as cost deflation."
Also on the upside, the new export orders index was still below the key 50 level, but improved 3.2 points to 49.4 in January after falling to 46.2 in December from 48.4 in November. Fiore noted more active Chinese demand.
The customers' inventories index contracted slightly from 48.2 to 47.4, a positive for future production. The backlog orders index at 43.4 versus 41.4 in the prior month posted a second straight rise but is still in strong contraction.
Fiore said firms are positive about a pickup in the economy in the second half of 2023, and that business conditions for manufacturers for the year are likely to be similar to those seen in 2022 based on projections in the latest corporate earnings reports.
"We have 25 percent of headline comments indicating that order rates are so soft, down from 31 percent in December, so we may have turned the corner on that and see what February says," Fiore said.
He also said about only 20 percent of the sector was reducing headcounts in the January survey.
"The only reason why they retain headcounts is in preparation for something in the future ... towards the second half of the year," he said."I think what's happened is that companies decided not to lay them (workers) off because it's hard to get them back and they are going to miss the upside in the second half."
Fiore noted that the US manufacturing sector relies about 80 percent on domestic demand but recovering Chinese demand is"positive" for the sector overall.
The employment index edged down to 50.6 in January after unexpectedly returning to expansion territory in December, surging to a revised 50.8 from a revised 48.9 in November.
The supplier deliveries index continued to show faster deliveries. It rose 0.5 point to 45.6 from 45.1 the previous month, which was the lowest since 43.2 seen in March 2009.
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 US credit crisis.
Market Consensus Before Announcement
At 48.4 in December, the ISM manufacturing index has been gradually and consistently deteriorating. January's consensus is 48.0.
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.
