U.S. manufacturing activity was in contraction for an eighth straight month in November as firms remain reluctant to invest amid uncertainties over President-elect Donald Trump's hefty tariff threats on America's close trading partners but the pace of decline eased slightly on optimism that a Republican administration will be business friendly, the latest monthly data from the Institute for Supply Management showed.

The sector index compiled by the ISM, which indicates general direction, rose 1.9 percentage points to a five-month high of 48.4 in November after unexpectedly slipping to 46.5 in October from 47.2 recorded in both September and August. The latest reading came in well above the median economist forecast of 47.6.

"Demand remains weak, as companies prepare plans for 2025 with the benefit of the election cycle ending," Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement, repeating similar comments he had made previously."Production execution eased in November, consistent with demand sluggishness and weak backlogs. Suppliers continue to have capacity, with lead times improving but some product shortages reappearing."

"New order rates expanded only marginally as backlog levels continued to decline, causing manufacturers to reduce output to close the calendar year," Fiore said. But he also pointed to a silver lining in the November report that"companies are showing signs of willingness to invest in inventory, a marked departure from the last two years of activity."

Concerns over a possible inflationary fiscal policy stance under the Trump administration is"not going away" but firms are looking at the positive side as Republicans tend to be"business friendly," Fiore told reporters.

Asked about Canadian Prime Minister Justin Trudeau's surprise visit with Trump and his incoming team over the weekend, Fiore said,"We've seen this (diplomatic) style before. Hopefully it works (to defuse trade friction)." Trump said last week that he would impose a 25% tariff on all goods from Mexico and Canada as soon as he takes office on Jan. 20, and that he would also slap an additional 10% tariff on imports from China, all part of his drive to crack down on illegal drugs and immigration.

Fiore said he still believes the ISM manufacturing PMI will pop above the crucial 50 mark in the January-March quarter of 2025 in a long overdue recovery from the post-pandemic slowdown that was caused by heightened geopolitical risks and uncertainties over the U.S. fiscal and monetary policy trajectories.

Fiore repeated that the U.S. manufacturing sector is away from a serious downturn and the November ISM report supports the path toward soft-landing amid signs of slowing but resilient employment and consumption.

The ISM index has averaged 47.4 in the latest 25-month period (from October 2022, when the index slipped to the neutral line of 50 from 50.8 the previous month), compared to 44.2 during the 18-month Great Recession that spanned from February 2028 (48.8) until July 2009 (49.7). This is the longest sectorial recession since the 25-month downturn that lasted from May 1989 (49.3) until May 1991 (44.5), ISM data shows.

Among the five subindexes that directly factor into the manufacturing PMI, the new orders index expanded in November after seven consecutive months in contraction, registering 50.4, an increase of 3.3 points compared to October's figure of 47.1. However, it still hasn't indicated consistent growth since a 24-month streak of expansion ended in May 2022.

The production index continued in contraction territory in November, hovering at 46.8, which was just 0.6 point above 46.2 in October. The index rose to 49.8 in September from 44.8 in August, which was the lowest since 34.2 in May 2020, when world demand plunged at the initial phase of the pandemic.

The employment index stood at a five-month high of 48.1 in November, up 3.7 points from 44.4 in October. Of the six big manufacturing sectors, only one (food, beverage & tobacco products) expanded employment."Respondents' companies are continuing to reduce head counts through layoffs, attrition and hiring freezes," Fiore said."This sentiment was supported in November by the approximately 1-to-1.5 ratio of hiring versus staff reduction comments, compared to a 1-to-3 ratio the previous month, meaning less workforce reduction activity."

Delivery performance of suppliers to manufacturing organizations was faster in November, with the supplier deliveries index registering 48.7, a 3.3-point decrease compared to the reading of 52.0 reported in October. This expansion follows four consecutive months of slower deliveries, preceded by four straight months of faster deliveries.

The manufacturing inventories index stood at 48.1 percent in November, up a notable 5.5 points compared to the reading of 42.6 in October. It has remained under the neutral line of 50 for the past 22 months except in August 2024.

Among other subindexes, the prices paid index was at 50.3, down 4.5 points from 54.8 in October, indicating raw materials prices increased for the second straight month in November after decreasing in September. Aluminum, copper, and natural gas posted slight gains, offset by steel, plastic resins and crude oil moving down. In November 12% of companies reported higher prices, down from 20% in October.

The manufacturing sector continues to struggle headed into year end and purchasing managers are fretting about weak demand and uncertainty over the incoming administration's economic policies. After declining to 46.5 in October from 47.2 in September, forecasters look for the index at 47.6 in November.

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.

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.