Manufacturing ends 2018 on a decline, reports ISM

Manufacturing output for the month of December finished 2018 on a downward slide, according to the monthly manufacturing Report on Business, which was released today by the Institute for Supply Management (ISM).

The report's key metric, the PMI, dropped 5.2% to 54.1 (a reading of 50 or higher indicates growth). Even with the decline, the index has now grown for 28 consecutive months, with the overall economy now having grown for 116 consecutive months.

Prior to the November increase, the PMI saw sequential declines in September and October, following its most recent high of 61.3 in August, the highest reading over the last 15 months. The December PMI is 4.7% below the 12-month average of 58.8 and is also the lowest PMI reading during this period.

ISM reported that 13 of the 18 manufacturing sectors reported growth in December, including: Textile Mills; Apparel, Leather & Allied Products; Machinery; Transportation Equipment; Computer & Electronic Products; Wood Products; Chemical Products; Food, Beverage & Tobacco Products; Miscellaneous Manufacturing; Electrical Equipment, Appliances & Components; and Primary Metals. The six industries reporting contraction in December were: Printing & Related Support Activities; Fabricated Metal Products; Nonmetallic Mineral Products; Petroleum & Coal Products; Paper Products; and Plastics & Rubber Products.

Along with the PMI, each of the report's key metrics fell in December.

New orders, which are commonly referred to as the engine that drives manufacturing, fell 11% to 51.1 but grew for the 36th consecutive month, with six of 18 manufacturing sectors reporting growth for the segment. This marks the lowest level for new orders going back to August 2016, when it came in at 50.5.

Production fell 6.3% to 54.3, growing for the 28th consecutive month, and employment was off 2.2% to 56.2, growing for the 28th consecutive month. Supplier deliveries, at 56.2 (a reading above 50 indicates contraction) decreased at a slower rate for the 27th month in a row. Inventories fell 1.7% to 51.2, while still growing for the 12th consecutive month.

Comments submitted by ISM members for the report voiced concerns on various fronts, including slowing economic growth, the impact of Brexit, and customer demand, among others.

“Growth appears to have stopped,” said a computer & electronic products respondent. “Resources [are] still focused on re-sourcing for U.S. tariff mitigation out of China.”

A transportation equipment respondent said that customer demand continues to decrease due to concerns about the economy and tariffs.

Tim Fiore, chair of the ISM's Manufacturing Business Survey Committee said that the December report's sub-indexes, including new orders, hit its lowest levels in recent years, including: production at its lowest level since September 2016; employment in January 2018; and supplier deliveries in December 2017.

“The real surprise, in this report, is new orders at 51.1,” he said. “Going back in history, we saw an 11.7% drop in January 2014, which bounced back 3.7 points the next month. The PMI falling to 54.1 is not a 2008-like event, which is the single largest decline since October 2008, which is about a 20% drop in the range. But I don't think that is what we are looking at here. There is a lot of uncertainty here. December is generally a slow month anyway, with a lot of people off for the holidays and less manufacturing workdays, weather issues, the closing of the fiscal year. You can almost argue that people had a plan in the bag and decided not to overreach in December….there is a seasonality factor in four of the five sub-indexes. December did not feel as good as November.”

December prices, at 54.9, fell 5.8%, while still growing for the 34th consecutive month, and backlog of orders, at 50, fell 6.4% compared to November but unchanged when compared to November as three of the top six manufacturing industries recording expansion. Exports rose 0.6% to 52.8, and imports slipped 0.9% to 52.7.

The trio of backlog of orders, new orders, and customer inventories (up 0.2% to 41.7), which Fiore views collectively as a proxy for the health of the demand side, saw two of those three readings decline, with no expansion for backlog of orders. The last time that happened was January 2017 at 48.6. But Fiore said that it was a positive that customer inventories remained low at 41.7, with the caveat that it is the index that ISM respondents have the “least feel for,” as it is difficult for the supply community to understand how much inventory customers actually have on hand.”

Looking ahead, Fiore said he expects manufacturing output to bounce back to the mid-50's range, from around 55-to-57, with December serving as a signal to manufacturing decision-makers to be more proactive and bring back some needed stability.

“Having a North American steel and aluminum market would be a really great move, as would resolving the $200 billion increase in tariffs,” he said. “I think the Fed had to do what they did in December to raise the federal interest rate by a quarter of a point, and it would be surprising if it is raised more in the next six months. It would also be good to get the federal government back to work, too.”

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