ISM reports manufacturing ends 2019 on a decline

Manufacturing output in December contracted for the fifth consecutive month to finish 2019 according to data issued by the Institute for Supply Management (ISM) in its Manufacturing Report on Business, which was issued late last week.

The report's key metric, the PMI, fell 0.9% to 47.2 in December (a reading of 50 or higher indicates growth), following readings of 48.1 in November and 49.1, 47.8, and 48.3, in August, September, and October, respectively. The December PMI marks the fifth consecutive month the PMI has come in below 50, while the overall economy grew in December for the 128th consecutive month. The December PMI is 4% below the 12-month average of 51.2. December's 47.2 is the lowest reading during that span and is the lowest PMI reading going back to June 2009, when it came it at 46.3.

ISM reported that five of the 18 manufacturing sectors it tracks saw growth in December, including: Food, Beverage & Tobacco Products; Miscellaneous Manufacturing; and Computer & Electronic Products. The 15 industries reporting contraction in December — listed in order — are: Apparel, Leather & Allied Products; Wood Products; Printing & Related Support Activities; Furniture & Related Products; Transportation Equipment; Nonmetallic Mineral Products; Paper Products; Fabricated Metal Products; Petroleum & Coal Products; Electrical Equipment, Appliances & Components; Textile Mills; Primary Metals; Chemical Products; Plastics & Rubber Products; and Machinery.

The majority of the report's key metrics, including the PMI, were down in December.

New orders, which are commonly referred to as the engine that drives manufacturing, slipped 0.4% to 46.8, falling for the fifth consecutive month. The last five months of contraction were preceded by 43 consecutive months over which time it had a cumulative average of 58.5. ISM said that three of the 18 manufacturing sectors it tracks grew in December.

Production, at 43.2, was off 5.9% compared to November, down for the fifth consecutive month and representing its lowest reading since the 36.7 recorded in April 2009, with three manufacturing sectors reporting growth for the month. Employment, at 45.1, was off 1.5%, falling for the fifth consecutive month. Supplier deliveries, at 54.6 (a reading above 50 indicates contraction), marked a 2.6% upward difference from November to December, slowing at a faster rate for the second straight month.

December inventories, at 46.5, rose 1%, contracting for the seventh consecutive month at a slower rate, with companies endeavoring to make an effort to match raw-material inputs with new-order receipts and backlog status, the report observed. And customer inventories, at 41.1, dropped 3.9%, down for the 39th consecutive month. Backlog of orders, eked out a 0.3% increase to 43.3, contracting for the eighth month in a row.

Comments in the report submitted by ISM reflected slowing end of the year market conditions to a large degree.

A computer & electronic products respondent said that the backlog of orders is shrinking due to the pace of new orders continuing to fall. A transportation equipment respondent said he was cautiously optimistic, with sales being decent but unclear about what 2020 will bring.

ISM Manufacturing Business Survey Committee Chair Tim Fiore said in an interview that December's numbers suggest that a “bottom” in manufacturing output may have been reached.

“That is kind of what it feels like, because the new orders side is still weak,” he said. “The only positive side is that customer inventory numbers are already low [down 3.9% to 41.1] and the backlog cannot contract any worse than it was, which is good. New export orders [down 0.6% to 47.3] are still contracting but not heavily. There also was not a big shift in new orders. The biggest impact to PMI was the consumption piece of production and employment, and it was supported by a number of factors.”

Those factors, he said, include only being able to produce what there are orders for, with both the new orders and the backlog of orders numbers both low, coupled with December typically being a short manufacturing month. And when removing seasonality factors he said the December PMI would have been 45.4, due to seasonality factors stepping up strongly for new orders, production, employment, and supplier deliveries.

What's more, he added that there signs that many workers were taking time off in December than usual, in the form of furloughs and planned time off. And Fiore said that in December many books of business were likely closed for the year, too, leading to a December drawdown in production output, due to a lack of new orders and backlog.

“If all goes well, we could see a ‘bottoms-up' type of recovery, with the first signs of stirring in the supply community,” said Fiore. “And if you look at the Phase One [U.S.-China trade] deal and the fact that there is actually a deal and people are talking, and being into an election year, and exports licenses may be slowing down to the Chinese more than they were, that should bode well for computers and electronics. And the economic stimulus in China should bring back more demand in the chemical area. If both of those sectors head up, then the PMI can go back up over 50.”

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