One of the most user-friendly aspects of the ISM® Report On Business® is that when there is surprise upward or downward movement in the composite PMI®, a glance at the subindex data quickly reveals why it happened.
So, when the headline number equals its previous-month reading, as the Manufacturing PMI® did in November at 46.7 percent, one would expect the same clarity from the underlying data. Among the five subindexes that directly factor into the composite number, two (New Orders and Inventories) were up month over month, and three (Production, Employment and Supplier Deliveries) were down.
None of the other subindexes were eye-popping, though the Customers’ Inventories Index (50.8 percent) was in expansion, which is considered a negative for future production, and the Prices Index (49.9 percent) was on the cusp of “increasing” territory.
With nine of 10 subindexes in contraction and the Customers’ Inventories Index at a level indicating products are not flying off shelves, every data point was negative in November, Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management® Manufacturing Business Survey Committee, told a conference call of reporters on Friday.
“The sector is still in the trough,” he said.
Month over month, the U.S. manufacturing sector stayed in place, reflective of its slow and steady sluggishness since the PMI® went into contraction 13 months ago, the longest such stretch since 18 straight months of sub-50 percent readings from August 2000-January 2002.
While there has been no growth in factory activity in the last year, there’s also been no volatility: The PMI® has stayed between 46 percent and 49 percent. “It will probably stay in a trough position for quite some time, because things are moving very slowly,” Fiore said. “If you look back at the last 13 months of PMI® decline, it’s been very gradual and not moving much — and manufacturing generally moves a lot.”
And there were some numbers that made the November report “pretty good,” as Fiore told Bloomberg TV earlier on Friday. The New Orders Index showed signs of life, with a 2.8-percentage point gain to 48.3 percent.
However, there was a caveat: Sentiment from Business Survey Committee respondents was not as sunny, with 34 percent of comments reflecting new order softness, the highest level since June. “I really don’t have any idea where new orders will be next month,” Fiore said. “I don’t expect it to be in the tank, but I don’t expect it to grow dramatically.”
The Prices Index increase was driven by steel, but overall relief could be coming if oil prices continue to ease, despite production cuts for early 2024 by Organization of the Petroleum Exporting Countries (OPEC) members.
Still, the areas of concern are acute — and suggest more staying in place. The Employment Index decreased 1 percentage point to 45.8 percent, and among survey respondents’ comments, for every company that was hiring, one was reducing staff. The 9.3 percent of respondents indicating their companies were adding staff is down from 15.4 percent in September; 71.3 percent reported no change in head count in November.
Meanwhile, the Backlog of Orders Index (39.3 percent) reaching its lowest level since June does not bode well for future staffing levels. With new orders and production continuing to stall, factory workers have focused on order backlog reduction. “But eventually, that backlog is going to run out,” Fiore said.
ISM indicates manufacturing sector remains weak. Especially notable was that the breakdown shows no growth in order backlogs. pic.twitter.com/bl6jF8tg2W— Kathy Jones (@KathyJones) December 1, 2023
The Report On Business® roundup:
Barron’s: Manufacturing Activity Is Still Contracting, ISM Index Shows. “The reading is a miss and it isn’t great news. Things have been contracting for a very long time. It’s the longest consecutive contraction streak in decades. The (Manufacturing) PMI® declined for 16 out of 18 months in 2008, but there were a couple of months above 50 (percent) over that span, which included the Financial Crisis.”
CNBC: October Construction Spending Beats Expectations With Best Reading Since August. “On ISM Manufacturing for November, 46.7 (percent); that’s a miss,” analyst Rick Santelli said. “We were expecting a number much closer to 48.” He added, “The (New Orders Index), 48.3 percent is a bit better than we were expecting … but here’s the bad news: It’s the 15th consecutive number below 50 percent, which means in contraction territory, and it’s hard to square that with some of the stronger data we’ve seen, like the revision to (third-quarter U.S. gross domestic product).”
Mace News: Manufacturing in Contraction for 13th Straight Month as Firms Trim Output, Head Count in Response to Soft Demand. “To assess the overall economic climate, the latest ISM survey indicates the overall economy contracted for a second month in a row after one month of weak expansion preceded by nine months of contraction and 30 months of expansion from June 2020 to November 2022. (A Manufacturing PMI®) reading above 48.7, over time, generally indicates an expansion of the U.S. economy.”
On the positive side, demand stabilized somewhat but remained negative, with new orders (up from 45.5 to 48.3) falling at a slower pace in November. On the other hand, production (down from 50.4 to 48.5) decreased once again following two months of expansion.— Chad Moutray (@chadmoutray) December 1, 2023
MarketWatch: Manufacturers Still Treading Water, ISM Survey Shows: ‘Demand Remains Soft.’ “The industrial side of the economy has shown signs of bottoming out, but conditions are likely to remain weak as long as interest rates stay high. High rates discourage consumer purchases of big-ticket items such as cars and curtail business investment. Heavy industry represents about 10 percent of gross domestic product.”
Reuters: U.S. Manufacturing Mired in Weakness; Factory Employment Declines. “A rebound anytime soon is unlikely as manufacturers in the ISM survey mostly described customer inventories as bloated. … Some economists believed that the United Auto Workers strike, which ended in late October, continued to have an impact on the PMI®. Indeed, makers of fabricated metal products reported that ‘automotive sales (are) still impacted by (the) UAW strike,’ adding they were ‘still waiting for orders to come in.’ ”
ISM’s Services PMI® will be unveiled on Tuesday, and the Hospital PMI® on Thursday. Also, the Semiannual Economic Forecast for the manufacturing and services sectors will be released on December 15. For the most up-to-date content on the reports under the ISM® Report On Business® umbrella, use #ISMPMI on X, formerly known as Twitter.