At first glance, the release of the Manufacturing ISM® Report On Business® data for December revealed more of the running in place that U.S factories have done for more than a year — eliciting, as one report put it, “ho-hum” reaction from investors.
Though the composite PMI® reading of 47.4 percent slightly beat analysts’ expectations, it indicated a 14th consecutive month of contraction. Sluggishness in some of the biggest industries based on contribution to manufacturing gross domestic product (GDP) is weighing down the entire sector (more on that later).
Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management® Manufacturing Business Survey Committee, reiterated his sentiment that manufacturing could return to expansion in the first quarter of 2024 in a conference call of reporters on Wednesday. But the climb has been long and arduous, and Fiore added, “I’m tired of seeing that PMI® number below 50 (percent).”
Manufacturers continued to remain challenged, contracting for the 14th straight month, but with the ISM® Manufacturing Purchasing Managers’ Index® improving from 46.7 in November to 47.4 in December. The underlying data were mixed. pic.twitter.com/1vVKfnIo9Y— Chad Moutray (@chadmoutray) January 3, 2024
However, mining the subindex readings, other data and Business Survey Committee respondents’ comments fueled Fiore’s optimism, especially considering much of that information was collected before the December 13 announcement by the U.S. Federal Reserve (Fed) that interest rates would remain steady, with three cuts possible this year. (The minutes from the Fed’s December meeting were released later on Wednesday.)
“Companies were going through their business plans and looking at the economic cycle and feeling confident for 2024 would be better,” Fiore said, echoing sentiment indicated in ISM’s Semiannual Economic Forecast released in December.
He continued, “That probably would lead to a spike in new orders at some point. But with the Fed saying it feels good about cutting rates, those that were holding back on making longer term investments have to be (more confident).”
The New Orders Index reading of 47.1 percent was down 1.2 percentage points compared to November and in contraction territory for the 16th straight month. Fiore called the index “the most dynamic potential growth number” in the first quarter, for two reasons: (1) Chemical Products, a bellwether manufacturing industry, reported growth in December and (2) new orders activity sets off a chain reaction, impacting production, inventories, order backlogs and employment.
JOLTS comes in at 8.79mil vs 8.85 last month - lower than expected. ISM manufacturing index stays below 50 at 47.1 overall with new orders at 47.1 vs 48.3 and prices paid at 45.2 vs 49.9. All numbers came in softer than expected.— Kathy Jones (@KathyJones) January 3, 2024
The Production Index returned to expansion in December, at 50.3 percent. The Employment Index also increased, registering 48.1 percent, but Fiore said that is largely a product of companies right-sizing head counts in response to demand.
If consumers and purchasing professionals are more eager to buy, Fiore said, increased new order levels will lead to more production — which is already expanding. Also, the Backlog of Orders Index increased 6 percentage points in December, to 45.3 percent. “If you have fewer factory workers than six months ago, that backlog number is only going to climb,” Fiore said. “So, you’ll need to hire more.”
Such a change in direction would be easier if three of the manufacturing sector’s largest industries improve performance. Computer & Electronic Products, Petroleum & Coal Products and Machinery all contracted strongly (defined as a PMI® below 45 percent) in December, which is a not-insignificant drag on the overall composite number.
“The single biggest factor to holding down the PMI® has been Computer & Electronic Products,” Fiore said. “It’s been the top industry (in manufacturing GDP contribution), and it’s had stronger employment contraction as well. If that industry can get above 50 percent or even contract at a slower rate, that would really help the PMI®.”
In a nutshell so far ISM Manufacturing and JOLTS are good reports for Fed: decelerating but decent growth and less pressure from labor market.— Mario Cavaggioni (@CavaggioniMario) January 3, 2024
However I remain skeptic that Fed will be able to cut already in late Q1: labor market remains tight, HHs leverage low and corps healthy
Other data points justify a more bullish outlook. The Prices Index had threatened to return to expansion (or “increasing”) territory, but it declined 4.7 percentage points in December, to 45.2 percent. The Manufacturing PMI® data led the Federal Reserve Bank of Atlanta to adjust its closely watched GDPNow model estimate for seasonally adjusted U.S. GDP growth in the fourth quarter of 2023, raising it from 2.0 percent to 2.5 percent.
And, once again, manufacturing companies are anticipating interest rate cuts. “For the first time in a while, there was a 3-to-1 ratio of positive over negative viewpoints on the future (among survey respondents),” Fiore said. A loosening of monetary policy, he added, “should brighten further assessments of what 2024 will look like.”
The Report On Business® roundup:
Barron’s: ISM Report Shows Manufacturing Activity Continues to Decline. “It’s a very ho-hum reading. The manufacturing economy just isn’t recovering. The good news from the weak reading is that the PMI report tends to reflect what investors already know. Overall demand was weak in 2023. Manufacturers are hoping for a stronger 2024.”
Bloomberg: U.S. Factory Gauge Shows 14th Month of Shrinking Activity. “Manufacturers were beset last year by high borrowing costs and waning demand for goods that prompted some companies to rethink capital spending plans. While the (Manufacturing PMI®) still shows contraction — and almost all industries shrank during the month — it is holding in a range that suggests activity has stabilized at a weak level.”
Mace News: Manufacturing in Contraction for 14th Straight Month but Production is Stable Amid Weak Demand. “Asked about recent attacks by Houthi rebels on Israeli-linked vessels in the Red Sea, Fiore said shipments may be delayed and ocean freight costs are likely to rise, but that he said it is ‘not an operational concern.’ ”
MarketWatch: U.S. Manufacturing Sector Shrinks for 14th Straight Month in December. “The contraction in manufacturing is the longest since 2000-01, after the dot-com bubble exploded. … Economists said that depressed capital spending has been the key drag on the factory sector, along with weak global trade. They expect that a sharp drop in long-term interest rates will improve the picture, but the change won’t happen overnight.”
❔Purchasing managers in the #manufacturing sector are generally feeling more upbeat in their responses than the ISM index indicates— Gregory Daco (@GregDaco) January 3, 2024
✅"Business conditions are good... stronger demand... demand is up... forecasting a somewhat strong year" pic.twitter.com/E80ZwRC37n
Reuters: U.S. Manufacturing Sector Eyes Recovery in December. “The so-called hard data suggest that manufacturing, which accounts for 10.3 percent of the economy, is plodding along. Orders for long-lasting manufactured goods were up strongly on a year-on-year basis in November. Though factory production has been weak, the magnitude of the drop has gotten smaller in recent months.”
ISM’s Services PMI® will be unveiled on Friday, and the Hospital PMI® on Tuesday. 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.