The Institute for Supply Management—hardly a household name—got a lot of attention last week as its leading manufacturing index, the PMI, dropped to historic lows. The index dove by 5.2% -- from 59.3 in November to 54.1 in December.
Depending on the source material, this was the worst decline since 2008 or since 2014. For the electronics industry, the month-to-month data was bad enough: the sector dropped by 10 points in December while other big manufacturing segments dropped by five.
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“Growth appears to have stopped,” a computer and electronics executive told the ISM in its monthly survey. “Resources [are] still focused on re-sourcing for U.S. tariff mitigation out of China.”
Any number above 50 indicates growth, so U.S. manufacturing is still expanding. However, all the PMI supporting indices fell in December:
- The new orders index registered 51.1%, a decrease of 11 percentage points from the November reading of 62.1%.
- The production index registered 54.3%, a 6.3-percentage point decrease compared to the November reading of 60.6%.
- The employment index registered 56.2%, a decrease of 2.2 percentage points from the November reading of 58.4%.
- The supplier deliveries index registered 57.5%, a 5-percentage point decrease from the November reading of 62.5%.
- The inventories index registered 51.2%, a decrease of 1.7 percentage points from the November reading of 52.9 percent.
- The prices index registered 54.9%, a 5.8-percentage point decrease from the November reading of 60.7%, indicating higher raw materials prices for the 34th consecutive month.
“Comments from the [manufacturing business] panel reflect continued expanding business strength, but at much lower levels,” said Fiore. “Demand softened, with the new orders index retreating to recent low levels; the customers’ inventories index remaining too low — a positive heading into the first quarter of 2019 — and the backlog of orders declining to a zero-expansion level. Consumption continued to strengthen, with production and employment still expanding, but at much lower levels compared to prior periods. Inputs — expressed as supplier deliveries, inventories and imports — softened as well, with suppliers improving delivery performance, and inventories and imports declining.
Exports continue to expand, but at low levels consistent with November, the ISM reported. Price increases relaxed to levels not seen since June 2017, when the index registered 53%. According to Bloomberg News, the PMI’s 5.2-point drop from the prior month has been exceeded just twice this century, both times during recessions: in the financial crisis a decade ago and following the Sept. 11, 2001, terror attack.
Although several December metrics were surprising, said Fiore, the ISM views the month as a reset for 2019. “These shifts are not unusual for a December,” he said. “The most unusual was the new order number [51.1%], which we haven't seen since January 2014. It then bounced back by 3.7 points. I think we’ll see a bounce back in new orders which will help set the pace for the year. I think we'll all be more comfortable with a level in the mid-50s.”
Concern over tariffs — which had abated somewhat — re-emerged as a talking point in December. The uncertainty caused by U.S. and China trade policies continues to wreak havoc in the supply chain.
“Customer demand continues to decrease [due to] concerns about the economy and tariffs,” a transportation industry executive told the ISM. “The ongoing open issues with tariffs between U.S. and China are causing longer-term concerns about costs and sourcing strategies for our manufacturing operations."
"We were anticipating more clarity [regarding] tariffs at the end of 2018,” a machinery manufacturer said. In miscellaneous manufacturing, business is robust for certain sectors such as aerospace, and flat to down for others such as energy. “Tariffs continue to impact business direction and profit,” one executive said.
“We are still running at about a 36-percent level of tariff-related commentary," Fiore said. "People are still concerned that things aren’t moving until March. The biggest thing that could happen is a resolution with China or a buildup of the U.S. steel industry. We’ve been struggling a lot with exports and when you cut off the export market you are going to see a decline in business. Maybe December’s PMI will serve as a warning.”