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ISM Manufacturing PMI Indicates Contraction At 48.4%

January 5, 2023

Economic activity in the manufacturing sector contracted in December for the second consecutive month following a 29-month period of growth, say the nation's supply executives in the latest Manufacturing ISM® Report On Business®.

The report was issued by Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management Manufacturing Business Survey Committee:

“The December Manufacturing PMI registered 48.4 percent, 0.6 percentage point lower than the 49 percent recorded in November. Regarding the overall economy, this figure indicates contraction after 30 straight months of expansion. The Manufacturing PMI® figure is the lowest since May 2020, when it registered 43.5 percent. The New Orders Index remained in contraction territory at 45.2 percent, 2 percentage points lower than the 47.2 percent recorded in November. The Production Index reading of 48.5 percent is a 3-percentage point decrease compared to November’s figure of 51.5 percent. The Prices Index registered 39.4 percent, down 3.6 percentage points compared to the November figure of 43 percent; this is the index’s lowest reading since April 2020 (35.3 percent). The Backlog of Orders Index registered 41.4 percent, 1.4 percentage points higher than the November reading of 40 percent. The Employment Index returned to expansion territory (51.4 percent, up 3 percentage points) after contracting in November (48.4 percent).

 

The Supplier Deliveries Index reading of 45.1 percent is 2.1 percentage points lower than the November figure of 47.2 percent; this is the index’s lowest reading since March 2009 (43.2 percent). The Inventories Index registered 51.8 percent, 0.9 percentage point higher than the November reading of 50.9 percent. The New Export Orders Index reading of 46.2 percent is down 2.2 percentage points compared to November’s figure of 48.4 percent. The Imports Index continued in contraction territory at 45.1 percent, 1.5 percentage points below the November reading of 46.6 percent.”

Fiore continues, “The U.S. manufacturing sector again contracted, with the Manufacturing PMI® at its lowest level since the coronavirus pandemic recovery began. With Business Survey Committee panelists reporting softening new order rates over the previous seven months, the December composite index reading reflects companies’ slowing their output. Demand eased, with the (1) New Orders Index remaining in contraction territory, (2) New Export Orders Index markedly below 50 percent, (3) Customers’ Inventories Index in ‘just right’ territory, and (4) Backlog of Orders Index recovering slightly but still in strong contraction. Output/Consumption (measured by the Production and Employment indexes) was neutral, with a combined zero-percentage point impact on the Manufacturing PMI® calculation. The Employment Index moved back into expansion, and the Production Index dropped into contraction territory. Many panelists’ companies confirm that they are continuing to manage head counts through a combination of hiring freezes, employee attrition and layoffs. Inputs — defined as supplier deliveries, inventories, prices and imports — accommodated future demand growth. The Supplier Deliveries Index indicated faster deliveries, and the Inventories Index expanded at a faster rate as panelists’ companies continued to effectively manage the total supply chain inventory. The Prices Index contracted for the third consecutive month and has declined in each reading since March 2022, when it registered 87.1 percent.

“Of the six biggest manufacturing industries, one — Petroleum & Coal Products — registered moderate growth in December.

“Manufacturing contracted again in December after expanding for 29 straight months. Panelists’ companies continue to judiciously manage hiring. The month-over-month performance of supplier deliveries was the best since March 2009. Average lead time remained 32 percent above previous trough for capital expenditures and 37 percent for purchased materials; both are too high. Managing head counts and total supply chain inventories remain primary goals as the sector closes the year. More attention will be paid to demand as we enter the first quarter to shore up order books for the next six to 12 months,” says Fiore.

The two manufacturing industries that reported growth in December are: Primary Metals; and Petroleum & Coal Products. The 13 industries reporting contraction in December, in the following order, are: Wood Products; Fabricated Metal Products; Chemical Products; Paper Products; Plastics & Rubber Products; Electrical Equipment, Appliances & Components; Furniture & Related Products; Apparel, Leather & Allied Products; Computer & Electronic Products; Machinery; Food, Beverage & Tobacco Products; Transportation Equipment; and Miscellaneous Manufacturing.

The U.S. manufacturing sector contracted in December, as the Manufacturing PMI® registered 48.4 percent, 0.6 percentage point below the reading of 49 percent recorded in November. “This is the second month of contraction and, as predicted, will likely be the norm for the PMI® at least through the first quarter of 2023, with the PMI® expected to be between 48 and 52 percent. Of the five subindexes that directly factor into the Manufacturing PMI®, two (Employment and Inventories) were in growth territory, with both gaining a bit of ground. The PMI® registered its lowest level since May 2020, when the index was 43.5 percent. Of the six biggest manufacturing industries, only Petroleum & Coal Products registered moderate growth in December. The Production Index decreased 3 percentage points, falling into contraction territory. Supply chain congestion continued to ease, indicated by the Supplier Deliveries Index showing faster deliveries. Only two of the 10 subindexes were positive for the period,” says Fiore. A reading above 50 percent indicates that the manufacturing sector is generally expanding; below 50 percent indicates that it is generally contracting.

A Manufacturing PMI® above 48.7 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the December Manufacturing PMI® indicates the overall economy contracted in December after 30 consecutive months of expansion following contraction in April and May 2020. “The past relationship between the Manufacturing PMI® and the overall economy indicates that the Manufacturing PMI® for December (48.4 percent) corresponds to a 0.1-percent decrease in real gross domestic product (GDP) on an annualized basis,” says Fiore.

ISM®’s New Orders Index contracted for the fourth consecutive month in December, registering 45.2 percent, a decrease of 2 percentage points compared to the 47.2 percent reported in November. “Of the six largest manufacturing sectors, only Transportation Equipment reported increased new orders. Price and lead time declines as well as backlog contraction should encourage buyers to reenter the market and sales agents to be more aggressive in seeking new business, but clearly this did not occur in December. Slowing in new order rates to adjust for overordering in 2021 and the first quarter of 2022 has been underway since March of this year,” says Fiore. (For more on lead times, see the Buying Policy section of this report.) A New Orders Index above 52.9 percent, over time, is generally consistent with an increase in the Census Bureau’s series on manufacturing orders (in constant 2000 dollars).

Of the 18 manufacturing industries, three reported growth in new orders in December: Textile Mills; Primary Metals; and Transportation Equipment. Eleven industries reported a decline in new orders in December, in the following order: Wood Products; Nonmetallic Mineral Products; Fabricated Metal Products; Food, Beverage & Tobacco Products; Chemical Products; Furniture & Related Products; Plastics & Rubber Products; Electrical Equipment, Appliances & Components; Miscellaneous Manufacturing; Computer & Electronic Products; and Machinery.

The Production Index registered 48.5 percent in December, 3 percentage points lower than the November reading of 51.5 percent, indicating contraction after 30 consecutive months of growth. “Of the top six industries, only two — Transportation Equipment; and Machinery — expanded in December. The Production Index contraction is a strong indicator that backlog reduction is not sufficient to maintain production growth. Additionally, as customers’ inventories have reached ‘about right’ levels, panelists are now concerned about future production potential,” says Fiore. An index above 52.4 percent, over time, is generally consistent with an increase in the Federal Reserve Board’s Industrial Production figures.

The four industries reporting growth in production during the month of December are: Primary Metals; Electrical Equipment, Appliances & Components; Transportation Equipment; and Machinery. The eight industries reporting a decrease in production in December — in the following order — are: Chemical Products; Wood Products; Paper Products; Fabricated Metal Products; Furniture & Related Products; Plastics & Rubber Products; Miscellaneous Manufacturing; and Computer & Electronic Products. Six industries reported no change in production.

ISM®’s Employment Index registered 51.4 percent in December, 3 percentage points higher than the November reading of 48.4 percent. “The index indicated employment expanded after contracting for one month. Of the six big manufacturing sectors, only two (Petroleum & Coal Products; and Machinery) expanded. Labor management sentiment continued to shift, with a number of panelists’ companies reducing employment levels through hiring freezes, attrition — and since November — layoffs. In December, layoffs were mentioned in 11 percent of employment comments, down from 14 percent in November, likely due to the holiday period. Turnover rates improved marginally, recording their lowest level (27 percent of comments) since tracking began in June 2021. For those companies expanding their workforces, comments continue to support an improving hiring environment,” says Fiore. An Employment Index above 50.5 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment.

Of 18 manufacturing industries, five reported employment growth in December: Petroleum & Coal Products; Furniture & Related Products; Plastics & Rubber Products; Machinery; and Miscellaneous Manufacturing. The six industries reporting a decrease in employment in December — in the following order — are: Textile Mills; Wood Products; Primary Metals; Electrical Equipment, Appliances & Components; Computer & Electronic Products; and Food, Beverage & Tobacco Products. Seven industries reported no change in employment in December compared to November.

The delivery performance of suppliers to manufacturing organizations was faster for a third straight month in December, as the Supplier Deliveries Index registered 45.1 percent, 2.1 percentage points lower than the 47.2 percent reported in November. This reading indicates the fastest supplier delivery performance in 165 months (March 2009, when the index registered 43.2 percent). Of the top six manufacturing industries, only Food, Beverage & Tobacco Products reported slower deliveries. “In December, 88 percent of panelists reported ‘same’ or ‘faster’ delivery times. Panelists’ comments overwhelmingly confirmed that suppliers performed better in December compared to previous months, continuing an improvement trend that began in May 2022,” says Fiore. A reading below 50 percent indicates faster deliveries, while a reading above 50 percent indicates slower deliveries.

Three of 18 manufacturing industries reported slower supplier deliveries in December: Textile Mills; Miscellaneous Manufacturing; and Food, Beverage & Tobacco Products. The 10 industries reporting faster supplier deliveries in December as compared to November — in the following order — are: Paper Products; Plastics & Rubber Products; Wood Products; Electrical Equipment, Appliances & Components; Fabricated Metal Products; Machinery; Primary Metals; Chemical Products; Computer & Electronic Products; and Transportation Equipment.

The Inventories Index registered 51.8 percent in December, 0.9 percentage point higher than the 50.9 percent reported for November. “Manufacturing inventories expanded at a faster rate compared to November. Of the six big manufacturing industries, two (Food, Beverage & Tobacco Products; and Computer & Electronic Products) increased manufacturing raw material inventories in December. Panelists’ companies continue their efforts to reduce their total supply chain inventories in preparation for a further economic slowdown, indicated by the contraction in new orders, slow expansion in manufacturing inventories and the ‘just right’ level of customers’ inventories,” says Fiore. An Inventories Index greater than 44.4 percent, over time, is generally consistent with expansion in the Bureau of Economic Analysis (BEA) figures on overall manufacturing inventories (in chained 2000 dollars).

Of 18 manufacturing industries, the eight reporting higher inventories in December — in the following order — are: Nonmetallic Mineral Products; Paper Products; Primary Metals; Electrical Equipment, Appliances & Components; Plastics & Rubber Products; Food, Beverage & Tobacco Products; Miscellaneous Manufacturing; and Computer & Electronic Products. The six industries reporting contracting inventories in December — in the following order — are: Apparel, Leather & Allied Products; Fabricated Metal Products; Furniture & Related Products; Chemical Products; Machinery; and Transportation Equipment.

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