Although the overall economy grew for the 79th consecutive month in December, the U.S. manufacturing industry contracted for the second consecutive month. The Institute for Supply Management’s leading manufacturing index, the PMI, declined by 0.4 percent from the November level to 48.2 percent. Any number below 50 indicates the industry is contracting.
The data surprised many industry observers, including the ISM’s Chair of the Manufacturing Business Survey Committee Bradley J. Holcomb. “It surprised everyone, judging from the comments of our survey respondents,” he said. “If you go back to the December 8 [2015 semiannual report] these same panelists were predicting a 4.1 percent revenue growth for 2016 versus a 1.4 percent increase in 2015. Things change on a day to day basis: the Middle East has people concerned; China is contracting again; and you’d be hard pressed to find a solid direction [for the economy] and to maintain confidence in global demand.”
Low oil prices continue to wreak havoc on a large customer base for many U.S. manufacturers. “Low oil prices are negatively impacting oil and gas exploration activities," said an executive in the petroleum and coal sector. Suppliers to that sector say demand remains soft. Other sectors, including automotive, are benefiting from low gas prices and savings in energy. "Business is going well. Low fuel prices keep full size SUV and truck sales at high volumes," said an executive in plastics and rubber products. Deflation in many commodities is helping with product savings in the transportation equipment segment. “Low oil prices remain a plus and a minus,” said Holcomb.
Several of the indexes supporting the PMI also contracted but at a slightly slower pace than in November. The new orders index registered 49.2 percent, an increase of 0.3 percentage point from the reading of 48.9 percent in November. The production index registered 49.8 percent, 0.6 percentage point higher than the November reading of 49.2 percent. The new export orders index registered 51 percent, up 3.5 percentage points from the November reading of 47.5 percent and the imports index registered 45.5 percent, down 3.5 percentage points from the November reading of 49 percent. “As was the case in November, 10 out of 18 manufacturing industries reported contraction in December,” said Holcomb. “Contraction in new orders, production, employment and raw materials inventories accounted for the overall softness in December.”
In the computer and electronics industry, one executive reported December revenue was flat compared with November. This could be due to slow consumer spending during the holidays or low product prices compared with prior years.
Raw materials prices also remain low, which is a positive for manufacturing; but inventory levels, which reached 43.5 percent in December, remain well below 50. That data drags the PMI down, said Holcomb. "Manufacturers knew what they were doing, closing the year out with low inventory levels," he said. "However, inventories have been exceptionally low for a number of months."
“December was a disappointing soft landing,” he concluded. “We saw the same pattern in 2012 with similar averages and the last two months of the year down. It’s becoming harder and harder to predict.”
For 2016, 63 percent of respondents to the ISM’s Semiannual Economic Forecast expect revenues to be greater than in the prior year. The panel of purchasing and supply executives expects a 4.1 percent net increase in overall revenues for 2016, compared with a 1.4 percent increase in 2015. That growth will be driven by capital expenditures, which are expected to increase by 1 percent in 2016.