Manufacturing in the U.S. contracted for the fourth consecutive month in January, signaling what’s likely to be a slow climb back to growth for the early part of 2016.
The nation’s leading manufacturing index, the Institute for Supply Management’s PMI, registered 48.2 percent in January, increasing only 0.2 percent from its level of 48.0 in December. The PMI has been hovering under 50 -- the line of demarcation between growth and contraction – since October.
Two contributing factors to the PMI – employment and inventories—are dragging down the overall index. January’s employment index registered 45.9 percent, 2.1 percentage points below the December reading of 48 percent. Manufacturers’ inventories of raw materials were at 43.5 percent, the same reading as in December. Inventories are likely to stay low, said Brad Holcomb, chair of the ISM’s Manufacturing Business Survey Committee, as manufacturers continue to keep stock off their books. “I see January as a continuation of the year-end trend toward reducing inventories to close the books without a pile of raw materials on the shelves,” he said, adding: “It’s clear manufacturers aren’t ready to see things as robust enough to start replenishing stock. I would expect [inventory] to move upward as months go by.”
The drop in employment could be temporary as manufacturers lay off workers they hired for the holiday season. However, companies in one of the largest U.S. industries, petroleum and coal products, are reducing their headcount, the ISM reports. Low gas and oil prices continue to dog manufacturers in that market while other industries are benefiting from cost savings in energy and transportation.
Feedback from respondents to the ISM’s survey was mixed for the month— managers in the electronics and computer segment expect a “huge rollout in wireless in 2016 across all markets will keeps factories very, very busy." The oil and gas sector continues to be challenged by low oil and gas prices, executives said, and there’s an increased risk of suppliers filing for bankruptcy.
The two bright spots in the ISM’s January report were new orders, which increased by 2.7 percent to 51.5; and production, which grew 0.3 percent to 50.2 percent. “Seeing new orders in this type of environment is pretty positive,” said Holcomb. “Production is following right along.” Backlog—which is still contracting – is progressing at a lesser pace, moving from 41 percent in December to 43 in January.
Based on conditions in the global market Holcomb said he wouldn’t be surprised if manufacturing remains sluggish for a few more months. “Hopefully, it’s just a continuation of the sluggishness we saw at the end of last year,” he added.