Manufacturing Index Contracts for Third Straight Month

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U.S. factory activity contracted for the third straight month in October as trade issues, the GM strike and global economic uncertainty plagued the market. The Institute for Supply Management’s manufacturing index registered 48.3 last month, up slightly from a 10-year low of 47.8 in September.

New orders, employment and inventories all rose from September but remained below 50, the line of demarcation between growth and contraction. “October was better than the prior month,” said Tim Fiore, chair of the ISM manufacturing business survey committee, “because the rate of contraction slowed.”

Business sentiment also improved slightly from September, but the industry remains cautious. “Demand has been declining; prices have increased; stock outs have accelerated, and U.S. products are no longer price competitive in the global market,” Fiore said. The General Motors strike negatively impacted both the U.S. manufacturing and services industries, he added – transportation equipment was the weakest performing sector in October.

Customer demand for computers and electronic products was down for the month, said one industry executive, and the fourth quarter is expected to remain soft. No relief is expected in Q1 2020 as component suppliers report a continued rise in labor costs. “[This is] ultimately reflected in rising product costs,” the executive added.

China’s PMI also dropped in October, according to market research firm IC Insights. Although China’s PMI was at or above 51 during the first three quarters of 2018, the PMI dropped below 50 in Q4 and has remained there since.

In other words, China’s PMI has been below 50 since the U.S. implemented its first round of tariffs.

“Overall, the low level of China’s PMI figures, as well as concerns about the possible continuation of the current trade war, have created a significant amount of anxiety over the health of the Chinese economy in the fourth quarter of 2019,” according to IC Insights. “Without a trade deal between the U.S. and China, this index is likely to stay below 50 as the worldwide economy continues to slow.”

Trade anxiety continues to weigh on global demand for U.S. products. New factory orders contracted marginally in October, according to the ISM; customers’ inventories moved to ‘about right’ territory; and backlog contracted for the sixth straight month and at a faster rate. New export orders, however, surged into expansion territory, likely slowing the contraction of the new orders index.

“Our business levels have softened over the last three to five months in the U.S. market [and] globally,” said an electrical equipment/component industry executive. “Germany and China are both experiencing similar slowdowns. We are in the industrial industry, and the outlook appears to remain soft into Q1 of 2020.”

U.S. factory consumption – as measured by the production and employment indexes – also contracted in October, due primarily to lack of demand. Although the employment index increased – by 1. 4 percent to 47.7 — labor force-reduction concerns also increased.

Manufacturing inputs — expressed as supplier deliveries, inventories and imports — were likewise lower in October. This resulted in a combined 0.4-percentage point net improvement in the supplier deliveries and inventories indexes, said Fiore. Overall, inputs indicate that supply chains are meeting demand and companies are more confident that materials received will be consumed in a reasonable time period, he said.

The ISM only provides forecasts twice a year. A recent electronics industry survey shows some optimism for 2020.

TPC and the ECIA surveyed electronics executives in October. The demand outlook tipped up for Q3 2019 while Q4 demand decreased slightly. The Q4 data is in line with growth expectations in the prior two years, but the bookings outlook slightly improved.

“Our initial survey of C1Q20 shows roughly the same demand q/q growth outlook as last year, but better from a seasonality point of view (more in line with 2017 seasonal growth)” said TPC. “The above leads us to believe that we are at the bottom of the cycle and are showing signs of recovery heading into CY20.”