The U.S. manufacturing index in December fell to its lowest point in a decade as new orders, production and employment again declined. Reports of a phase-one trade deal between the U.S and China had no immediate impact on the PMI, which dropped 0.9 percent last month to 47.2.
This is the fifth straight month of contraction as measured by a PMI below 50, according to the Institute for Supply Management. December’s deterioration was driven by the weakest gauges of new orders and production since April 2009. The indexes show American factories continue to be plagued by pullbacks in business investment, soft global demand and continuing trade uncertainty.
That said, there are signs that some industry sectors will benefit from the trade deal, according to Tim Fiore, chair of the ISM's Manufacturing Business survey committee. “Overall, sentiment this month is marginally positive regarding near-term growth," he said.
That's not evident in December’s top-line numbers:
- New orders decreased 0.4 percent to 46.8
- Production was down 5.9 percent to 43.2
- Backlog increased 0.3 percent to 43.3
- Employment declined 1.5 percent to 46.6
- New exports declined 0.5 percent to 47.3
- Imports increased by 0.5 percent to 48.8
- Prices increased by 5 percent to 51.7
Digging deeper, Fiore said the big story is consumption and employment. “Consumption is normally low in December and it essentially remained flat, so that’s encouraging. In employment, we are hearing more about lower headcount through attrition. In previous months, the story was furloughs and layoffs. So, the industry feels it can reach a nominal headcount level in 2020 by letting things be.”
There was a similar dynamic in production—which dropped by 5.9 percent-- he said. Manufacturers were fulfilling orders in December, so they didn’t push capacity. Now, lead times are beginning to extend, prices are increasing and deliveries remain strong.
This data indicates supply chains began to stress in December and companies remained cautious that materials received would be consumed by the end of the fourth quarter. "Supplier deliveries [at 54.6] are approaching 55 and remain robust," Fiore explained. "Prices are rebounding, so that means buyers are competing for materials. Prices increased for the first time since May 2019, so that's a positive for 2020." Discussions around tariffs are beginning to abate, he added.
There are still headwinds for U.S. factories as they drag themselves out of a contraction beginning in 2019. While a thaw in trade relations could help, factories still face the repercussions of policy uncertainty, a weak corporate investment climate and a step down in global growth. In the computer and electronics industry, backlogs are shrinking as the pace of new orders continues to fall, one executive told the ISM.
Restrictions on sales to China are reportedly easing, said Fiore, and “export licenses are flowing.” Semiconductor companies may have more freedom to sell to customers such as Huawei Technologies, a global manufacturer of 5G networking equipment. But the supply chain will still struggle in the wake of Boeing grounding its 737 Max aircraft.
Boeing told its suppliers to suspend parts shipments starting in mid-January following the suspension. Fiore said Boeing’s problems will probably be a drag on manufacturing for the next four to six months. “Boeing has a good history of working with its suppliers,” Fiore added. “It's very unlikely Boeing will let its supply chain go belly-up.”
Uncertainty remains the biggest challenge for manufacturers going into 2020, he said. In addition to Boeing’s struggles, capital expenditures for the year are expected to decline. In the ISM’s December semiannual forecast, capex was forecast to drop by 2.91 percent in 2020.
“The long-term unwillingness to invest in plant and equipment lessens the comfort level heading into the new year,” Fiore said. “That’s an uncertainty that will last until after the election.”
IHS Markit’s purchasing managers index registered 52.4 in December in sharp contrast with the ISM. The nation’s two most-watched manufacturing surveys pointed in different directions in November as well, according to Bloomberg News, underscoring disagreement among economists and investors on which index offers a more accurate picture of the sector.
The ISM index averaged a reading of 51.2 for all of 2019, the lowest in a decade. That’s down 7.6 points from 2018’s average, the steepest drop since 2001.