–ISM Manufacturing Index 49.1 Vs. Downwardly Revised 47.1 in December
–ISM’s Fiore: This Could be Beginning of Growth
–Fiore: Still Bullish Main Index Will Go Above Neutral Line of 50 in March
–Fiore: Customer Inventories Still Too Low, Positive for Future New Orders
–Fiore: Member Firms Generally Agree to Pay Higher Prices in January
By Max Sato
(MaceNews) – U.S. manufacturing activity was in contraction territory for the 15th straight month in January, but the key index rose further from December on a surprise jump in new orders and stable production, staying on course toward a pickup from being in a trough, data from the Institute for Supply Management released Thursday showed.
The sector index compiled by the ISM, which shows general direction, rose 2.0 percentage points to 49.1 in January from 47.1 (revised down from 47.4) in December, coming in stronger than the median economist forecast of 47.4. It remained below 50, which indicates contraction in the sector, but stood at the highest point in 15 months, since recording 50.0 in October 2022. The ISM’s annual revisions to seasonal factors resulted in changes to recent numbers.
“The U.S. manufacturing sector continued to contract, though at a marginal rate compared to December,” Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement. “Demand moderately improved, output remained stable and inputs are accommodative.”
Fiore told reporters that he is “still bullish” about his prediction made last month that the main index would go above the neutral line of 50 in March. Summarizing the January survey, he said, “This could be the beginning of growth.”
But he added that the jump in new orders subindex in the January survey was a surprise and new orders may face headwinds in February, and thus that he needs to see a few more months of data to confirm whether this category is on a recovery track. Last month, Fiore had projected a “spike” in the ISM new orders subindex in a couple of months, and that the inventories subindex would start climbing “fairly rapidly” in coming months.
In other developments, the prices subindex rose sharply as new pricing agreements for 2024 went into effect, Fiore said. New export orders slumped, which “can hurt but can’t kill us,” he said, noting the U.S. manufacturing sector relies only 15% on external demand for its output.
Among the five subindexes that directly factor into the manufacturing PMI, the new orders Index posted growth after being in contraction for 16 months. It rose 5.5 percentage points to 52.5 in January after falling 0.8 point to 47.0 in December, hitting the highest since 55.3 in May 2022.
The production index also popped above the neutral line of 50 after being in contraction for seven months, rising 0.5 point to 50.4 in January after rising 1.1 points to 49.9 in December. “Panelists’ companies essentially maintained the levels of output from December and November and now have an opportunity to increase production, based on the ‘too low’ reading for the customers’ inventories index,” Fiore said.
The employment index contracted for the fourth straight month, edging down 0.4 point to 47.1 in January after rising 1.4 points to 47.5 in December. Attrition, freezes and layoffs were used to reduce head counts. “The majority of panelists’ comments indicated labor force reductions; in the previous two months, they were equally split between companies hiring and others reducing their labor forces,” Fiore said. An employment index above 50.3, over time, is generally consistent with an increase in the Bureau of Labor Statistics data on manufacturing employment.
The delivery performance of suppliers to manufacturing organizations was faster for the 16th straight month, thanks to improved supply chains. The supplier deliveries index at 49.1 is up 2.1 points from 47.0 in December, when it rose 0.8 point. This is the only ISM subindex that is inversed; a reading of above 50 indicates slower deliveries, which is typical as the economy improves and customer demand increases.
The manufacturing inventories index contracted for 12 months but at a slower pace. It rose 2.3 points to 46.2 in January after falling 0.4 point to 43.9 in December.
Among other subindexes, the customers’ inventories index slumped 4.4 points to 43.7 in January after falling 2.7 points to 48.1 in December, hitting the lowest level since October 2022, when it was at 41.6. It indicates the level is “too low.” Fiore said panelists report their companies’ customers have a significant shortage of their products in inventory, “which is considered positive for future new orders and production.”
The prices index indicated the first increase in nine months as member firms generally agreed to pay higher costs for some commodities, which were somewhat offset by lower energy prices. It jumped 7.7 points to 52.9 in January after dipping 4.7 points to 45.2 in December, reaching the highest since 53.2 in April 2023.
The backlog orders index stayed below 50, and thus in contraction, for 16 months. It fell 0.6 point to 44.7 in January after rising 6.0 points to 45.3 in December. It slumped 5.6 points to 37.5 in May 2023, which is the lowest since the Great Recession (33.6 in February 2009).
The new export orders index was in contraction for the eighth straight month. It slumped 4.7 points to 45.2 in January after rising 3.9 points to 49.9 in December. It rose 0.2 point to the neutral level of 50.0 in May 2023, which was preceded by nine straight months in contraction territory and 25 months of expansion from July 2020 to July 2022.
The ISM main index has been on a downtrend since it fell 2.7 points to 53.4 in June 2022 but it seems to have hit a bottom in June 2023 at 46.4, the lowest since May 2020, when the index at 43.5 was recovering from a recent low of 41.8 the previous month during the first wave of the pandemic. The pandemic high was 63.8 recorded in May 2021. The all-time low is 29.4 hit in May 1980.
To assess the overall economic climate, the latest ISM survey indicates the overall economy grew for the 45th straight month after one month of contraction in April 2020. The ISM’s manufacturing PMI reading above 42.5, over time, generally indicates an expansion of the U.S. economy. The January survey showed that 62% of manufacturing gross domestic product contracted, down from 84% in December.
The manufacturing sector is in the sixth contracting phase in the past 20 years. Previously, the ISM manufacturing PMI posted contraction just before the pandemic hit the global economy, from August to December 2019, and from March to May 2020. The deepest slump in the past two decades was recorded from September 2008 until July 2009 (the bottom was 34.5 in December 2008) triggered by the U.S. credit crisis.