–ISM’s Fiore: December Decline Not So Steep; in Adjustment Phase
–Fiore: Index Still in 48 to 52 Range but May Fall Below Floor
–Fiore Repeats His Outlook: ‘Sluggish’ 1st Half 2023; ‘Pretty Strong’ 2nd Half
–Fiore: Manufacturing Sector Does Not Rely Much on International Markets, Hit by Soft Domestic Demand
By Max Sato
(MaceNews) – U.S. manufacturing activity slowed further in December as customer demand remained sluggish amid uncertainty over rising borrowing costs and growth prospects, after slipping into its first contraction since the initial stage of the pandemic in November, data from the Institute for Supply Management released Wednesday showed. The ISM monthly survey also indicated that prices continued falling while employment expanded unexpectedly.
The sector index compiled by the ISM, which shows general direction, fell further to 48.4 in December (above the consensus call of 48.1) from 49.0 in November and 50.2 in October. Only two manufacturing industries reported growth in December while 13 industries saw contraction.
“Regarding the overall economy, this figure indicates contraction after 30 straight months of expansion,” Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement. The ISM noted last month that a manufacturing PMI reading above 48.7, over time, generally indicates an expansion of the overall economy.
The index has been on a gradual downtrend after holding at 52.8 in August 2022 and slipping in July from 53.0 in June. The latest figure remains the lowest since May 2020, when the index at 43.5 was recovering from a recent low of 41.6 the previous month during the first wave of the pandemic. The all-time low is 29.4 hit in May 1980.
Fiore told reporters that the index decline in December was not so steep and that overall business conditions were not so different from those in November. “We are just in an adjustment period,” he said.
“We are still in the 48 to 52 range that we’ve been talking about since September, October,” he said. “We are at the lower end of it and we could possibly break that floor and go a little bit lower, but it’s not a real steep decline.”
Fiore described the current situation as a temporary standoff between suppliers and buyers amid falling prices and softer demand. Average lead time remained 32% above the previous trough for capital expenditures and 37% for purchased materials, both of which are too high, he added.
The new orders index remains in contraction territory at 45.2 in December, down sharply from 47.2 in November and 49.2 in October. It had slumped 4.2 points to 47.1 in September from 51.3 in August.
The prices index stood at 39.4, down 3.6 percentage points from November’s 43 and hitting the lowest since 35.3 seen in April 2020.
The production index decline by 3-percentage points to 48.5 in December from 51.5 in November came as a “big surprise,” Fiore said, adding, “We are still waiting for new orders to come back.” The backlog orders index stood at 41.4, rising 1.4 percentage points from the November reading of 40.0.
Asked about shrinking international trade volumes, Fiore said the U.S. manufacturing sector does not rely much on international markets, and that it is being affected more by softer domestic demand. China’s reopening its economy may provide some benefit to the sector while there are no signs of improvement in the European economy, he added.
Fiore repeated his outlook based on the ISM’s semiannual survey released last month that demand in the sector is likely to be “sluggish” in the first half of 2023 but should be “pretty strong” in the second half, possibly on the prospects for higher profitability on lower input prices. But he warned about “so much uncertainty” over the Federal Reserve’s tightening, currency exchange rates and overseas growth.
“The continued uncertainty in the economy has resulted in customers delaying their commitments for capital purchases, which is impacting our fourth quarter sales and lowering our forecast for the first quarter of 2023,” a firm in the machinery industry told the ISM survey. A company in the chemical products industry said, “Customer demand continues to be depressed. While 2023 pipeline is looking very positive, current demand is significantly down.”
The employment index unexpectedly returned to expansion territory, rising 3 points to 51.4 in December after slipping back into contraction in November, when it fell 1.6 points to 48.4 after rising 1.3 points to 50.0 in October. It had dipped into contraction for the first time in three months in September, when it plunged 5.5 points to 48.7.
“Many panelists’ companies confirm that they are continuing to manage head counts through a combination of hiring freezes, employee attrition and layoffs,” Fiore said in a statement.
The supplier deliveries index continued to show faster deliveries. It fell 2.1 percentage points to 45.1 December after edging up to 47.2 in November from 46.8 in October. The index remains at the lowest point since March 2009, when it was at 43.2.
The new export orders index is below the breakeven point of 50 for the fifth month amid slower demand from China and the European Union. It fell 2.2 points to 46.2 in December following a rise to 48.4 in November from 46.5 in October.
“Skilled labor shortages are huge, putting a lot of pressure on existing personnel,” a firm in the computer and electronic products category told the ISM survey. “Electronic components still a major supply chain issue, particularly if the component you need is not the current hot technology.”
“New China technology trade restrictions have impacted our business and plans going forward,” a company from the electrical equipment, appliances and components industry reported.
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.