Economic Activity in Manufacturing Sector Continues to Contract

Economic activity in the manufacturing sector contracted in November for the 13th consecutive month following a 28-month period of growth, according to the latest Manufacturing ISM Report on Business from the Institute for Supply Management.

“The Manufacturing PMI registered 46.7% in November, unchanged from the 46.7% recorded in October,” Timothy R. Fiore, CPSM, CPM, chair of the ISM’s manufacturing business survey committee, said. “The overall economy continued in contraction for a second month after one month of weak expansion preceded by nine months of contraction and a 30-month period of expansion before that. (A Manufacturing PMI above 48.7%, over a period of time, generally indicates an expansion of the overall economy.) The New Orders Index remained in contraction territory at 48.3%, 2.8 percentage points higher than the figure of 45.5% recorded in October. The Production Index reading of 48.5% is a 1.9-percentage point decrease compared to October’s figure of 50.4%. The Prices Index registered 49.9%, up 4.8 percentage points compared to the reading of 45.1% in October. The Backlog of Orders Index registered 39.3%, 2.9 percentage points lower than the October reading of 42.2%. The Employment Index registered 45.8%, down one percentage point from the 46.8% reported in October.

“The Supplier Deliveries Index figure of 46.2% is 1.5 percentage points lower than the 47.7% recorded in October. (Supplier Deliveries is the only ISM Report on Business index that is inversed; a reading of above 50% indicates slower deliveries, which is typical as the economy improves and customer demand increases.)

“The Inventories Index increased by 1.5 percentage points to 44.8%; the October reading was 43.3%. The New Export Orders Index reading of 46% is 3.4 percentage points lower than October’s figure of 49.4%. The Imports Index remained in contraction territory, registering 46.2%,1.7 percentage points lower than the 47.9% reported in October.

“The U.S. manufacturing sector continued to contract at the same rate in November as compared to October, again posting a reading of 46.7%. Companies are still managing outputs appropriately as order softness continues. Demand eased, with the (1) New Orders Index contracting but at a slower rate, (2) New Export Orders Index dropping further into contraction territory and (3) Backlog of Orders Index dropping below 40% (39.3%) to remain in strong contraction territory. The Customers’ Inventories Index reading moved into expansion, toward the upper end of ‘about right’ territory, not accommodative for future production. Output/Consumption (measured by the Production and Employment indexes) was negative, with a combined 2.9-percentage point downward impact on the Manufacturing PMI calculation. Panelists’ companies slightly reduced month-over-month production and took more actions to reduce head counts, primarily using layoffs and attrition. Inputs — defined as supplier deliveries, inventories, prices and imports — continued to accommodate future demand growth. The Supplier Deliveries Index indicated faster deliveries for the 14th straight month at a faster rate compared to October, and the Inventories Index moved upward while remaining in moderate contraction territory. The Prices Index remained in ‘decreasing’ territory (but just barely), signifying price stability as a result of energy markets easing, though offset by increases in the steel markets. Manufacturing supplier lead times continue to decrease, a positive for future economic activity.

“Of the six biggest manufacturing industries, two — food, beverage and tobacco products and transportation equipment — registered growth in November.

“Demand remains soft, and production execution is slightly down compared to October as panelists’ companies continue to manage outputs, material inputs and — more aggressively — labor costs. Suppliers continue to have capacity. Sixty-five percent of manufacturing gross domestic product (GDP) contracted in November, down from 75% in October. More importantly, the share of sector GDP registering a composite PMI calculation at or below 45% — a good barometer of overall manufacturing weakness — was 54% in November compared to 35% in October and 6% in September. Three of the top six industries by contribution to manufacturing GDP were at or below 45%, same as the previous month.”

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