US Manufacturing Is Slowing Down Too Far and Too Fast

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Manufacturing activity is slowing. That’s the view of the Institute for Supply Management’s Report on Business for the month of December. The Purchasing Managers Index came in at 54.1%. While this still represents growth above the 50.0 line, there are some troubling signs when you back out some of the internals and when you look at some of the comments that the ISM included in its release.

The Wall Street Journal forecast a reading of 57.0%. That was down from the preliminary report of 59.3% in November.

Thursday’s report suggested that new orders, production and employment were growing in December, but supplier deliveries slowed while the backlog was unchanged. Another issue to consider was that the inventories of raw materials were growing, and the ISM indicated that customers’ inventories are too low. There is good news on the inflation front as prices were increasing at a slower rate at the same time that exports and imports grew.

All in all, the ISM showed that December marked the 116th consecutive month that the U.S. manufacturing sector expanded. But when you look at the overall trend, each of the main components here was shown to be “decreasing” across the board. A breakdown of the report follows:

  • The New Orders Index was 51.1%, a decrease of 11.0 percentage points from November.
  • The Production Index was 54.3%, 6.3-percentage point decrease.
  • The Employment Index was 56.2%, a decrease of 2.2 percentage points.
  • The Supplier Deliveries Index was 57.5%, a 5.0-point decrease.
  • The Inventories Index was 51.2%, a decrease of 1.7 percentage points.
  • The Prices Index was 54.9%, a 5.8-percentage point decrease.

Overall comments showed that demand softened, new orders were at recent lows, inventories remained too low and backlog declined to a zero-expansion level. Also noted in the report was that price increases “relaxed to levels not seen since June 2017.” Of the 18 manufacturing industries, 11 were still reporting growth in December.

24/7 Wall St. rarely includes each month’s commentary from respondents. That said, this is definitely worth a look for just how much things have slowed into the end of 2018. The quotes are not named by company, but they are named by sector as follows:

  • “Growth appears to have stopped. Resources still focused on re-sourcing for U.S. tariff mitigation out of China.” (Computer & Electronic Products)
  • “Brexit has become a problem due to labeling changes.” (Chemical Products)
  • “Customer demand continues to decrease [due to] concerns about the economy and tariffs.” (Transportation Equipment)
  • “Starting to see more and more inflationary increases for raw materials. Also, suppliers [are] forcing price increases due to tariffs.” (Food, Beverage & Tobacco Products)
  • “The ongoing open issues with tariffs between U.S. and China are causing longer-term concerns about costs and sourcing strategies for our manufacturing operations. We were anticipating more clarity [regarding] tariffs at the end of 2018.” (Machinery)
  • “Business is steady, but pace of incoming orders are slowing.” (Furniture & Related Products)
  • “Business is robust for certain sectors [aerospace] and flat to downward for others [energy]. Tariffs continue to impact business direction and profit.” (Miscellaneous Manufacturing)
  • “Caution seems to be the outlook. Are we in a correction, or is the market getting ready to slow over time?” (Fabricated Metal Products)
  • “No major change in business operations towards the end of 2018; however, we are carefully monitoring oil prices and outside influence from market conditions to better understand our 2019 outlook and capital plans.” (Petroleum & Coal Products)
  • “Customers are hedge buying in December as a result of announced price increases starting in January.” (Textile Mills)

Stocks were already weak ahead of this report, but the main stock market indexes headed further south after the ISM report showed just how much the activity was slowing. The Dow Jones industrials were down 503 points at 22,842 and the S&P 500 was down almost 46 points at 2,464.14. The Nasdaq Composite, which owed some unpleasantries to Apple on Thursday, was down about 146 points at 6,521.01 about 30 minutes after the ISM report.

Meanwhile, the yield on the 10-year Treasury note was down almost five basis points to 2.61% and the 30-year Treasury bond was down almost five basis points at 2.93%.