Manufacturing in U.S. Contracts at Fastest Pace in Six Years

Manufacturing activity nationally contracted for a second straight month in December, with the Institute for Supply Management’s Purchasing Managers’ Index registering at 48.2.

Early Monday, a private survey of China’s manufacturers showed factory activity contracting more quickly than many economists expected.

PMI(R) Manufacturing contracted in December as the PMI(R) registered 48.2 percent, a decrease of 0.4 percentage point from the November reading of 48.6 percent, indicating contraction in manufacturing for the second consecutive month, and is the lowest reading since June 2009 when the PMI(R) registered 45.8 percent. And a measure of new orders, a barometer of future output, increased to 49.2 from 48.9. The employment gauge, meanwhile, dropped 3.2 points to 48.1% in December. Any readings that falls below fifty indicate contraction and more than fifty signals an expansion.

The year ended on a down note, and prospects for the first quarter of 2016 don’t look a whole lot brighter, with projections from the United States Manufacturing PMI forecast showing a bump up from 51.2 actual PMI at the end of December 2015 to 53 in Q1/2016, with a drop back down to 51.4 in Q2/2016; back to 53.8 in Q3/2016; and continuing flat at 53.64 in Q4/2016. Moreover, the sector continues to contend with the protracted slump in energy prices which is weighing on energy related investment and hindering demand for drilling equipment and other heavy machinery.

Several executives at companies surveyed by the ISM blamed low oil prices for weak sales.

“Because of the 18 months’ positive growth and the warm weather in November, a slip concerns me a bit”, he said. A New Orders Index above 52.1 percent, over time, is generally consistent with an increase in the Census Bureau’s series on manufacturing orders (in constant 2000 dollars). The index rose to 51 from 47.5 in November.

The measure of export orders showed foreign demand climbed surprisingly last month for the first time in eight months, signalling the worst may be over.

But the bigger challenge to the PMI is raw materials inventories, which were up 0.5 percent to 43.5, said Holcomb.

“Inventories were planned down to this level in order to close the books at yearend with as low numbers as practical”, explains Holcomb. This is the lowest reading since the Prices Index registered 32 percent in April 2009. “After all, the Fed based liftoff – and will continue to base subsequent rate hikes – on expectations rather than current conditions, which leaves the potential for a significant disconnect between what the USA economy can withstand and what the Fed intends to deliver”.

China’s deceleration has been hugely disruptive for countries that have long exported commodities such as oil, copper and other metals to the Chinese market.