Manufacturing activity finishes 2015 in declining fashion, reports ISM

By Jeff Berman, Group News Editor

January 04, 2016

Manufacturing activity contracted in December for the second straight month, according to the Institute of Supply Management’s (ISM) Manufacturing Report on Business.

The PMI, the ISM’s index to measure growth, came in at 48.2 (50 or higher indicates growth) in December, which dropped 0.4 percent compared to November’s 48.6. November represented the first month since November 2012 that the PMI contracted, as well as the first declining month in a 36-month span, and December’s PMI is at its lowest level since June 2009. The current PMI is 3.2 percent below the 12-month average of 51.4. Despite the PMI’s recent declines, the ISM noted that the overall economy grew for the 79th consecutive month, according to ISM.

Two of the report’s four key metrics, which includes the PMI, were down in December. New orders, which are often cited as the engine that drives manufacturing, saw a 0.3 percent uptick to 49.2, coming off of its first decline in 35 months, as well as its lowest level since November 2012, in November 2015. Production rose 0.6 percent to 49.8 but is also in contraction mode, following November’s decline for the first time since August 2012. Employment saw a 3.2 percent drop-off at 48.1 after a 3.7 percent jump to 51.3 in November and is also contracting.

Of the 18 manufacturing sectors tracked by the ISM, six grew in December, including food, beverage, and tobacco products, printing & related support activities, textile mills, paper products, miscellaneous manufacturing, and chemical products.

Comments submitted to the report by ISM member respondents were mixed depending on industry.

A petroleum & coal products respondent noted that low oil prices are negatively impacting oil and gas exploration activities, and a chemical products respondent said that month-over-month sales were down and profitability was up.

Brad Holcomb, chair of the ISM Manufacturing Survey Business Committee, said in an interview that even though the PMI has been sub the growth benchmark of 50 in November and December, the ISM member respondents are optimistic about future growth, as evidenced in data from its Semiannual report issued last month, which called for 2016 manufacturing revenue to be up 4.1 percent compared to 2015.

“Let’s just hope this is a bottoming out,” he said. “But this is getting harder to forecast in my opinion. Last year we had bad weather, the West Coast port labor situation, low oil prices, a strong dollar, and now we have a continuation of the slowdown in China, a new geopolitical situation in the Middle East, and the Federal Reserve taking action in December. None of these things are helping, and that makes it harder to predict.”

In addressing the 3.2 percent December decline for employment, Holcomb said that the employment reading has been up and down across the 50 mark for the last few months, with manufacturing again trying to find its direction in terms of how many people to have on board, which, he said, has become trickier and trickier to forecast in the short term.

He added that the current reading of 48.1 is not a bad number, with the sector at relatively full employment levels in 2015, with a higher base to work from.

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

“This is dragging the PMI down more than any other sub-index,” said Holcomb. “It is a concerted effort on the part of manufacturing to reduce inventories and close the books at year-end with as little inventory as possible. That is not a bad thing; we just have to wait and see what type of corrections we see in January.”

Prices in December dropped 2.0 percent to 33.5, driven mainly by ongoing declines in oil and fuel, with only one commodity, dairy, up in price for the month. Supplier deliveries fell 0.3 percent to 50.3, and backlog of orders down 2.0 percent to 41.0.

Prices of raw materials continues to serve as the most interesting ongoing story, as they have declined for 14 straight months, which Holcomb explained represents deflation of raw materials.

“Nobody likes the work “deflation,” certainly not in the long term, but it seems to have had some short-term benefits in terms of opening up margins and profitability,” he said. “But as you go further out, it becomes more of a reflection of global demand overall. I would like to see it move up as we proceed into the New Year.”

Looking ahead, Holcomb said that for growth to return in earnest, a rebound in new orders needs to come in across the board, which could take at least a couple of months to get things truly moving in the right direction again.

“A return to modest growth in 2015 would be a good start without getting too carried away,” he said. “In 2015, the average PMI was 51.4, and in 2012 it was 51.7, with very similar patterns, including the last two months of the year being down. Following 2012, 2013 was 2 points better and 2014 was 2 points better than that so we have sort of been there before, but we certainly don’t know these days if history will repeat itself. There is a whole new dynamic now, with geopolitical situations creating more turmoil than we have seen in the past.”