U.S. ISM Manufacturing Index (December 2019)

Fotios Raptis, Senior Economist | 416-982-2556

Date Published: January 3, 2020

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Manufacturing sentiment worsens again in December

  • The ISM manufacturing index ticked lower to 47.2 in December from 48.1 in November, missing the consensus expectation for an improvement to 49. The headline composite index has now signaled contraction for five consecutive months.
  • Just two of the five subcomponents of the headline composite index improved in the month, with all but one (supplier deliveries) continuing to signal contraction. The largest improvement was in supplier deliveries (+2.6 to 54.6), followed by inventories (+1 to 46.5). In contrast, production declined the most (-5.9 to 43.2 – the lowest since April 2009), followed by employment (-1.5 to 45.1) and new orders (-0.4 to 46.8). 
  • Prices paid rose strongly in December (+5 to 51.7), signaling increasing price pressures for the first time since May. Higher prices appear to be largely a result of price increases for steel, copper, and aluminum products.
  • The new export orders index signaled a deeper contraction in December (-0.6 to 47.3), while import orders improved, but still remained in contraction (+0.5 to 48.8).
  • Of the eighteen manufacturing industries, three reported growth in December, down from five in November. Fifteen industries reported a contraction in the month (previously thirteen).

Key Implications

  • Manufacturing sentiment worsened unexpectedly in December, but the narrative remains unchanged. Manufacturing output is in the doldrums with little hope for a quick recovery. Persistently weak new orders and employment do not bode well for a broad rebound in production in the coming months. Global trade policy uncertainty remains the greatest concern across industries, and some industries are blaming weaker-than-expected foreign demand as the reason for cutting back production in December.
  • A similar story was observed for global manufacturing sentiment in December, which barely registered expansion in the month. Europe remains ground zero for the global manufacturing slump, while sentiment in emerging Asia continued to gradually improve. The recent improvement in emerging Asia may reflect optimism about the Phase 1 trade deal between the U.S. and China that is expected to become official mid-month. 
  • A Phase 1 deal may help de-escalate trade-related uncertainty a touch, but trade tensions between the U.S. and its major trading partners are likely to remain elevated this year. As such, trade policy uncertainty should continue to weigh on American manufacturers in the months ahead. Other factors likely to continue to impede domestic manufacturing output include weak foreign demand, a high dollar, and less robust domestic demand.