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U.S. Manufacturing contracts for the ninth consecutive month

AInvestFriday, Jan 3, 2025 12:45 pm ET
2min read

This PMI report from the Institute for Supply Management (ISM) indicates that the U.S. manufacturing sector contracted for the ninth consecutive month in December 2024, with the Manufacturing PMI registering 49.3 percent, a slight improvement from November's 48.4 percent. While any reading below 50 percent signifies contraction, the marginal increase suggests a slowing pace of decline. This marks the 25th time in the last 26 months that manufacturing has contracted, highlighting a persistent weakness in the sector.

Despite the overall contraction, some positive signs emerged. The New Orders Index expanded for the second consecutive month, reaching 52.5 percent, up from 50.4 percent in November. This suggests improving demand for manufactured goods. The Production Index also returned to expansion territory at 50.3 percent after six months of contraction, indicating that factories are beginning to increase output. However, the Employment Index continued to contract, falling to 45.3 percent, as companies continued to reduce headcounts.

The Prices Index remained in expansion territory, rising to 52.5 percent, indicating continued upward pressure on raw material prices. This could be a concern for businesses facing rising input costs while demand remains somewhat uncertain. The Backlog of Orders Index, while still in contraction, improved to 45.9 percent, suggesting a slower rate of decline in order backlogs. Supplier deliveries marginally slowed, with the index at 50.1 percent, which is typical as demand increases. Inventories continued to contract, signaling that companies are still managing their stock levels cautiously.

The report also provides insights into export and import activity. The New Export Orders Index registered an "unchanged" reading of 50 percent, indicating stable export demand. The Imports Index remained in contraction territory at 49.7 percent, suggesting a continued decline in import volumes. Customer inventories were considered “too low” suggesting potential future demand. The report also included commentary from survey respondents, indicating a mix of experiences across different industries, with some reporting softening sales and others citing capacity constraints due to labor shortages.

Regarding economic trends, the report presents a mixed picture. While the overall economy has continued to expand for 56 months, the persistent contraction in manufacturing raises concerns about the strength and breadth of economic growth. The employment contraction in manufacturing is a negative sign for the labor market, although the report suggests this may be due to end-of-year adjustments and may not persist. The continued increase in prices is a potential inflationary pressure, though the rate of increase is described as marginal.

The combination of contracting employment and rising prices raises the specter of stagflation, a period of slow economic growth coupled with high inflation. While the report does not definitively point to stagflation, the trends warrant close monitoring. The fact that new orders are growing and production is stabilizing is a good sign. However, the continued job losses and rising prices are not.

This economic data is crucial for the Federal Reserve as it considers its next monetary policy actions. The Fed is closely watching indicators like these to assess the state of the economy and determine whether to raise, lower, or maintain interest rates. The mixed signals in this report make the Fed's decision more complex. The Fed must balance the need to control inflation with the risk of further slowing economic growth and potentially triggering a recession. The data shows some positive signs of growth, but there are also some concerns about the labor market and inflation. The Fed will need to carefully weigh these factors as it makes its next policy decision.

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