U.S. manufacturing activity contracts at slower rate in December

Economic activity in the U.S. manufacturing sector contracted in December at a slower rate than in November, according to the Institute for Supply Management (ISM). December was the 14th consecutive month the activity contracted.

On Wednesday (Jan. 3), the ISM released the December Manufacturing ISM Report on Business that shows the manufacturing purchasing managers’ index (PMI) rose by 0.7 percentage points to 47.4% in December from November. A reading below 50% indicates manufacturing sector activity is contracting.

According to the report, new orders and backlogs decreased in December. Production increased. Employment declined. Supplier deliveries increased. Raw materials inventories fell. Customers’ inventories were too low. Prices fell. Exports and imports declined.

“The U.S. manufacturing sector continued to contract, but at a slightly slower rate in December as compared to November,” said Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee. “Companies are still managing outputs appropriately as order softness continues.”

The primary metals industry was the only manufacturing industry to report growth in December.

“Demand remains soft, and production execution is stable compared to November, as panelists’ companies continue to manage outputs, material inputs and labor costs,” Fiore said. “Suppliers continue to have capacity.”

In the report, several respondents noted an increase in demand and were optimistic about 2024.

A respondent in the computer and electronic products industry said “anticipation of the U.S. Federal Reserve holding off on interest-rate changes will encourage more companies to spend on capital investments again. As budgets get approval after the start of the calendar year, this should help drive investment and increase manufacturing activity once again.”

In the chemical products industry, a respondent said “overall, order intake has picked up over the last quarter, and a backlog of projects is beginning to accumulate.” A respondent in the transportation equipment industry said “demand is up across the board. We are starting to see back orders grow again.”

A respondent in the food, beverage and tobacco products industry said “commodity costs are decreasing. Supply is readily available, and customers are still ordering to last year’s volumes.”
In the machinery industry, a respondent said “business is slowing. Finished goods inventories are growing.”

A respondent in the fabricated metal products industry is “forecasting a somewhat strong year for 2024. We’re currently mildly optimistic for how next year will play out.” In the primary metals industry, a respondent reported increasing demand from U.S. automotive manufacturers after the United Auto Workers strike.

“Looking at a very strong first quarter of 2024,” the respondent said.

A respondent in the wood products industry said “higher financing costs have diminished demand for residential investment. Customers are delaying a portion of their plans until borrowing costs are reduced. We are impacted with reduced new orders, diminished backlog of orders and uncertain short-term demand for products and services.”

In the electrical equipment, appliances and components industry, a respondent said 2023 was ending like 2022, but 2023 “was more erratic. Working to restore inventory position to ensure we have appropriate safety stock.”

A respondent in the miscellaneous manufacturing industry said “business conditions are good. Sales and production are tracking in accordance with forecasts.”