The Institute for Supply Management (ISM) reported today that the pace of new manufacturing orders declined in December at an unusually steep sequential rate. The decline came as supply and purchasing managers demonstrated significant caution with the threat of higher tariffs on China-made goods hanging over their heads.
The ISM monthly report on manufacturing, which is highly influential due to its near real-time glimpse of $1 trillion in corporate ordering activity, found that the “new orders” index, one of 10 categories that comprise the report, plunged 11 percentage points to 51.1 percent, a level not seen since August 2016 when the index registered a reading of 50.5 percent. A reading of 50 percent or above is considered expansionary, so this level is cautionary.
The headline Purchasing Managers Index (PMI), which is effectively a roll-up of the survey results of all 10 categories, came in at 54.1 percent, a 5.2-percentage-point drop over the November reading. Not since October 2008, considered the depths of the financial crisis and the accelerating point of the Great Recession, has the PMI dropped so steeply on a month-over-month basis.
“The manufacturing community continues to expand, but at much lower levels and at a sharp decline from November,” said Timothy R. Fiore, chair of the committee producing the monthly report.
The December data was almost uniformly subpar. In addition to a sharp drop in new orders growth, month-to-month declines were reported in production – which fell 6.3 percentage points – employment, supplier deliveries, and order backlogs. Import activity declined, while levels of exports increased but at a much slower rate, according to the survey.
Benjamin J. Hartford, transport analyst for Baird, an investment firm, said the data is consistent with pressure caused by a combination of higher U.S. interest rates, a stronger U.S. dollar, and the risk of a slowdown in industrial production during the first half of 2019. Of note to the transport sector, Hartford said, was the 5 percentage point sequential drop in the “supplier deliveries” component of the report. A lower reading indicates faster delivery times, which reflects less supply chain congestion, Hartford said. The component hit a cycle peak in June 2018, which coincided with a peak in spot-market pricing, according to Hartford. The subsequent moderation in the category trends with the leveling off of spot pricing, he added.
The two pieces of good news in the report were that the pace of price increases, which has been a persistent concern, eased to levels not seen for 18 months, and that end-customer inventory levels remain too low, an indication businesses are not burdened with excess stockpiles and could be primed to ramp up ordering if they saw clarity on the geopolitical front.
The commentary from supply and purchasing executives included in the report had an overarching message: The festering trade dispute between the U.S. and China is taking a toll on sentiment and business activity. A transportation equipment executive said customer demand “continues to decrease” due to concerns over “the economy and tariffs.” A machinery executive said the trade fight is “causing longer-term concerns about costs and sourcing strategies for our manufacturing operations. We were anticipating more clarity (on) tariffs at the end of 2018.” A computer and electronic products executive said that “growth appears to have stopped. Resources (are) still focused on re-sourcing for U.S. tariff mitigation out of China.” ISM does not identify the executives or their companies.
Following the G-20 Summit in late November in Buenos Aires, President Trump agreed to delay the January 1, 2019 deadline for raising tariffs from 10 to 25 percent on $200 billion of Chinese goods. In return, China pledged to buy more U.S. goods and to work with the U.S. over the subsequent 90 days to address Washington’s main objections to China’s business practices. The U.S. has long accused Beijing of stealing intellectual property by forcing U.S. companies to transfer critical and proprietary technologies to their Chinese partners as a condition of doing business there.
Many U.S. importers had already “pulled forward” their first quarter 2019 orders into the fourth quarter so goods could be cleared into the country ahead of the January 1 deadline. As a result, most industry executives and economists expected the ordering hangover to hit in the first quarter. ISM’s import index registered 52.7 percent in December, down from 53.6 percent in November and at its lowest level of expansion since May 2017. Import growth in December declined sequentially for the third consecutive month. ISM does not track export orders from China.
Lee Klaskow, senior analyst, transport and logistics at Bloomberg Intelligence, said the December weakness is due more to the uncertainty surrounding the outcome of the U.S.-China trade fight than to a drying up of pull-forward orders. The good news from the report, according to Klaskow, is that it “still signals an expanding manufacturing economy.”
The December report comes less than a month after ISM published its annual report in which regular respondents to its monthly surveys on manufacturing and the service sector issued bullish outlooks for 2019. Manufacturing executives said they expected a 5.7 percent “net” increase in 2019 revenues, up from a 5.1 percent increase predicted in 2018 over 2017 levels, ISM reported. Capital expenditures were predicted to rise by 6 percent in 2019, the manufacturing executives said.
Kristin Cahill, an ISM business analyst, said the December data does not alter the 2019 outlooks, noting that it represents a snapshot of one month’s activity.
(Note: This story has been updated to include supplier-delivery data and analysis)