November manufacturing activity takes a step back, reports ISM

While staving off contraction in the previous four months, manufacturing in November did not grow, according to the most recent edition of the Institute for Supply Management’s (ISM) Manufacturing Report on Business.

The PMI, the ISM’s index to measure growth, was 48.6 (50 or higher indicates growth) in November, down 1.5 percent from October, contracting for the first time since November 2012 and at its lowest level since June 2009, snapping a streak of 36 months of growth, while the overall economy showed growth for the 78th month in a row. The current PMI is 3.3 percent below the 12-month average of 51.9 and is at its lowest level during that period.

Three of the report’s four key metrics, which includes the PMI, were down in November. Employment was the lone metric showing growth, rising 3.7 percent to 51.3. Production fell 3.7 percent to 49.2, contracting for the first time since August 2012. And new orders,
often cited as the engine that drives manufacturing, dipped 1.5 percent to 48.9, halting a growth streak of 35 months and at its lowest level since November 2012.

Of the 18 manufacturing sectors tracked by the ISM, five grew in November, including food, beverage, and tobacco products and transportation equipment.

Like in past months, comments submitted to the report by ISM member respondents were mixed depending on industry.

A machinery respondent said that the downturn in China and European markets is having a negative impact on business, and a computer and electronic products respondent said bookings and new orders are lower than expected. A transportation equipment respondent said business remains good.

Brad Holcomb, chair of the ISM Manufacturing Survey Business Committee said that even though the PMI dipped below 50 for the first time since the recession ended, the average year-to-date PMI through November for both this year and 2012 was nearly identical.

“In 2012, things bounced back in December and then went on to have a good year in 2013 and an even better year in 2014,” said Holcomb. “That is not to say history will repeat itself….but cycles are interesting and important. There were different issues back then than now, but we are hopeful December will come in above 50.”

The declines in PMI and new orders represent what Holcomb called a pause in the action. What is bringing down the PMI the most, he said, was inventories, which fell 3.5 percent in November to 43.0.

“Inventories are being worked off because of the tentativeness of new orders but also it is common practice to reduce inventories at year-end so businesses are not sitting on inventory when the books are closed,” he said. “It is pretty normal stuff and does not show up in our customers’ inventories (down 0.5 percent to 50.5 in November), but anything above 50 is still too high so there is a propensity among customers to hold off on new orders and work off their inventories as well.”

The 3.7 percent decline in production to 49.2 is a byproduct of new orders that has held backlog of orders (up 0.5 percent to 43.0) constant, with a high focus remaining on new orders to drive manufacturing growth, explained Holcomb.

A possible bright spot moving ahead is the strong 3.7 percent improvement for employment, which Holcomb suggested could mean that new order books are looking strong going forward.

When asked about the impact of a strong U.S. dollar on manufacturing output, Holcomb said there are two different takeaways to consider.

“The negative part is that exports of finished goods products are more expensive, but it costs less in terms of imported raw materials,” he said. “On balance, we import more than we export so people forget about that.”