November manufacturing output remains in contraction territory

November manufacturing output remained below par for the fourth consecutive month, according to data issued by the Institute for Supply Management (ISM), in its Manufacturing Report on Business, today.

The report’s key metric, the PMI, slipped 0.2% to 48.1 in November (a reading of 50 or higher indicates growth), following readings of 49.1, 47.8, and 48.3, in August, September, and October, respectively. The November PMI marks the fourth consecutive month the PMI has come in below 50, while the overall economy grew in October for the 127th consecutive month. The November PMI is 3.7% below the 12-month average of 51.8. September’s 47.8 is the lowest reading during that span and is the lowest PMI reading going back to June 2009, when it came it at 46.3.

ISM reported that five of the 18 manufacturing sectors it tracks saw growth in November, including: Apparel, Leather & Allied Products; Food, Beverage & Tobacco Products; Paper Products; Miscellaneous Manufacturing; and Computer & Electronic Products. And the 13 industries reporting contraction in November are: Wood Products; Printing & Related Support Activities; Furniture & Related Products; Textile Mills; Fabricated Metal Products; Transportation Equipment; Primary Metals; Plastics & Rubber Products; Petroleum & Coal Products; Nonmetallic Mineral Products; Machinery; Chemical Products; and Electrical Equipment, Appliances & Components.

The majority of the report’s key metrics, including the PMI, were down in November.

New orders, which are commonly referred to as the engine that drives manufacturing, slipped 1.9% to 47.2, contracting for the fourth consecutive month. The last four months of contraction were preceded by 43 consecutive months over which time it had a cumulative average of 58.5. ISM said that five of the 18 manufacturing sectors it tracks grew in November.

Production, at 49.1, saw a 2.9% annual gain, while still contracting for the fourth straight month after 35 months of growth, with seven manufacturing sectors reporting growth for the month. Employment was off 1.1% to 46.6, contracting for the fourth month in a row. Supplier deliveries, at 52.0 (a reading above 50 indicates contraction), marked a 2.5 upward difference compared to October. Prior to October, supplier deliveries saw a 43-month stretch of slowing. 

November inventories, at 45.5, decreased 3.4%, after a 2% October gain, which followed four months of declines, and customer inventories, at 45.0, were down 2.8 and low for the 38th consecutive month. Backlog of orders, at 43.0, fell 1.1%, down for the seventh consecutive month. New export orders, at 47.9, were off 2.5%, following October’s 9.4% gain, which halted three months of declines. And imports, at 48.3, rose 3%, contracting for the fifth straight month.

As in past months, comments in the report submitted by ISM member respondents were consistent, with commentary on slowing business conditions and ongoing trade tension between the United States and China.

A food, beverage, and tobacco products respondent said that the economy is holding up, and business is staying constant, with the same challenges, including foreign exchange, trade uncertainty, and trend changes (like the sugar reduction), remaining intact. A wood products respondent pointed to a further downshift in markets and the continued confusion surrounding China trade keeping export markets on edge.

“The PMI remains in that 48-to-52 range, with things still on the low end and also the fourth straight month of contraction and the ninth straight month of contraction and slowing,” said Tim Fiore, ISM Manufacturing Business Survey Committee Chair Tim Fiore, in an interview. “It is a demand story, I think. The new orders number is consistent with October and is supported by a lack of new export orders, with those numbers sort of travelling in parallel here. The level of the backlog of orders contraction also remains pretty strong, and we are starting to run out of backlog. The gain in production reflected the fact that the backlog is being consumed to close on the fiscal year. And the inventory number dropping again is clearly indicative of trying to maintain an inventory level consistent with new orders and backlog.”

With prices––up 1.2% to 46.7 and decreasing for the sixth straight month––remaining weak, Fiore said that creates a “wait and see” attitude from a buyer by waiting as long as needed to get the right price at the end of the year, which he said may be contributing to the new order drop-off. And despite the uptick in the November supplier delivery tally, he said the difference between October and November was not much, with suppliers reducing lead times, which means they can hold out for last minute order replacements at reduced prices and meet various price goals for the year.

As for the impact of trade tension and tariffs on the manufacturing sector, Fiore continued to ongoing uncertainty, with President Trump yesterday saying, via Twitter, that the U.S. will reinstate tariffs on all steel and aluminum shipped into the U.S. from Brazil and Argentina, with currency manipulation as the driver for this action.

“This decision is obviously judgmental, and the U.S. has never really called anything on it before,” he said. “It came out of nowhere…there wasn’t even any indication this was being discussed. It supports the fact that there will not be any kind of business stability until this administration goes into the next administration or does something [else]. As far as Chinese tariffs, any deal is most likely going to mean more agricultural tariffs in return for not putting tariffs on consumer end items, which don’t really impact manufacturing. It won’t impact demand as much as it will impact pricing at the consumer level in the U.S.”

Manufacturing, at its current rate of output, equates to a GDP level between 1.5-to-1.8, according to Fiore.