Manufacturing Activity Plummets, Shrinking in U.S.

Manufacturing activity has fallen sharply, and now total manufacturing activity continues to shrink in the United States.

Manufacturing activity has fallen sharply, and now total manufacturing activity continues to shrink in the United States.

A new report by the Institute for Supply Management shows that manufacturers have decreased their inventories, suppliers have slowed deliveries, and businesses have reduced orders and production overall. In total, the ISM’s Purchasing Manager Index fell from 50.1 in October to 48.6 in November, a decline of 1.5 percentage points that results from weakening activity. Any reading under 50 indicates contraction, so the new PMI figure indicates that the manufacturing sector will continue to decline in the United States.

Despite the weakening in manufacturing, the report showed some strength in certain pockets of the sector. For one, employment has grown slightly, as the Employment Index rose 3.7 percentage points to 51.3 from October to November.

Eighteen manufacturing industries reported, with 13 of them reporting a contraction in market conditions. In the energy sector, some survey participants noted that a decline in oil prices has begun to impact energy production across the market. “The oil and gas industry is realizing, that [the] ‘low’ oil prices are now the new reality with expectations to continue at this level for some time,” the report quoted a respondent as saying.

In November, all measurements saw contraction except employment, supplier deliveries, and customer inventories; however, of these, only employment showed significant acceleration.

Prices constituted the weakest of the measurements tracked by the ISM report, as they fell to a reading of 35.5, a decline of 3.5 that experts believe will accelerate. Prices have fallen for 13 months, according to the ISM.

Analyst Responses

Analyst responses to the ISM data remain negative, with some indicating that the weakness in manufacturing, which breaks from many months of expansion and falls far below expectations, may indicate weaker demand in the United States than they had previously expected.

One investment bank note on the ISM report pointed out that tough comparisons on the U.S. dollar from a year ago have pressured manufacturing growth, and that continued appreciation in the U.S. dollar has made exports substantially less competitive in a global market. Despite an attempt to offset this with broader free trade agreements like the Trans-Pacific Policy, manufacturers in the U.S. will need to rely on domestic demand to improve capacity utilization in factories and increase manufacturing activity.

Meanwhile, another analyst commented that low rising wages and a rising portion of income devoted to debt servicing, combined with thinning margins for many small businesses, has limited aggregate demand in the United States. Additionally, higher debt loads for small and middle-sized businesses has pressured expansionary activity, which also sustains pressure by limited signs of growing consumer demand thanks to rising wages and growing purchasing power. The note points to declining personal consumption expenditure (PCE) figure, which has fallen throughout 2014 and 2015 to come near its lowest point since 2009.