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January 3, 2019 Blog 1 min read
Slower growth in new orders and production weighed on manufacturing in December according to the ISM Manufacturing Index
January ISM ChartManufacturing activity in the U.S. slowed precipitously last month, as a sharp decline in new order growth and production weighed on activity.

The ISM Manufacturing Index fell sharply to 54.1 in December, falling well short of expectations of a reading of 57.5. That represented the lowest reading in the Index since late 2016. Uncertainty around the degree of weakening in the global economy and signs of a slowdown in the U.S. weighed on activity, as a much more cautionary outlook on the economy and disruptions in global trade were felt across the sector.

While still expanding, the pace of increase in new factory orders slowed considerably. The New Orders Index plunged to 51.1 from 62.1 in November, particularly noteworthy given its value as a leading indicator.

The result comes on the heels of surprisingly weak results in a series for Federal Reserve regional manufacturing indexes. In December, manufacturing in five regions contracted outright – the first time that has happened since 2016.

It’s clear from a broad swathe of data that the pace of economic growth has downshifted, creating a headwind to the cyclically sensitive manufacturing sector, but there is more to the story.

Uncertainty surrounding trade policy remains a significant concern for manufacturers as talks between both China and U.S. move towards the 90-day deadline of March 1, 2019. Following that date, an additional 25% tariff would be imposed on nearly $200 billion in Chinese goods. Higher tariffs would further exacerbate already stressed supply chains. Still, the weakness wasn’t solely attributable to slowing demand, as tight labor market conditions have made it difficult to hire, further crimping the ability of many manufacturers to expand production.

When taken in conjunction with other economic indicators, the ISM manufacturing index points to an environment that is not as robust as in recent quarters. That was widely expected; the degree of the slowdown was not. Even so, the manufacturing sector is still expanding and is far from recessionary territory.
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