Manufacturing activity slowed again in December
Manufacturing activity declined again in December as new orders slowed further and production began to contract. The Institute for Supply Management’s manufacturing index dipped to 48.4 last month — its lowest point since May 2020, when the economy was just starting to emerge from recession.
The continuing slowdown in manufacturing illustrates two key macro trends for the economy in 2022: the transition of consumer spending at the margins away from goods and toward services and the notable slowdown in the pace of spending growth.
Consumer spending on “stuff” surged coming out of the 2020 recession while the service sector remained depressed. With many Americans unwilling or unable to travel and spending more time than ever at home, household savings swelled. That stockpile of cash was eventually unleashed, fueling a spending binge on goods that benefited the nation’s manufacturers.
Demand hasn’t collapsed, but consumers are still in the process of reverting to their pre-pandemic lifestyles and corresponding spending habits. At the margins at least, incremental dollars are still moving back into spending on travel and other activities that consumers denied themselves to varying degrees in recent years. Inflation also remains a challenge for consumers, who are feeling the pinch of higher prices and wage gains that aren’t always keeping pace.
As a leading indicator for the manufacturing sector, the decline in new orders doesn’t bode well. About half of survey respondents indicated that they saw little change in new order activity in December. Still, that’s down 10 percentage points from November, and those that saw a change tipped heavily toward a reduction in orders. Nearly twice as many respondents saw a decline compared to those that experienced a pickup in orders.
If there’s good news to be found, it’s on the inflation front, as underlying commodity prices contracted again in December. The combination of falling demand, a rebalancing in inventories, and continued easing of supply chain frictions are providing relief from higher prices.
Certainly, the nation’s factories generally slow around the end of the year as workers take a break for the holidays. That doesn’t account for the broader slowdown that occurred in the manufacturing sector over the latter half of 2022.
Economists have been calling for recession in 2023 for some time now. If that comes to pass, it may be the most widely expected recession in memory, but one that’s a byproduct of a boom/bust cycle in fiscal and monetary stimulus that helped to lift the economy out of a severe slump and briefly supercharged growth before drying up. It also won’t bode well for the near-term outlook for the nation’s factories.
The bottom line? Manufacturing activity has been in a relatively steady decline over the past year, a trend that appears likely to continue into 2023.
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