Manufacturing conditions remained lackluster last month
The manufacturing sector’s yearlong contraction extended into November as widespread weakness across the nation’s goods-producing business continued. The ISM Manufacturing Index was unchanged at 46.7 in November, falling short of forecasts for a moderate improvement. A reading above 50 is indicative of expansion, while a reading below 50 is consistent with contraction within the sector.
The duration of the lull in activity is notable, as it coincides with continued growth in the U.S. economy more broadly. While a comparatively small piece compared to the service sector, the manufacturing sector’s heightened degree of sensitivity to cyclical factors has typically made it a meaningful signal for turning points in the economic cycle. This time appears to be different — at least thus far — a byproduct of the highly unusual nature of the post-2020 era in which spending on goods surged as the service sector was slow to recover. Although the spending binge on goods clearly ended, consumers shifted their spending focus to services, allowing the economy to push forward despite the marked slowdown in manufacturing.
The underlying factors driving the ISM index showed some divergence in November, although the key components all point to various degrees of weakness.
New orders improved moderately but continue to contract. That reduction in demand was even more pronounced for new export orders, illustrating even weaker conditions outside the United States.
Manufacturer backlogs continue to shrink, suggesting that a more pronounced slowdown in production and hiring could be coming in the near term.
In response, manufacturers are continuing to keep a close eye on payrolls and appear to be leaning further into trimming their workforce. Across the 18 industries represented, only three reported net hiring in November, compared to the nine that trimmed their payrolls. With new order growth slowing, a near-term resurgence in hiring seems unlikely.
While the current state of manufacturing is challenged, activity in the sector hasn’t fallen to a degree that’s typically associated with recession. The ISM Manufacturing index has held fairly steady in a relatively narrow, modestly contractionary range over the past year.
The silver lining in the report was good news on commodity and component prices, which have receded as global supply chain issues were resolved and demand slowed. Prices may not be falling at this point, but relative stability should provide a degree of reassurance for businesses, consumers, and policymakers.
The bottom line? The manufacturing sector is weak but hasn’t fallen off a cliff. There continues to be slippage but not at a pace typically consistent with recent recessions. A more pronounced recovery likely depends on the much-hoped-for soft landing scenario becoming a reality. Continued disinflation will be critical to enable the Fed to turn toward measured rate cuts in the coming year, avoiding two other potential near-term outcomes: higher-for-longer rates in response to inflation that refuses to retreat to 2% or aggressive rate cuts to cushion the impact of a more pronounced slowdown that risks tipping the economy into recession. Of those two, the former appears more likely than the latter, but an inability to begin to ease rates into a soft landing could increase the risk that more aggressive cuts could be needed to avoid, or in response to, a hard landing.
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