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US Manufacturing Unexpectedly Contracts for First Time in 36 Months

The ISM PMI drops all the way to 48.6 in November, its first contraction since November 2012 and evidence that manufacturing has an inventory problem.

U.S. manufacturing activity contracted for the first time in three years in November — under pressure from falling energy prices, the stronger dollar and slowing global growth.

The Institute for Supply Management purchasing managers index for the manufacturing sector dropped to 48.6 in November from an October reading of 50.1 that was just a tick inside growth territory. The contraction, the first since November 2012, was unexpected, with analysts on average forecasting an increase to 50.4 on the index.

Activity is abnormally weak, according to Daniel J. Meckstroth, chief economist for the MAPI Foundation, with manufacturing activity registering 48.6 or lower just 17% of the time during the last quarter of a century. “The only good news in the report,” Meckstroth said, “is that employment is growing.

“This is inconsistent with the theme that manufacturing activity is declining.”

A competing Markit survey differs significantly, putting the index and 52.8, down from 54.1 in October.

“Manufacturing has an inventory problem,” Meckstroth said. “The ISM report finds firms are reducing inventory at a faster rate — an index of 43% in November compared with 46.5% in the prior month. The inventory drawdown is a symptom of slow production growth and the deflation that is rampant within the goods-producing industries. A large inventory drawdown means that firms’ demand is temporarily growing faster than production.

“The trade indicators in the ISM suggest that exports are falling faster than imports. Foreign trade will be a major drag on manufacturing activity and the general economy this year and the next two years.”

No matter the survey, the numbers raised eyebrows this morning, for plenty of reasons.

This “indicates more weakness than we expected,” wrote John E. Silvia, chief economist at Wells Fargo. Silvia also wrote that the index suggests weakness in new orders and production, with inventory correction continuing.

“The fact that the manufacturing ISM declined in November to its lowest level since June 2009, i.e. since the end of the Great Recession, is unequivocally a very bad surprise,” said Harm Bandholz, chief US economist at UniCredit Research.

But, he pointed out, manufacturing only represents about 12% of the U.S. economy and less than 10% of total employment, and the much more important services sector “has continued to do very well.”

Ten of the 18 manufacturing industries surveyed reported contraction in November, “with lower new orders, production and raw materials inventories accounting for the overall softness,” the ISM said.

New orders fell particularly hard, tumbling four points to 48.9. Production dropped 3.7 points to 49.2. Both components had been growing in October. Inventories contracted at a faster pace, while customers’ inventories fell slightly but were still considered to be too high for the fourth straight month.

“Downturn in China and European markets are negatively affecting our business,” one survey respondent in the machinery sector said.

“The oil and gas industry is realizing that ‘low’ oil prices are now the new reality with expectations to continue at this level for some time,” a purchasing manager in the sector said.

IHS Global Insight economist Michael Montgomery noted that manufacturing has been weak for some time.

“The manufacturing sector is suffering from a bad case of the blahs worldwide; some countries are firming from tepid to less tepid and others are in modest retreat, but worldwide PMI scores are hovering around 50 due to anemic global demand for goods,” Montgomery said.

Copyright Agence France-Presse, 2015

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