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US Manufacturing Sputters Under Strong Dollar

Nov. 2, 2015
The PMI drops again to 50.1, its fourth straight decline and its lowest point in almost two and a half years, though analysts remain optimistic about modest growth in 2016 and 2017.

WASHINGTON, D.C. — Under pressure from the strong dollar that makes exports more costly, American manufacturing continued to grow in October — but just barely, according to a private survey.

The Institute for Supply Management’s purchasing managers index fell to 50.1 in October, the lowest reading since May 2013, from 50.2 in September. That marked the fourth straight month of declines in PMI, bringing it almost to the 50 dividing line between growth and contraction.

Manufacturing has been a long-running weak spot in the U.S. economy, which is dominated by the services sector. The October PMI number was slightly better than the flat reading expected, and details of the report revealed some positive signs.

There was a pick-up in growth in new orders, with the index jumping 2.8 points to 52.9. Production also grew at a faster pace. But employment contracted sharply and the backlog of orders continued to shrink. New export orders fell for the fifth month in a row.

Still, the index has been at 50.1 or lower just 26% of the time during the last quarter of a century, according to Daniel J. Meckstroth, chief economist for the MAPI Foundation, “so activity is abnormally weak.”

“An inventory problem is evident in the report, as both firms and their customers are reducing inventory,” Meckstroth said. “This drawdown is a symptom of slow production growth and the deflation that is rampant within the goods-producing industries. Falling prices create a financial loss on inventory held, so the incentive is to lower inventory as quickly as possible. Deflation in commodity prices is good for consumers but it causes declining investment spending in extraction and processing industries.”

As written about previously, imports are falling faster than exports. The faster decline in imports, Meckstroth said, “suggests an improvement in the trade deficit. It is important to remember that while the oil, food, and metal commodity price collapses will lower the dollar value of the trade deficit, the inflation-adjusted trade deficit, which reflects physical volume, will worsen. Foreign trade will be a major drag on manufacturing activity and the general economy this year and over the next two years.”

Respondents in the ISM survey indicated concern about the strong dollar. “Currency exchange is having a large impact on business results,” said one manager in the chemical products sector.

Another worry was the continuing low price of oil, which has led energy companies to scale back production, pushing a slowdown in related industries.

“Energy market continues to struggle. Effects are beginning to bleed into other areas,” said a respondent in the computer and electronic products industry.

“The October ISM report implies that manufacturing production is going through an inventory adjustment,” Meckstroth said. “We believe that there is moderate, sustainable growth in consumer spending that will drive modest and accelerating economic and manufacturing production growth in 2016 and 2017.

“The shocks this year — the rapid appreciation of the dollar, collapsing commodity prices, severe winter weather, West Coast port strike, de-leveraging, etc. — are not likely to repeat again in the coming two years.”

Copyright Agence France-Presse, 2015

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