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United States PMI December 2018

United States: ISM manufacturing index logs steepest month-on-month decline since the last recession in December

The U.S. manufacturing sector tumbled sharply in December after logging a robust performance in November. The Institute for Supply Management (ISM) manufacturing index fell from 59.3 in November to 54.1 in December, reaching a 25-month low and well below analysts’ expectations of 57.9. The decline was furthermore the largest observed in a single month since October 2008, during the Great Recession. Nevertheless, the index remained above the 50-point threshold that separates expansion from contraction in the U.S. manufacturing sector, where it has been for 28 consecutive months.

The decline logged in December was broad-based, but was due primarily to a sharp fall in output growth, and an even sharper decline in the new orders index, which lost a staggering 11 points in the month and came close to the 50-point threshold. Interestingly, the new export orders index was one of the two indicators to rise slightly in December, indicating that dramatically softer demand conditions were exclusively caused by the domestic economy. Consequently, backlogs of orders—which had been rising at a robust pace so far this year—were stable in December, while both employment and import growth softened.

Looking at supply-side indicators, weaker demand in December also had an outsized impact on manufacturers’ supply chains, with signs of strain abating significantly. Indeed, supplier delivery times lengthened at a much softer pace in the month, while input cost inflation also declined markedly. Growth in input inventories meanwhile slowed, while, conversely, customers’ inventories depleted at a marginally softer pace than in November.

As in previous months, manufacturers continued to be mainly preoccupied with the state of the ongoing trade feud with China, and their responses also reflected significantly less optimistic sentiment than just a few months ago. One respondent for instance declared that “the ongoing open issues with tariffs between U.S. and China are causing longer-term concerns about costs and sourcing strategies for our manufacturing operations. We were anticipating more clarity [regarding] tariffs at the end of 2018”.

According to James Knightley, chief international economist at ING, “the plunge in the ISM manufacturing index adds to the sense of unease about the prospects for the global economy and will reinforce financial market gloom”, strongly suggesting that the Fed will abstain from raising interest rates again at least until the end of Q1.

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