February 3, 2020
The Institute for Supply Management’s index of conditions in the manufacturing sector jumped 3.1 points in January to 50.9 after having fallen 0.3 point in December. this is the first reading above 50.0 since July of last year.. Clearly, the trade war between the U.S. and China has taken a toll on manufacturers, but the January reading suggests the tariffs impact is largely behind us. The PMI has fallen fairly steadily since reaching a peak of 60.8 in August of last year. The PMI for January of 50.9, if sustained, corresponds to a 2.1% increase in GDP growth. The earlier numbers were consistent with GDP growth between 4.0-4.5%. This is clearly indicative of significant softness in the manufacturing sector. However, a couple of things. First this index has fallen below 50 on a couple of occasions in recent years — two months in late 2012, and then five months in late 2015-early 2016 — and the economy kept plodding along. Make no mistake, this softness in the manufacturing sector is a brake on the pace of economic activity, but it is not even remotely close to a level that would point towards an impending recession. Second, keep in mind that the manufacturing sector is only 11% of the economy. Factory employment makes up 8.5% of payroll employment, and in the first quarter made up 11.3% of GDP. Service sector employment, by contrast, is almost 2/3 of the economy and it is expanding at about a 2.5% pace. Compare the ISM index for manufacturing vs. non-manufacturing. They are going in entirely different directions but the January increase in the manufacturing sector is encouraging.
It is important to recognize that the overall index is the compilation of a number of different components — production, orders, employment, supplier deliveries, inventories, prices, the backlog of orders, exports, and imports.
The orders component jumped 4.4 points in January to 52.0 after having risen 0.4 point point in December. An orders index above 52.4 is, over time, consistent with an increase in the Census Bureau’s series on factory orders.
The earlier weakness in orders overall is, to a large extent, the result of slower growth overseas. But export orders jumped 6.0 points in January to 53.3 which is the highest reading since September 2019.
The production component surged 9.5 points in January to 54.3 after having fallen 4.3 points in December. This is the highest reading for this category since March of last year.
The employment index rose 1.4 points in January to 46.6 after having fallen fell 1.1 points in December. Employment still declined in January, but at a slightly slower pace than in other recent months.
The backlog of orders rose 2.4 points in January to 45.7 after having risen 0.2 point in December.
The prices paid component rose 1.6 points in January to 53.3 after having jumped 5.0 points in December. A price index level above 52.5 is consistent with an increase in the BLS producer prices index for intermediate materials.
We believe that the economy is expanding at a moderate pace. We expect GDP growth of 2.4% in 2020. During that period of time the manufacturing sector will continue to be relatively flat.