December 2, 2019

The Institute for Supply Management’s index of conditions in the manufacturing sector fell 0.2 point in November to 48.1 after having risen 0.5 point in October.  Clearly, the escalating trade trade war between the U.S. and China is taking its toll on manufacturers but the fact that this index has been largely unchanged for the past three months suggests that the worst may be over.  The PMI has fallen fairly steadily since reaching a peak of 60.8 in August of last year.    The PMI for November at 48.1, if sustained, corresponds to a 1.5% 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.

Timothy R. Fiore,  Chair of the ISM’s Manufacturing Business Survey Committee indicated that “Comments from the panel were consistent with the previous month, with sentiment improving compared to October. November was the fourth consecutive month of PMI contraction, at a faster rate compared to the prior month.”

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 fell 1.9 points in November to 47.2 after having risen 1.8 points in October to 49.1 after having fallen 0.1 point in September.  “The Transportation Equipment sector had the biggest drag on the New Orders Index in November. One the top six industry sectors expanded, and five contracted,”  This clearly reflects the impact of the G.M. strike on the data.   An orders index above 52.4  is, over time, consistent with an  increase in the Census Bureau’s series on factory orders.


The weakness in orders overall is, to a large extent, the result of slower growth overseas.  Export orders fell 2.5 points in November to 47.9 after having jumped 9.4 points in October. “The index is back in positive territory, which contributed to the improvement in new orders in October. Three of the six big industry sectors expanded, and two contracted during the period. Transportation Equipment contracted strongly,”

The production component rose 2.9 points in November to 49.1 after having fallen 1.1 points in October.   “Three of the big six industry sectors expanded, and three contracted.”  A level above 51.7 is consistent with an increase in the Federal Reserve’s industrial production figure.

The employment index fell 1.1 points in November to 46.6 after having risen 1.4 points in October.  “Three of the six big industry sectors expanded, and three contracted during the period.  While the economy is currently cranking out about 170 thousand jobs per month, the factory sector accounts for only about 5 thousand of them.  Most of the jobs are coming from services and construction.  An ISM employment index above 50.8 is consistent with an increase in the Bureau of Labor Statistics data on manufacturing employment.”.

The backlog of orders declined 1.1 point in November to 43.0 after having fallen 1.0 point in October.  Backlogs continued to contract moderately. Four of the six big industry sectors’ backlogs contracted during the period,” says Fiore.

The prices paid component rose 2.9 points in November to 46.7 after having fallen 1.2 points in October. “Prices contracted in November, at a slower rate compared to October. Generally, prices continued to decline. Price stability remains elusive.”   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 both 2019 and n 2020.  During that period of time the manufacturing sector will continue to be relatively flat.

Stephen Slifer