Since April 2022, S&P Global's PMI — or purchasing managers index — has been on a slide. That means tougher operating conditions for U.S. manufacturers. December's index reading was 46.2 (seasonally adjusted), down from 47.4 in November when it dropped below the all-important level of 50 for the first time since June 2020. Fifty is the dividing line for growth (above 50) and contraction (below 50).
Last month was the fastest decline in operating conditions since May 2020, according to S&P.
The panel of about 800 purchasing managers at manufacturers that filled out the S&P questionnaire indicated that "the downturn stemmed from weak client demand, which drove faster contractions in output and new orders." Production levels also declined, according to the PMI report released on Tuesday.
The weak demand from clients was due to economic uncertainty and inflation, which ate away at the purchasing power of customers, according to the purchasing managers. The U.S. dollar's strength weighed on sales made abroad.
One effect of low demand was a downward adjustment in excess inventories that had been built up earlier in 2022. Firms drew down those stocks, especially pre-production inventories, instead of spending on inputs. Inputs "fell at the steepest rate since 2009," said Siân Jones, a senior economist at S&P Global Market Intelligence.
"Muted" domestic and foreign demand led to a slower rise in employment at manufacturers, one of the index's five components: new orders, output, employment, suppliers' delivery times, and stocks of purchases.
Respondents said lower prices for fuel, metals, and oil-related products dampened the overall upturn in operating expenses. — S&P Global Market Intelligence
Manufacturers didn't have to bulk up their workforces in December because "capacity waned and backlogs of work fell sharply," said S&P. The hiring firms did do was "largely linked to skilled hires," said Jones.
The silver lining in all this, if there is one, is that December data showed cost burdens softening — the most since July 2020. "Respondents said lower prices for fuel, metals, and oil-related products dampened the overall upturn in operating expenses," according to S&P. Selling prices to customers also slowed at the fastest pace in two years because manufacturers passed through savings in an effort to stimulate sales amid the strong dollar.
The low purchasing activity by manufacturers meant lead times for inputs were unchanged, "as supplier capacity constraints were less apparent than earlier in the year," said S&P.
"Growing uncertainty and tumbling demand suggest challenges for manufacturers will roll over into the new year," said Jones.
But a different survey found a glimmer of hope. Forty-five percent of purchasing and supply manufacturing executives expect "overall improved revenues compared to 2022," a December 2022 forecast from the Institute for Supply Chain Management found. "Executives expect a slow start to the year, however, with growth not returning until the second half," reported Manufacturing Dive in its coverage of the survey.
Executives anticipate a 5.5% net increase in overall revenues in 2023, off about four percentage points of growth from 2022.
Fifteen of eighteen manufacturing sectors project revenue increases for the year, led by plastics and rubber products; transportation equipment; and apparel, reported Manufacturing Dive.