The Economy

Manufacturing Activity Contracts Again

A closely-followed factory gauge reaches its lowest level in more than six years as low commodity prices continue to limit orders.
Matthew HellerJanuary 5, 2016
Manufacturing Activity Contracts Again

Economic activity in the U.S. manufacturing sector contracted in December for the second consecutive month, sending the Institute for Supply Management’s factory gauge to its lowest level in more than six years.

The institute reported that its Purchasing Managers’ Index (PMI) fell to 48.2 from 48.6 a month earlier. Readings lower than 50 indicate contraction. The median forecast in a Bloomberg survey of 72 economists was 49.

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According to Bloomberg, struggling overseas demand and declines in commodity prices continue to limit orders for U.S. manufacturers. “As the impact of the strong dollar and weak global demand continues to play out, it’s no surprise that we’re seeing these kinds of sub-par prints in manufacturing,” Millan Mulraine, deputy head of U.S. research and strategy at TD Securities, told Bloomberg.

machineryman“As low energy prices continue to have an impact on the energy sector, then we’re likely to see a weak showing in manufacturing for a long time,” he added.

Low oil prices drag down oil and gas exploration; at the same time, they are a positive for the petrochemical industry.

Ten of the 18 industries surveyed by ISM contracted last month, led by clothing, plastics, and machinery; six, inluding paper products and chemical products, reported growth. While the institute’s gauge of new orders improved to 49.2 last month from 48.9 in November, it still showed bookings were falling. Order backlogs thinned to the smallest in three years.

The measure of export orders showed foreign demand surprisingly climbed in December for the first time in eight months, but imports dropped at the fastest pace in more than nine years. The hiring gauge fell to 48.1 in December from 51.3 the prior month, while the production gauge improved to 49.8 from 49.2 in November.

“The past relationship between the PMI and the overall economy indicates that the average PMI for January through December [2015] (51.4%) corresponds to a 2.6% increase in real gross domestic product on an annualized basis,” Bradley Holcomb, chairman of the ISM’s factory survey, said in a news release. “In addition, if the PMI for December [2015] is annualized, it corresponds to a 1.6% increase in real GDP annually.”

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