U.S. manufacturing health continued to slide, despite the United States and China moving closer to a limited trade agreement.
The Institute for Supply Management’s (ISM) manufacturing Purchasing Managers’ Index (PMI) fell to 47.2 in December 2019. As shown in the LPL Chart of the Day, December’s reading was the lowest of the economic cycle, and its fifth straight month in contractionary territory (below 50).
Underlying details of the PMI report were also discouraging. ISM’s forward-looking gauge of new orders fell to a 10-year low, signaling weak demand may continue to weigh on manufacturing over the next few months.
“We had hoped to see some stabilization in domestic manufacturing with trade progress in sight, but Friday’s report showed the sector may take a while to bounce back,” said LPL Financial Chief Investment Strategist John Lynch. “However, we’re still hopeful that the manufacturing decline will bottom out at these levels, even if it takes some time.”
We’re still constructive on economic fundamentals, even amid manufacturing’s malaise. Manufacturing has historically been a bellwether for the economic outlook, but its role in output has shrunk. Manufacturing accounts for about 11% of gross domestic product, according to Bureau of Economic Analysis data, so it’s unlikely the sector alone will drag the rest of the economy down. ISM’s PMI has dropped below 50 three other times this cycle without a recession materializing, and other key segments of the economy still look solid.
There are also unusually circumstances to consider. Boeing Co. suspended its 737 Max airplane production on December 17, so there could have been a temporary weight on new orders and the overall PMI in December.
Manufacturing’s decline is concerning, and bouts of weakness matter for corporate profits and capital investment. We’ll be watching to see if the ISM PMI falls to the low 40s, the PMI level that has historically been associated with recessions.
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