Manufacturing Activity 'Abnormally Weak' but Exports Growing

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“The Institute for Supply Management (ISM) reports that the December 2015 index was 48.2%, down slightly from 48.6% in November. With the dividing line between growth and decline at 50%, the December report indicates that manufacturing activity is declining,” noted Meckstroth. “Only 15% of the time in the last 25 years has the PMI been at or less than 48.2%, so activity is abnormally weak but not at recession levels (about 43%). The only good news in the report is that exports are growing.

“A competing index from Markit released today puts their index at 51.2% in December, down from 52.8% in November,” he added. “The Markit survey finds manufacturing output continuing to expand at a slow rate rather than declining.

“The inventory problem in the goods side of the economy is evident in the ISM report. Manufacturers have reduced inventories for the sixth month in a row and the pace of the liquidation accelerated recently,” Meckstroth explained. “The inventory index was in the 43% range in both November and December from 46.5% in October and the 49% range from July to September. The inventory drawdown is the cause of the decline seen in the last two months. Rampant deflation in commodity prices (particularly oil) has pushed down overall supply chain prices within the goods-producing industries.

“The trade indicators in the ISM suggest that exports were rising faster than imports in December,” Meckstroth continued. “Nevertheless, the collapse in oil and natural gas prices makes the dollar value of imports fall but the low prices encourage rising physical consumption of foreign-made products. Foreign trade will be a major drag on manufacturing activity and the general economy this year and next.

“The December ISM report confirms that manufacturing production is going through an inventory adjustment that has dragged production down. The good news is that inventory swings are always temporary and this swing has probably already run its course,” Meckstroth concluded. “The overall economy is being driven by solid job growth and accompanying income and consumption growth. Having a solid base of moderate overall growth allows the manufacturing sector to weather this temporary soft patch. This year will not see the dollar appreciate nearly as much than last (2015), commodity prices will not collapse again, it is unlikely that there will be another severe winter, and the West Coast port strike is over. Without these shocks, manufacturing production will accelerate in early 2016.”