U.S. manufacturing activity recorded a 14th consecutive monthly contraction in December as demand remained weak and manufacturers continued to manage output, material inputs, and labor costs accordingly. The Institute for Supply Management's (ISM) PMI index rose 0.7% from November to 47.4 in December, but remained below the 50% growth threshold. New orders fell 1.2% to 47.1.
Tim Fiore, chair of the ISM Manufacturing Survey Committee, said: "Although the PMI sub-index is adjusting in a more favourable direction in response to demand in the event of a rebound, we have been at a trough of 47% to 49% since September. "Although December is not usually a big month for new orders, new orders have declined. â€
The ISM Production Index rose 1.8 percentage points to 50.3 in December, breaking through the growth range. The price index was 45.2, down 4.7 percentage points from 49.9 in November. The order backlog index was 45.3%, 6 percentage points higher than the 39.3 in November. The employment index was 48.1 percent, up 2.3 percentage points from 45.8 percent in November.
The new export orders index was 49.9 percent, 3.9 percentage points higher than the 46 percent index in November. The import index remained in contraction territory at 46.4 percent, 0.2 percentage points higher than the 46.2 percent reported in November.
Fiore added: "Customer inventories are approaching 'just right' levels, with new export orders approaching 50 per cent. "Three-quarters of respondents expect orders to increase in January 2024, which is better than the 1:2 ratio we've been seeing. Manufacturers are running out of inventories due to too many orders, and by March we could see the index exceed 50%. â€
Fiore said there are a number of variables that could affect this optimism, including changes in interest rates and inflation. The PMI data was collected before the Fed discussed a rate cut in 2024.
A tech executive told ISM: "The expectation that the Fed will delay interest rate adjustments will encourage more companies to recapitalize." "With the budget approved after the start of the year, this should help drive investment and increase manufacturing activity again. â€
"[We] ended a year similar to 2022, however, 2023 has been more volatile," said a manager from the electrical equipment, appliances and components industry, "and efforts are underway to restore inventory to ensure we have proper safety stocks." â€
The electronics industry is struggling
ISM's six major manufacturing industries, including computers and electronics, did not grow in December. Distributors said on the third-quarter earnings call that electronic component inventories in the supply chain remain high and may take a few more quarters to deplete.
IPC reported that confidence in the electronics sector fell in December, with new orders, shipments and inventory indices all falling. Only the capacity utilization index remained stable. According to the trade association's December 2023 Global Electronics Supply Chain Confidence Report, overall demand sentiment remains in positive territory, despite the decline.
IPC added that while material costs continue to improve, labour costs remain a pain point. Three-fifths (58%) of electronics manufacturers say they are currently facing rising labor costs. Companies that are members of the ISM team continued to take action to reduce headcount in December, mainly through layoffs.
Other data in the IPC report includes:
- The new orders index fell by 4 points in December after rising 5 points in November 2023;
- The labor cost index fell by 2 points to 128, the lowest level of the indicator;
- Margins are expected to improve, but hiring ease and backlog may remain challenging.
Over the next six months, electronics manufacturers expect labor and material costs to continue to increase, while orders and shipments will also increase significantly, IPC concluded. Overall, the manufacturing sector is still able to cope when demand growth becomes a reality, according to the ISM.