The Institute for Supply
Management‘s (ISM) monthly sentiment survey of U.S. manufacturers reflected a slower rate
of contraction in the sector during December. The
Concurrent activity in the services sector -- which accounts for 80% of the economy and 90% of employment -- decelerated (-2.1PP, to 50.6%). Employment (-7.4PP), inventory sentiment (-6.9PP), and inventories (-5.8PP) exhibited the largest changes.
Respondent
comments included the following –
Wood
Products. “Higher financing costs
have diminished demand for residential investment. Customers are delaying a
portion of their plans until borrowing costs are reduced. We are impacted with
reduced new orders, diminished backlog of orders and uncertain short-term demand
for products and services.”
Construction. “Congestion at the Panama Canal is expected to
continue for the next several months. The effect of this is rerouting marine
cargoes at the expense of cost and schedule.”
Changes
in S&P Global‘s
headline index value for manufacturing declined (for a faster rate of
contraction) whereas services increased (although still only barely in
expansion). Details from S&P Global’s surveys follow --
Manufacturing. US manufacturing performance declines at sharper
pace as demand conditions weaken.
Key findings:
- Renewed contraction in output as orders fall at sharper pace
- Rates of inflation pick up
- Joint-fastest drop in employment since June 2020
Services. Service sector expansion picks up, but demand
conditions remain historically subdued.
Key findings:
- Fastest upturn in new business since June spurs rise in activity
- Employment growth joint-quickest in six months
- Price pressures intensify but charges rise at slower pace
Commentary
by Chris Williamson, S&P Global’s chief business economist --
Manufacturing. “US manufacturers ended the year on a sour note,
according to S&P Global’s PMI survey. Output fell at the fastest rate for
six months as the recent order-book decline intensified. Manufacturing will
therefore likely have acted as a drag on the economy in the fourth quarter.
“The
slowdown is spreading to the labor market. Payrolls were cut for a third month
running as increasing numbers of firms grew concerned about the development of
excess operating capacity. The fourth quarter has consequently seen factories
reduce employment at a pace not seen since 2009 barring only the early pandemic
lockdown months.
“With
factories also cutting back sharply on their purchases of inputs in December,
suppliers were also less busy on average, again hinting at the development of
spare capacity.
“While
there was some uplift in the rate of both raw material and factory gate selling
price inflation, firms’ costs notably continued to rise at a pace below the
survey’s long-run average to hint at historically subdued industrial price
pressures.
“Given
current order book trends, the overall picture from the survey is one of supply
exceeding demand for many goods, which points to downside risks to production,
employment and prices as we head into 2024. Potential supply chain disruptions
need to be monitored, however, notably in terms of shipping, as the survey has
clearly demonstrated in the past how supply chain tensions quickly feed through
to higher prices.”
Services. “Some New Year cheer is provided by the PMI signaling
an acceleration of growth in the vast services economy, which reported its
largest rise in output for five months in December. The improvement overshadows
a downturn recorded in manufacturing to indicate that the overall pace of US
economic growth likely accelerated slightly at the end of the year.
“Some
support to financial services in particular is coming from the recent loosening
of financial conditions amid growing hopes of interest rate cuts in 2024.
Growth nevertheless remains subdued by standards seen over the spring and
summer, with the struggling manufacturing sector dampening demand for business-to-business
services and consumers remaining far less inclined to spend on luxuries such as
travel and recreation than earlier in the year.
“The
more challenging demand environment has dampened firms’ pricing power,
squeezing service sector selling price inflation to the lowest for over three
years on average during the fourth quarter. With sticky service sector
inflation being a key area of concern among Fed policymakers, the slower rate
of price increase in December is welcome news.”
The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.
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