The Institute for Supply Management (ISM) manufacturing index fell 5.2 percentage points to 54.1 in December. Markets were expecting less of a deceleration, with a move down to 57.5 from November’s 59.3 value. This marks the slowest pace of expansion in the U.S. manufacturing sector since November 2016.

All of the five subcomponents that comprise the headline figure declined in December. New orders fell 11 points to 51.1, production fell 6.3 points to 54.3, and employment fell 2.2 points to 56.2. Supplier deliveries fared no better, falling 5 points to 57.5, while inventories fell 1.7 points to 51.2.

The trade components of the report registered a slight improvement in export orders (+0.6 to 52.8), and a slight deceleration in import order growth (-0.9 to 52.7). Nevertheless, these levels remain well below those recorded at the time the U.S. administration levied tariffs on steel and aluminum imports this past March. Notably, import orders in December were growing at the slowest pace since May 2017 (52.3).

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Although volatile and not seasonally adjusted, both the decline in prices paid and the order backlog components are worth noting. Prices paid shed 5.8 points to 54.9, the slowest reported pace of price increases since June 2017. Reduced price pressures are a result of declines in aluminum and steel products, while crude oil/gas prices also fell. The backlog of new orders didn’t grow in December (-6.4 points to 50), the first time this has occurred since January 2017.

Eleven of eighteen manufacturing industries reported growth in December, down from thirteen in November. Six industries reported contraction: printing and related support activities, fabricated metal products, nonmetallic mineral products, petroleum and coal products, paper products, and plastics and rubber products.

Key Implications

After months of manufacturing activity moving sideways, with a slight downtrend from cyclical highs reached this past summer, manufacturing activity in the U.S. appears to be catching down to its global peers. Although one month of a dramatic slowdown does not imply a trend, there is little indication that the dramatic declines in the pace of expansion of the major components were driven by temporary factors. Comments by survey respondents suggest that demand has slowed, and is most evident in the fall in the growth of new orders. Tariffs were cited as contributing to uncertainty and hence the slowdown in demand, while also being blamed for spurring higher prices for inputs. What’s more, both production and new orders for December may be somewhat inflated as firms pulled forward purchases in advance of announced price increases slated to take effect at the start of 2019. Although the pace of U.S. manufacturing activity has slowed, capacity, labor, and component shortages still remain.

After a strong showing in the first half of 2018, global manufacturing surveys continue to signal a broad economic slowdown beginning in the second half of 2018. With few exceptions, the pace of expansion in manufacturing activity trended lower in December across the world, with France joining China, Turkey, and Taiwan in contraction. A broad-based slowdown in global manufacturing is consistent with the trend of weakening growth in trade volumes, commodity prices, and global growth more broadly. Overall, slowing foreign demand is likely to remain a headwind to U.S. manufacturers through the first half of 2019. That said, trade talks between the U.S. and China could yet prove fruitful this quarter, and if a deal is reached should help alleviate much of economic policy uncertainty while also working to restore confidence in the global economy.

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