The Institute for Supply Management released a report on Thursday showing a much bigger than expected drop by its index of activity in the manufacturing sector – Indicating a notable slowdown in the pace of growth in U.S. manufacturing activity in the month of December.
The ISM said its purchasing managers index tumbled to 54.1 in December after rising to 59.3 in November, slumping its lowest level since hitting 53.4 in November of 2016.
While a reading above 50 still indicates growth in manufacturing activity, economists had expected the index to show a more modest drop to a reading of 57.9.
The much bigger than expected decrease by the headline index partly reflected softening demand, as the new orders index plunged to 51.1 in December from 62.1 in November.
“Customer demand expansion softened quite notably in December, as the index retreated to an expansion level not seen since August 2016,” said Timothy R. Fiore, Chair of the ISM Manufacturing Business Survey Committee.
The report said the production index also slid to 54.3 in December from 60.6 in November, while the employment index fell to 56.2 from 58.4.
On the inflation front, the prices index tumbled to 54.9 in December from 60.7 in November, dropping to its lowest level since June of 2017.
“The Fed elected to raise rates in December and signal two hikes in 2019 despite recent market turmoil as real economic indicators did not yet reflect the kind of trouble indicated by financial markets,” said Chris Low, chief economist at FTN Financial. “Today’s ISM manufacturing surprise was a step in the direction of confirmation, though a headline read in the mid-50s is still pretty good.”
He added, “Nevertheless, slowing U.S. manufacturing, weakness in leading components like orders and the backlog coupled with an even sharper global slowdown and falling inflation fundamentals certainly make a solid case for taking a break from rate hikes.”
Next Monday, the ISM is scheduled to release a separate report on activity in the service sector in the month of December.
Why Markets Care About ISM Manufacturing PMI
ISM Manufacturing PMI (also called Manufacturing ISM Report On Business) measures the level of a diffusion index based on surveyed purchasing managers in the manufacturing industry
It is derived from a survey of about 400 purchasing managers which asks respondents to rate the relative level of business conditions including employment, production, new orders, prices, supplier deliveries, and inventories;
It is released monthly, on the first business day after the month ends by the Institute for Supply Management (ISM) – before most of the official data on industrial output, manufacturing and Gross Domestic Product (GDP) become available.
The PMI covers five major survey sectors/areas: new orders, inventory deals, supplier deliveries & employment, and production. In doing so, it asks the respondents about changes in their discernment of key business variables from the month before. After getting the data, a composite index is constructed.
So, basically, it is a survey-based measure that asks questions about any change in business conditions, whether it is improving or not.
The Purchasing Managers’ Index (PMI) is a number from 0 to 100. Above 50 indicates expansion, below 50 indicates contraction, and at 50 indicates no change.
PMI = (Pi * 1) + (Pn * 0.5) + (Pd * 0)
Pi = percent of answers reporting an improvement
Pn = percent of answers reporting no change
Pd = percent of answers reporting a deterioration
The usual effect s that ‘Actual’ greater than ‘Forecast’ is good for the dollar and vice versa.
ISM Manufacturing PMI is a leading indicator of economic health – businesses react quickly to market conditions, and their purchasing managers hold perhaps the most current and relevant insight into the company’s view of the economy. PMI is both survey-based and an investor sentiment measure of the economy’s manufacturing sector. Digital participants and investors who invested in some manufacturer company must keep up with the market trends by following purchasing managers’ index (PMI).
Other Economy News : U.S. Private Sector Job Growth Exceeds Estimates In December
Partly reflecting favorable weather, payroll processor ADP released a report on Thursday showing much stronger than expected U.S. private sector job growth in the month of December.
ADP said private sector employment surged up by 271,000 jobs in December after climbing by a downwardly revised 157,000 jobs in November.
Economists had expected an increase of about 178,000 jobs compared to the addition of 179,000 jobs originally reported for the previous month.
The much stronger than expected job growth in December reflected the biggest jump in private sector employment since February of 2017.
“We wrapped up 2018 with another month of significant growth in the labor market,” said Ahu Yildirmaz, vice president and co-head of the ADP Research Institute.
“Although there were increases in most sectors, the busy holiday season greatly impacted both trade and leisure and hospitality,” she added. “Small businesses also experienced their strongest month of job growth all year.”
The report said employment in the service-providing sector jumped by 224,000 jobs, as employment in the leisure and hospitality and trade, transportation, and utilities industries rose by 39,000 jobs and 33,000 jobs, respectively.
Employment in the good-producing sector also climbed by 47,000 jobs during the month, partly reflecting an increase of 37,000 construction jobs.
ADP also said employment at medium-sized businesses shot up by 129,000 jobs, while small businesses added 89,000 jobs and large businesses added 54,000 jobs.
“Businesses continue to add aggressively to their payrolls despite the stock market slump and the trade war,” said Mark Zandi, chief economist of Moody’s Analytics. “At the current pace of job growth, low unemployment will get even lower.”
On Friday, the Labor Department is scheduled to release its more closely watched monthly employment report, which includes both public and private sector jobs.
Employment is expected to increase by 177,000 jobs in December after rising by 155,000 jobs in November, while the unemployment rate is expected to hold at 3.7 percent.