U.S. Factory Activity Hits 6-Year Low

Dec 02, 2015

Manufacturing gauge tips into contraction territory as reading is weakest since recession

U.S. factory activity in November fell to the lowest level since the end of the recession, as weak global demand and a strong dollar continued to buffet the manufacturing sector.

The Institute for Supply Management said Tuesday that its gauge of manufacturing activity fell to 48.6 last month from 50.1 in October, slipping into contraction territory for the first time since the end of 2012 and notching the weakest reading since the final month of the recession in June 2009. Readings above 50 indicate expansion.

Economists weren’t expecting the index to tip into contraction territory. Those surveyed by The Wall Street Journal had expected the index to rise to 50.5. The index has fallen for the past five months, but was as high as 53.5 in June.

Economists noted that the major factors weighing on manufacturing, such as a strong dollar and weak Chinese and European growth, were unlikely to reverse course in the near future. Exports shrank for the sixth straight month, as a strong dollar makes U.S.-made goods more expensive for overseas buyers.

“None of these factors are likely to turn around anytime soon, so in coming months overall U.S. economic growth is likely going to have to occur without any contribution from the nation’s factories,” said Joshua Shapiro, chief U.S. economist at MFR Inc.

Another headwind that seems unlikely to abate soon: Low oil and other commodity prices have reduced demand for drilling, mining and production equipment.

“The oil and gas industry is now saying, ‘Hey, this is the new normal, and we have to deal with that and adjust our companies and our footprint and our employment rate accordingly,’ ” said Bradley Holcomb, chairman of the ISM’s manufacturing business survey committee.

Still, Mr. Holcomb said the contraction could be a blip, noting that the index is tracing a similar trajectory this year to that of 2012, which contracted in November and then regained its footing.

Demand and production slowed sharply in November, driving the overall decline. New orders dropped to 48.9 from 52.9 and production fell to 49.2 from 52.9.

Inventories fell for the fifth straight month to 43.0. Prices fell for the 13th month in a row to 35.5.

“We try to breeze over it because the [Federal Reserve] doesn’t like that word, but prices have been decreasing for 13 consecutive months—that’s deflationary,” Mr. Holcomb said.

Still, economists said the weak reading likely wouldn’t be a deal breaker for an expected interest-rate increase by the Fed in mid-December.

“All the reasons for why the ISM has printed weak [a slowing China and a stronger dollar] are on the Fed’s radar,” said Zoltan Pozsar, director of U.S. economics at Credit Suisse.

However, he noted the Fed hasn’t raised interest rates with the ISM’s manufacturing index below 50 since the mid-1990s and said the soft reading makes Friday’s jobs report all the more important.

Hiring provided one of the report’s few bright spots. Factory employment rose to 51.3, after contracting in October.

Manufacturing jobs had been recovering since early 2010, but the pace of gains has slowed over the past year as low commodity and energy prices have dented demand for related industrial equipment. Since March 2010 through October of this year, the economy has added 864,000 manufacturing jobs, or an average of 13,000 per month. That pace has slowed in the past year down to 7,000 per month through October.

One company hiring is Columbia Machine Inc., a Vancouver, Wash., maker of factory automation equipment. Columbia has hired about five dozen people so far this year as customer demand increased.

“People made do with older equipment, and it’s at the point where people have held off too long,” said Chief Executive Rick Goode.

But, he added, firms in overseas markets such as Brazil, China and Mexico are showing some caution.

While the broader U.S. manufacturing sector has been sluggish in recent months, certain categories likely geared toward the domestic market—such as furniture, paper products, and food and beverage—have been consistently expanding. That jibes with retail data showing that sales at furniture and home-furnishings stores are up 5.5% for the year through October from the same period in 2014. The housing market is on track for its best year since the recession.

Strong domestic car sales have also been a boon for manufacturers, although the strong dollar makes imported vehicles more attractive to U.S. consumers. Sales of domestic cars fell in November while sales of imported cars and light trucks rose.

Manufacturing accounts for about 10% of private-sector employment in the U.S. and 12% of economic output. The services sector, which accounts for the bulk of jobs and consumer spending, has been expanding. The November ISM services report will be released Thursday.

Source: Wall Street Journal