15-Month Low for US Manufacturing PMI in December

IHS Markit report finds business confidence lowest since October 2016.

The end of 2018 saw a slower, but still solid, improvement in the health of the U.S. manufacturing sector according to the latest report from IHS Markit. The headline PMI dipped to a 15-month low amid a weaker rise in new business and the joint-softest expansion in output since September 2017.

At the same time, the pace of job creation eased to an 18-month low, despite a further rise in backlogs. Notably, business confidence among manufacturers fell again in December, with the degree of optimism dipping to the lowest since October 2016. Meanwhile, inflationary pressures eased at the end of 2018.

“Some of the weakness is due to capacity constraints, with producers again reporting widespread difficulties in finding suitable staff and sourcing sufficient quantities of inputs,” commented Chris Williamson, Chief Business Economist at HIS Markit. “However, the survey also revealed signs of slower demand growth from customers, as well as rising concerns over the impact of tariffs. Just over two thirds of manufacturers reporting higher costs attributed the rise in prices to tariffs.”

The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index (PMI) posted 53.8 in December, down from 55.3 in November. The latest headline figure suggested a weaker, but still strong, improvement in operating conditions across the goods producing sector. Although ending the year with a softer overall expansion, the final quarterly average of 2018 was strong and quicker than that seen in 2017.

(Image courtesy of IHS Markit.)

(Image courtesy of IHS Markit.)

Production growth remained solid in December, and at a rate comparable to the one in November. Although some firms stated that the upturn was driven by new order inflows from newly acquired clients, others cited concerns surrounding a drop in client demand compared to earlier in the year.

Conversely, new export business grew at an accelerated pace in December. New orders from abroad increased for the fifth successive month and at the fastest rate since January amid stronger foreign client demand.

“Growth was led by strengthening demand for consumer goods, and robust growth was also reported for investment goods such as plant and machinery,” Williamson commented. “But producers of intermediate goods – who supply inputs to other manufactures – reported the weakest rise in new orders for over two years, hinting at increased destocking by their customers.”

A weaker overall rise in new orders led to a drop in business confidence among manufacturing firms in December. The degree of optimism was strong, but well below the long-run series average. Positive sentiment was dampened by concerns surrounding the longevity of new business growth. Moreover, future output expectations were at their lowest since October 2016.

Despite a moderate rise in backlogs in December, the rate of job creation softened to an 18-month low. Although firms noted an increase in workforce numbers following greater production requirements, others suggested that low rates of employee retention had weighed on growth.

Meanwhile, rates of both input price and output charge inflation eased in December. Greater cost burdens were reportedly due to raw material stockpiling among manufacturers, shortages of electronics components and the ongoing impact of tariffs. That said, the rate of inflation dipped to an 11-month low. Factory gate prices meanwhile rose at the weakest rate in 2018.

“A shift to inventory reduction was highlighted by purchasing activity in the manufacturing sector,” Williamson said, “rising at the weakest rate for one and a half years in December, providing further evidence that companies have become increasingly cautious about spending amid rising uncertainty about the outlook.”

For more information, visit the IHS Markit website.