January 27, 2022

US: Manufacturing activity moderates in December; Supply constraints ebbing

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U.S. manufacturing slowed in December amid some cooling in demand for goods, but supply constraints are starting to ease and a measure of prices paid for inputs by factories fell by the most since early 2020 when the pandemic disrupted economic activity.

The Institute for Supply Management (ISM) said on Tuesday that its index of national factory activity fell to a reading of 58.7 last month. That was the lowest reading since last January and followed 61.1 in November.

A reading above 50 indicates expansion in manufacturing, which accounts for 11.9% of the U.S. economy. Economists polled by Reuters had forecast the index falling to 60.1.

The ISM survey’s measure of supplier deliveries declined to a reading of 64.9 from 72.2 in November. A reading above 50% indicates slower deliveries to factories.

Raw materials have been in short supply as global economies rebounded from the COVID-19 pandemic. Shortages have also been exacerbated by the shift in demand to goods from service early in the pandemic. Millions of workers needed to produce and move raw materials remain sidelined.

The tentative signs of improvement in supply chains suggest inflation at the factory gate could soon begin to subside.

The survey’s measure of prices paid by manufacturers tumbled to 68.2 last month, the lowest level since November 2020, from 82.4 in November. The drop was the biggest since March 2020, when mandatory closures of nonessential businesses were enforced to slow the first wave of coronavirus infections.

This supports the Federal Reserve’s long-held view that the current period of high inflation was transitory. Inflation is well above the U.S. central bank’s flexible 2% target.

The ISM survey’s forward-looking new orders sub-index fell to a still-high reading of 60.4 from 61.5 in November. With customer inventories still depressed, the slowdown in new order growth is likely to be temporary or limited.

Factories hired more workers. A measure of manufacturing employment rose to an eight-month high. This, together with very low first-time applications for unemployment benefits, support views that job growth accelerated in December.

According to a preliminary Reuters survey of economists, nonfarm payrolls likely increased by 400,000 jobs in December after rising 210,000 in November. The Labor Department is scheduled to publish December’s employment report on Friday.

© 2022 Thomson/Reuters. All rights reserved.

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