January’s ISM reading of 48.2% was fractionally better than in December, but worse than the anticipated 48.5% and follows 48.0% in December. December was the lowest reading since the end of the last recession in June 2009. However, on the upside, both the important new orders index and the production index increased to back above 50. The major area of weakness was the employment index, which dropped to 45.9, the lowest reading since June 2009. Comments from the respondents (listed below) were a little more mixed than previously more negative reports. The further weakness in the prices paid component suggests ongoing pressure on corporate profits.
Bottom line: January’s ISM at 48.2% confirms that the manufacturing sector is still being in outright contraction, although for the aggregate economy a much lower 43.1% has become the dividing expansion/contraction line, according to the ISM. The headwinds here seem to be little changed from previous reports, in the form of the stronger dollar and the decline in global demand, in addition to the weakness in commodity prices. On top of this, the inventory-to-sales ratio has risen far above its new-normal levels. The Fed views manufacturing as having a much smaller share of the aggregate economy, whereas other areas of the economy are still holding up reasonably well (e.g., consumer spending and housing), enough so that the agency has had the confidence to raise interest rates. However, the sharp pullback in the employment index this past month (in addition to the financial market volatility) will be a concern, and any weakness will be closely watched for the degree to which it starts to taint the relatively solid consumer sector, upon which this recovery is being built.
For a copy of this report or to subscribe to the Economics Weekly or Economic Indicators reports, please contact your William Blair representative.
Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.