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First Cut: December ISM Manufacturing Index falls to lowest in 25 months

The December ISM Manufacturing Index slipped to 54.1 from 59.3 in November and reached its lowest reading since 53.4 in November 2016. The declined reflected an abrupt and sharp slowing in new orders and production, and to a lesser extent in delivery times. Employment and inventories were also down, but only mildly. Survey respondents’ comments point to essentially one cause – tariffs. Orders were moved up to avoid expected price increases in January or cut back in the face of greater economic uncertainty. Production has fallen off as earlier orders were filled and new ones did not fully take up the gap. Order backlogs – not an index component – dropped back to near neutral for the first time since January 2017.

The slowing in the index was not unexpected, but the size was a surprise. While the reading is consistent with moderate expansion, the sudden decrease will sound alarms that unless this proves to be a one-month pause, the factory sector’s two years of hectic activity have been choked off increased uncertainty and damaging trade policy.

The prices paid index moderated further to 54.9 in December on declining oil prices, but should punitive tariffs be imposed in January, commodity costs are likely to drive it higher again as happen in the late spring and early summer of 2018. Export orders have settled into a recent trend in the low 50’s that points to only lackluster growth. Imports have declined to the low 50’s as well as manufacturers act to avoid building unnecessary inventories but also bring in fewer foreign goods due to higher tariffs.

The manufacturing sector is still growing even if it settles down to a more temperate pace. What is missing is the initial kick of confidence that greeted the election of Donald Trump, synchronized global expansionary conditions that were hurt by punitive trade policy, and the short-term fiscal stimulus associated with the tax package enacted in December 2017. Survey respondents do not seem to be as concerned about labor supply and costs or delays in trucking as they were, nor is the much evidence that modestly higher interest rates are having a negative impact. At present, conditions are simply not as supportive for the sector as they were.

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