U.S. Manufacturing Cools a Little More

Michael Montgomery, a U.S. economist with IHS Global Insight (Lexington, MA), reports that the Institute for Supply Management (ISM; Tempe, AZ) index for manufacturing, the so-called purchasing managers’ index (PMI), cooled by another 1.6 points to 53.5 in January from a revised 55.1 in December. This was the worst performance for the PMI since last January, when Mother Nature caused havoc. New orders, shipments, vendor performance and employment all cooled from late 2014. The inventories piece, which is very volatile monthly, bounced back over 50. The story is the export series, which fell to 49.5 for its first foray under the 50-mark since November of 2012.

Weak export and weakening inventory building is going to be the early 2015 story. The ultra-near-term outlook for the U.S. is rather bland, but that still beats most of the world where bland would be an improvement. China remains mired slightly below 50 and Europe just over it. Canada cooled to a tepid 51, and the UK is the only nation in the same ballpark as the U.S.

The key for us for several months will be exports, and the story there was not good in January; exports cooled to 49.5 for the first sub-50 score in over two years. That story is not going to change soon with a strong greenback and growth-weakness overseas.

The double-whammy of a strong dollar and weak demand overseas will conspire with inventory building slowing on average to nudge the US closer to the pack, and the 53.5 of January will fade to near 50. It should not be bad enough to make the U.S. manufacturing sector linger under 50 if it sags below that threshold, but output turning sluggish will turn manufacturing job gains to a crawl, or perhaps a minor dip. This is just an adjustment process, not a long-term downturn and the gasoline dividend and yet one more up-cycle in inventories should make the last half of 2015 look a lot better than this winter chill. The manufacturing sector will turn erratic and spotty rather than robust and reliable, but only for four to six months.

The bottom line:

• The ISM purchasing managers’ index (PMI) sagged to 53.5 from 55.1. That still beats almost everyone else, but the writing is on the wall for more US slowing.
• The export reading sank under 50 for the first time in more than two years. It will not turn around soon with a strong dollar and weak demand overseas.
• Inventory building is slowing too, on average, and both will be brakes on growth for four to six months.

www.ihs.com