Manufacturing Output Flat Month-to-Month, But Positive Signs Emerge

November manufacturing output was flat in November, according to the new edition of the Manufacturing Report on Business, which was issued last week by the Institute for Supply Management (ISM).

The report’s benchmark metric, the PMI, matched October’s reading, at 46.7 (a reading of 50 or higher indicates growth), and contracting at the same rate for the 13th consecutive month. The past 13 months of contraction were preceded by a stretch of 28 consecutive months of growth. ISM also said that the overall economy contracted in November at the same rate for the second consecutive month, which was preceded by 30 consecutive months of growth.

The November PMI is 0.5% below the 12-month average of 47.2, with September 2023 marking the high for that period, at 49.0, and June 2023, at 46.0, marking the lowest.

ISM reported that three manufacturing sectors grew in November—food, beverage & tobacco products, nonmetallic mineral products, and transportation equipment. The 14 sectors contracting included paper products; printing & related support activities; electrical equipment, appliances & components; computer & electronic products; apparel, leather & allied products; textile mills; machinery; primary metals; furniture & related products; miscellaneous manufacturing; chemical products; fabricated metal products; wood products; and plastics & rubber products.

The report’s key metrics were mostly down in November, including:

• New orders, which are considered the engine that drives manufacturing, rose 2.8%, to 48.3, contracting at a faster rate for the 13th consecutive month with two sectors reporting growth;

• Production fell 1.9%, to 48.5, contracting after two months of growth with five sectors reporting growth;

• Employment was down 1%, to 45.8, contracting at a faster rate for the second consecutive month with three sectors reporting growth;

• Supplier deliveries, at 46.2 (a reading above 50 indicates contraction), grew at a faster rate for the 14th consecutive month with three sectors reporting slower deliveries;

• Backlog of orders, at 39.3, decreased 2.9%, contracting at a faster rate for the 14th consecutive month with no industries reporting growth;

• Inventories, at 44.8, were up 1.5%, contracting at a slower rate for the ninth consecutive month with three sectors reporting higher inventories;

• Customer inventories, at 50.8, were up 2.2%, moving “too high” after heading “too low,” at a slower rate for the fifth straight month in October with eight sectors reporting customers’ inventories as too high; and

• Prices, at 49.9, were up 4.8%, decreasing at a slower rate for the seventh consecutive month with seven sectors reporting growth

Comments submitted by the ISM member respondents again highlighted various themes related to the economy and market conditions.

A chemical products shipper said his company is starting to feel softening in the economy, with labor still a challenge to backfill critical roles, adding that the 2024 forecast looks challenging, especially from a cost perspective. And a miscellaneous manufacturing respondent observed that customer orders have pushed into the first quarter of 2024, resulting in inflated end-of-year inventory.

In an interview, Tim Fiore, chair of ISM’s Manufacturing Business Survey Committee, said that while the PMI reading was flat sequentially, the fundamentals that make up the number shifted for the positive.

“I look at [the PMI reading] from a demand (new orders, new export orders, and backlog of orders), output (production and employment) and input (supplier deliveries, inventories, prices, and imports) standpoint,” he said. “The input side was flat. The output number in production came down and employment came down and were offset by the new order number going up. The two of those offset each other. That’s why we ended up with a 47.6 reading. It has shifted for the positive, meaning that the new order level almost went into expansion territory, not far from a reading of 50…to try to get the backlog up, which would give our panelists companies confidence they can start to invest in the future.”

And he explained that serves as a sign that maybe things are starting to come back towards growth, as evidenced by lead times coming down, as well as fairly stable prices, with an uncertain future, which would cause buyers to re-enter the market.

On the negative side, Fiore explained that was evidenced on the output side, with production down 1.9%, and employment down 1.0%.

“We expected production to come down and right-size itself with the forward forecast, which is much less than it had been before June,” he said. “It is not a dramatic step down for output; it is a moderate step down consistent with what we believed months ago, which was a planned step down in output.”

Addressing manufacturing employment, Fiore said that the hire-to-fire ratio came in at nearly 1:1, which he said is the best-performing number, or the lowest number, since he has tracked that data.

“We’re continuing to shed headcount and are stepping production down consistent with the forward forecast,” he said. “The new order level is not sagging as much as it was, which would indicate at some point we will get above that 50 mark. And the input side is sleeping, but it all represents upside for the future. That’s a supplier delivery number that will eventually get above 50 when demand gets to a level where suppliers get stressed. And inventory will eventually get above 48 when people are more confident about the future. On the manufacturing inventory number, we probably won’t see it break 50 before 2024. But I have a feeling that by the time we hit March, you’re going to see that number in the city to rain. So, all in all, we had a rejiggering of the five subindexes, all for the positive. Even though the PMI number was south of 47, it was the same as last month, while the fundamentals have shifted for the positive.”

SC
MR