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The Institute for Supply Management (ISM) manufacturing index was fell into contractionary territory in October, decreasing by 1.5 points to 48.6. The headline print was well below consensus expectations, which called for the index to improve to 50.5 from 50.1 in October.
The details of the report were also disappointing. Following an uptick last month, new orders (-4.0 points to 48.9) and production (-3.7 point to 49.2) subcomponents posted large declines in November falling into contractionary territory. Prices paid (-3.5 points to 35.5) and inventories (-3.5 points to 43.0) subcomponents also fell substantially. With both new orders and inventories declining on the month, the spread between the two indicators - which tends to lead the headline index by about three months - narrowed only slightly to 5.9 from 6.4 in October.
Activity remained soft as far as international trade is concerned, with the export subcomponents unchanged on the month at 47.5 while imports moved higher (+2.0 to 49.0).
Perhaps one piece of good news in this report came from the employment subcomponent (+3.7 to 51.3), which rose for the first time in five months, moving back into expansionary territory.
Softness in manufacturing activity was also apparent across industries, with only five of the eighteen industries reporting growth in November (Printing & Related Support Activities; Nonmetallic Mineral Products; Miscellaneous Manufacturing; Food, Beverage & Tobacco Products; and Transportation Equipment).
Faced with the drag from strong dollar, subpar global activity and continued slowdown in the domestic oil & gas industry, U.S. manufacturing activity has been under pressure for much of this year. The weakening trend was even more apparent in November, with the sector contracting outright after a flat performance in the month prior. This is a territory U.S. manufacturing has not been in since November 2012.
The strength of the U.S. dollar is not expected to abate any time soon, as the Federal Reserve is likely to raise rates in the near-future, while the European Central Bank is expected to deliver a fresh bout of monetary easing later this week. A weak euro vis-à-vis the U.S. dollar has been helping boost Eurozone manufacturing activity and exports for months, keeping the PMI of the common currency area firmly in expansionary territory while U.S. manufacturers continue to face competiveness pressures.
"Weaker factory activity has weighed on manufacturing payrolls, which is apparent in this year's employment numbers. The difference relative to last year is staggering: in the first 10 months of 2014 manufacturing sector created 150k jobs, or nearly ten times the 16k added this year. From this standpoint, a gain in the employment subcomponent is an encouraging sign, as is the improvement in the imports subcomponent - which actually tends to lead manufacturing activity. All told, while the marked slowdown in production and new orders in November raises some concerns regarding the outlook for manufacturing, the sector should continue to be supported by strong domestic demand in the U.S., which outside of the oil-related sectors, remains robust", notes TD Economics.
