The United States manufacturing sector continued its contraction for the 14th consecutive month in December, but at a slightly slower pace, according to survey data released by the Institute for Supply Management (ISM) on Wednesday. The ISM’s manufacturing index for December was 47.4 percent, a modest increase from November’s 46.7 percent, although it remains below the critical 50-point mark that separates growth from contraction.
ISM survey chief Timothy Fiore commented on the state of the manufacturing sector, stating, “The U.S. manufacturing sector continued to contract, but at a slightly slower rate in December.” Notably, none of the six largest manufacturing industries showed signs of growth during the month.
Demand also experienced a decline, with the new orders index contracting at a faster rate, and the new export orders index remaining essentially flat. The overarching weakness in the manufacturing sector has been attributed, in large part, to constrained capital spending, according to economists at Pantheon Macroeconomics.
However, a ray of optimism is expected to permeate the sector as interest rates are anticipated to fall this year. Respondents in the ISM survey, particularly in the computer and electronic products sector, expressed confidence that the U.S. Federal Reserve holding off on interest-rate changes would encourage more companies to invest in capital expenditures.
“As budgets get approval after the start of the calendar year, this should help drive investment and increase manufacturing activity once again,” noted an ISM respondent.
The Federal Reserve, which had raised the benchmark lending rate rapidly since early 2022 to curb surging inflation, has recently held rates steady at policy meetings, fueling optimism about potential rate cuts.
Economists at Pantheon project a rebound in manufacturing and the interest-sensitive housing sector. However, they caution that any boost to GDP growth may be offset by softer growth in real consumption spending, where the lagged effect of the prior surge in rates has yet to fully work through.
