Industry Market Trends

U.S. Manufacturing Shrinks in November

Dec 04, 2012

The U.S. manufacturing sector contracted in November, dropping to a three-year low as factories cut back on hiring and investment in the face of deepening concerns about the upcoming fiscal cliff.

Business activity in the United States manufacturing sector decreased in November, ending a two-month period of growth and indicating that economic concerns are mounting for domestic manufacturers. Last month's contraction derived primarily from a slowdown in new orders and hiring, as well as weaker demand for U.S.-made goods in international markets.

According to the Institute for Supply Management's (ISM) latest manufacturing Report on Business, U.S. manufacturing shrank in November following growth in October and September, while the overall U.S. economy grew for the 42nd consecutive month.

The ISM purchasing managers' index (PMI), a key monthly gauge of the factory sector, dropped to 49.5 last month, down from 51.7 in October and marking the lowest PMI reading since July 2009. Readings below 50 indicate overall contraction for the sector, meaning that manufacturing activity reversed its growth and has shrunk. November's PMI figure was well below the 12-month average of 51.9.

"Weaker overseas demand, less investment in equipment and the possibility of automatic tax increases and government budget cuts in 2013 are hurdles for companies making everything from apparel to machinery," Bloomberg News reports. "With six months of stagnation in manufacturing, construction gains, reflecting a rebound in housing, are helping pick up some of the slack for the world's largest economy."

The November reading was a surprise, as industry analysts expected manufacturing to continue to rebound from declines earlier in the year. Economists polled by MarketWatch had forecast the PMI to "hold steady" at 51.7 for the month.

Demand for manufactured products weakened in November, with ISM's new orders index dropping to 50.3, down from 54.2 in October but continuing a three-month trend of growth, albeit at a much slower pace.

Manufacturing employment also experienced a major decline in November, with ISM's employment index plunging to 48.4 from 52.1 in October, indicating that manufacturers have scaled back their hiring efforts considerably.

"Details of the report suggested that worries about whether Washington will keep the economy from tumbling off the so-called fiscal cliff - tax increases and spending cuts set to arrive in 2013 - have many manufacturers in a defensive crouch," the Wall Street Journal explains. "Employment in the manufacturing sector contracted for the first time in three years, while a measure of inventories - a gauge of future demand - dropped sharply to 45 from 50, suggesting firms are delaying hiring and keeping stockpiles low."

Many respondents to ISM's survey claim that the risk of going over the fiscal cliff without a resolution from Congress is the biggest impediment to new investment and hiring. As one respondent from the fabricated metal products industry notes, "The fiscal cliff is the big worry right now. We will not look toward any type of expansion until this is addressed; if the program that is put in place is more taxes and big spending cuts - which will push us toward recession - forget it."

Meanwhile, exports fell again in November, with the index dropping to 47 from 48 in November and continuing the six-month downward trend as demand for U.S.-made products remains weakened overseas.

Eleven of the 18 industries tracked by ISM reported contraction last month: apparel, leather and allied Products; wood products; primary metals; transportation equipment; chemical products; fabricated metal products; miscellaneous manufacturing; nonmetallic mineral products; plastics and rubber products; machinery; and printing and related support activities.

Despite the widespread signs of poor manufacturing performance in November, there were some positive indicators for the month. Production remained relatively strong, rising from 52.4 to 53.7, suggesting that Hurricane Sandy didn't force as many factory shutdowns as expected. Moreover, there is still the possibility of a resolution to the fiscal cliff problem, which would provide a significant boost to manufacturing heading into 2013.

"Surveys show consumers remain upbeat about the economy, despite the looming taxes and spending cuts. A measure of consumer confidence reached a five-year high in November," the Associated Press explains. "If lawmakers and President Barack Obama can work out a budget deal that averts the tax increases, most economists predict a good year for the economy."