Industry Market Trends

Manufacturing Sector Rebounds in December

Jan 03, 2013

The U.S. manufacturing sector expanded in December, rebounding from declines in the previous month, due to strong growth in hiring and exports, as well as stabilized demand for manufactured goods.

Business activity in the United States manufacturing sector increased in December, reversing contraction in November and helping the sector recover from a three-year low. The latest gains indicate manufacturers ended the year with relatively strong performance and are starting 2013 on a positive note, despite earlier pressure from the fiscal cliff.

According to the Institute for Supply Management's (ISM) latest manufacturing Report on Business, U.S. manufacturing made gains in several key categories last month, particularly exports and employment, which enabled it to post overall growth in December. The U.S. economy grew for the 43rd consecutive month in December.

The ISM purchasing managers' index (PMI), a key monthly gauge of the factory sector, rose to 50.7 last month, up from 49.5 in November and marking the third time manufacturing has grown in the last seven months. Readings above 50 indicate overall expansion for the sector, meaning that manufacturing activity has reversed its decline and resumed growth. However, December's PMI figure remained below the 12-month average of 51.7.

"The growth in U.S. manufacturing came in the face of fears late last year over the 'fiscal cliff' of tax hikes and spending cuts, which would have kicked in at the start of 2013, risking a new U.S. recession. Lawmakers struck a deal late on Tuesday, avoiding income tax hikes for most Americans and delaying the spending cuts for two months," Reuters reports. "The deal is in line with what many financial firms on Wall Street and around the world have been expecting, suggesting forecasts for economic growth of around 1.9 percent for 2013 would likely hold."

The December reading slightly exceeded expectations for growth, as economists polled by MarketWatch had forecast the PMI to rise to 50.5 for the month.

Demand for manufactured products held steady in December, with ISM's new orders index remaining unchanged at 50.3, indicating that orders are continuing to increase at the same pace. December also marked the fourth consecutive month of growing demand.

Manufacturing employment experienced a strong boost last month, with ISM's employment index rising to 52.7 from 48.4 in November and marking the highest level since September. The increase suggests that manufacturers have resumed hiring at a modest pace.

"Factories have continued to hire, a welcome sign ahead of the monthly employment report on the U.S. job market," CNN Money reports. "November's employment report showed that manufacturers cut 7,000 jobs. Most of the losses came from food manufacturing, which was not a surprise given that Twinkies-maker Hostess announced early in the month that it planned to layoff 18,500 workers."

Seven of the 18 industries tracked by ISM reported growth last month: furniture and related products; paper products; petroleum and coal products; wood products; primary metals; computer and electronic products; and food, beverage and tobacco products.

Meanwhile, exports climbed to 51.5 in December, up from 47 the previous month and marking the first time exports have grown in six months. The gains reflect better conditions in international markets, which are boosting overseas sales of U.S. goods.

"With recent indications that growth is also picking up in other key economies around the world, notably in emerging markets such as China and Brazil, and that the Eurozone's economic crisis is easing, U.S. companies should benefit as stronger demand lifts exports in early 2013," Chris Williamson, chief economist at Markit, said in a similar report.

Despite these positive signs, industrial production slowed slightly in December, with the ISM production index falling to 52.6 from 53.7 in November, indicating the third consecutive month of decelerating growth in output. This slowdown may extend into the early months of 2013, as well.

"Manufacturing growth was all front-loaded in 2012. Because production overshot demand early in the year, the sector was trapped in a long period of see-saw growth around a declining trend. Because of the first quarter surge, manufacturing industrial production will actually post 4 percent growth in physical volume in 2012, which is faster than the 2.1 percent growth in inflation-adjusted GDP," Daniel J. Meckstroth, chief economist at MAPI, noted. "We do not expect another manufacturing production surge in first quarter of 2013. We do see strong growth in the housing-related industries, aerospace and automobile production in 2013 but there are many other industries within manufacturing which should see little, if any, growth."