November ISM Manufacturing PMI at 48.4

On December 2nd, Monday, fresh data released by ISM showcased a notable sign of resilience within the American manufacturing sector. The report indicated that manufacturing activity in the United States experienced a smaller contraction in November than analysts had anticipated, with new orders showing a significant uptick, marking their first rise since March of the current year.

The ISM Manufacturing Purchasing Managers' Index (PMI) for November stood at 48.4, reaching its highest level since June, surpassing expectations of 47.6 and improving from 46.5 in October. This single-month increase of 1.9 points represents the most considerable monthly gain seen since March. Such metrics suggest a potential shift in the trend that has predominantly characterized the manufacturing landscape over the past couple of years.

Back in March, an unexpected surge in the ISM index broke the pivotal 50 mark, registering at 50.3 and putting an end to a distressing streak of 16 consecutive months of contraction. However, the months that followed saw a dwindling expansion, as the manufacturing sector grappled with continual challenges—experiencing contraction for almost every month in the ensuing two years, with just a lone exception.

Conversely, the sub-indices accompanying the November PMI data exhibited improvements, revealing glimpses of stability after two years of low performance. The overall PMI index hitting a five-month high served as a bright spot, hinting that the manufacturing domain may be on the road to recovery.

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Delving deeper into the components that drive this index reveals important developments: the new orders index rose to 50.4 from October's 47.1. This jump of 3.3 points marked the highest increase in five months, thus pushing new orders into expansion territory for the first time in eight months—a clear indicator of improving business confidence and the onset of optimism. For manufacturers, this surge in new orders is especially welcome, as backlogged orders fell to their lowest level since July, landing at 41.8. Since September 2022, backlogs have been in a state of contraction on a monthly basis.

Production also saw a modest recovery with the index increasing by 0.6 points to 46.8, although this remains below the neutrality threshold. Last month had witnessed a severe downturn in production, recording the largest single-month decline in the output index since April 2021. The Prices Paid index, at 50.3, indicated a significant drop from October's 54.8, marking a decrease of 4.5 points and signaling a favorable trend for producers as material costs began to subside. This drop places the Prices Paid index substantially below average projections for 2024, suggesting a more manageable overall cost environment.

On the employment front, the index rose to 48.1 from 44.4 in October, still indicating contraction but showing a notable improvement—a jump of 3.7 points, the largest surge in over two years. Similarly, manufacturers reported an increase in the Inventory Index, which rose by 5.5 points to 48.1, after having shrunk at its fastest pace since June 2012 a month prior. This recovery implies that significant inventory reductions that manufacturers undertook in September and October might have plateaued, potentially facilitating further order increases and stimulating production going forward.

Media analysts remarked that the Prices Paid index might bolster confidence regarding the maintenance of moderate goods prices in the economy. However, data released last week reflected that the Federal Reserve's preferred gauge of potential inflation had accelerated year-on-year as of October, suggesting that officials may be reluctant to lower interest rates in the near term.

Earlier in the day, Markit also released its manufacturing PMI for November, which came in at 49.7, representing the highest final value since June 2024. Specifically, the new orders component index hit 49.3, marking expansion for the fifth consecutive month. The supplier delivery times component index also registered its lowest reading since October 2022.

Chris Williamson, the Chief Business Economist at S&P Global Market Intelligence, highlighted a rising sense of optimism among American manufacturers. He pointed out that despite the favorable indicators, these positive sentiments have yet to translate into increased factory outputs.

Looking ahead, optimism concerning the next year has reached its highest level in two and a half years, buoyed by reduced uncertainty as well as expectations for stronger economic growth and robust protectionist policies following the new administration taking office in 2025.

In contrast, the current output levels in November marked their fourth consecutive month of decline, reflecting the most significant downward trend in nearly one and a half years. When considering the pandemic's impact, the disparity between anticipated future output and current production levels reflects the most substantial gap seen in a decade; this highlights the stark contrast between the challenging present conditions and the soaring hopes for the future.

As confidence rises, it becomes imperative for demand conditions to improve, encouraging manufacturers to ramp up production. Noteworthy is the observation that, despite ongoing declines in export sales, the overall drop in new orders during November was the smallest recorded in five months, indicating that the downturn in domestic demand for goods might be easing, potentially setting the stage for a revival in manufacturing as 2025 approaches.

Simultaneously, prospects of protectionism have led some American manufacturers to increase their purchases of inputs, as they aim to stock up before potential price hikes due to tariff threats on imported goods. Notably, a quarter of companies reported an increase in their input purchases due to concerns regarding tariffs, a testament to the anxiety among American manufacturers regarding inflationary impacts stemming from trade policies.