US Manufacturing Index Sank in January, Feeding Recession Risk

GMC Hummer EVs are seen on an assembly line ahead of a tour by the president of the General Motors Factory ZERO electric vehicle assembly plant in Detroit, Mich., on Nov. 17, 2021. Mandel Ngan/AFP via Getty Images

The U.S. manufacturing industry contracted for the third month in a row in January, and remained below a key threshold that is consistent with a recession in the broader U.S. economy.

On Wednesday, the Institute for Supply Management (ISM) announced that its Purchasing Managers Index (PMI) for manufacturing dropped to 47.4 in January. The new manufacturing PMI reading is one percentage point lower than the seasonally adjusted 48.4 percent rating that the ISM’s index recorded in December.

According to the ISM, a manufacturing PMI above 50 percent means the manufacturing economy is generally expanding, while a rating below 50 percent means manufacturing is “generally contracting.”

The index had been 58.4 percent in February 2022 and gradually fell to where it is today. In October, the index hit the 50 percent threshold before falling to 49 percent in November, then 48.4 in December and 47.4 to end the month of January.

The drop in ISM’s manufacturing PMI over the last month was steeper than anticipated by economists polled by Reuters. Those economists had expected the January index rating to only fall to about 48 percent.

The ISM’s manufacturing PMI is now the lowest it’s been since May 2020, when the index registered a seasonally adjusted 43.5 percent. That significant contraction came as COVID-19 spread throughout the United States.

“The past relationship between the Manufacturing PMI and the overall economy indicates that the Manufacturing PMI for January (47.4 percent) corresponds to a -0.5-percent change in real gross domestic product (GDP) on an annualized basis,” said ISM chairman Timothy Fiore.

Manufacturing accounts for about 11.3 percent of the overall U.S. economy.

The Federal Reserve’s fastest interest rate-hiking cycle since the 1980s as it fights inflation is undercutting demand for goods, which are mostly bought on credit. The dollar’s past appreciation against the currencies of the United States’s main trade partners and a softening in global demand are also hurting manufacturing. Spending is shifting back to services.

The weakness in the ISM mirrored a deterioration in the so-called hard manufacturing data. Manufacturing production declined at an annualized rate of 2.5 percent in the fourth quarter, data from the Fed showed last month.

Employment

While the ISM’s manufacturing PMI has marked three consecutive months of contractions in manufacturing, ISM data shows employment in the manufacturing sector is continuing to grow, though at modest levels.

As with the manufacturing PMI, a score above 50 percent on the ISM’s employment index indicates growth. The ISM’s employment index remained in growth territory in January, though it fell from a seasonally adjusted 50.8 percent in December to 50.6 percent in January.

While the ISM’s employment index gives a somewhat positive outlook, this gauge has swung up and down and has not been a good predictor of manufacturing payrolls in the government’s closely watched employment report.

Indeed, the ISM indicated that in the 18 different manufacturing industries that its employment index tracks, five reported growth in employment in January while nine reported a decline.

Other Recession Warnings

The ISM’s latest manufacturing PMI ratings are just one of several growing signs of a possible recession in recent months.

Economists saw two consecutive quarters of contraction in the U.S. economy in the first half of 2022. The period of economic contraction met long-held definitions of a recession, but the National Bureau of Economic Research (NBER) did not officially declare a recession.

While the United States did record economic growth in the second half of 2022, recessionary concerns have continued.

In January, the World Bank cut its economic growth forecasts for the entire global economy for 2023. The World Bank placed its forecast for the United States at just 0.5 percent—a minimal level of growth.

A majority of economists polled by the World Economic Forum (WEF) later on in January predicted a high likelihood of a global economic recession.

Reuters contributed to this article.

From NTD News