Wrapup 1: US manufacturing PMI rises to nine-month high, but challenges loom
03/01/2025 17:25
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ISM PMI rises to nine-month high of 49.3 in December
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Production rebounds as new order continue to grow
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Threat of tariffs raises inventory and import levels
By Lucia Mutikani
WASHINGTON, Jan 3 (Reuters) - U.S. manufacturing moved
closer to recovery in December, with production rebounding and
new orders rising further, but the outlook remains uncertain
amid the threat of higher tariffs that could raise prices of
imported raw materials.
Despite the increase in the Institute for Supply
Management's (ISM) Purchasing Managers Index (PMI) to a
nine-month high last month, the tone of the survey was less
upbeat, with phrases such as "volume decreases" and "significant
slowdown" appearing in some of the comments from respondents.
None of the six largest manufacturing industries grew last
month.
"Manufacturers ended the year with a hint of optimism, but
they could face some pretty stiff challenges in the new year,"
said Sal Guatieri, a senior economist at BMO Capital Markets.
The ISM said on Friday that its manufacturing PMI increased
to 49.3 last month, the highest reading since March, from 48.4
in November. A PMI reading below 50 indicates contraction in the
manufacturing sector, which accounts for 10.3% of the economy.
December marked the ninth consecutive month that the PMI
remained below the 50 threshold. Economists polled by Reuters
had forecast the PMI would be unchanged at 48.4.
Seven industries, including primary metals, electrical
equipment, appliances and components as well as paper products
and miscellaneous manufacturing reported growth last month.
Among the seven industries reporting contraction were textile
mills, machinery and transportation equipment.
Some manufacturers of food, beverage and tobacco products
said they were "seeing a softening in sales," adding that this
"is concerning, as it's our peak season."
Transportation equipment makers reported "automotive and
powersport volume decreases."
Machinery manufacturers reported a "significant slowdown in
production requirements in the last two months of the year." In
the fabricated metal products industry, some businesses reported
"order levels well below forecast projections."
The mood was, however, fairly optimistic among manufacturers
of electrical equipment, appliances and components, with some
saying that "the increase in new orders has our plant at full
capacity." Makers of miscellaneous goods noted the "combo of
seasonal factors plus increased demand outlook for 2025."
Primary metals producers said "there is definitely an uptick
this month, though not a stable one."
Manufacturing was battered by the Federal Reserve's
aggressive monetary policy tightening in 2022 and 2023 to tame
inflation. But sentiment surveys, including the PMI, have
exaggerated the magnitude of the decline in factory production.
Government data last month showed manufacturing growing at a
3.2% annualized rate in the third quarter and contributing to
the economy's 3.1% pace of expansion during that period.
The U.S. central bank lowered its benchmark overnight interest
rate by 25 basis points to the 4.25%-4.50% range last month. It
was the third consecutive rate cut since the Fed started its
easing cycle in September.
The Fed's policy rate was hiked by 5.25 percentage points in
2022 and 2023. A pledge by President-elect Donald Trump's
incoming administration to cut taxes could provide a boost to
manufacturing. But other policy promises, including higher
tariffs on imported goods, could increase raw materials prices.
Fed policymakers have projected two rate cuts this year,
compared to the four they had forecast in September, because of
the economy's resilience and uncertainty over the impact of the
incoming Trump administration's policies.
Stocks on Wall Street were trading higher. The dollar
slipped against a basket of currencies. U.S. Treasury yields
were largely unchanged.
PRODUCTION REBOUNDS
The ISM survey's forward-looking new orders sub-index
increased to 52.5 from 50.4 in November, which marked the first
expansion since March. Six industries, including electrical
equipment, appliances and components as well as primary metals
and miscellaneous manufacturing, reported orders growth.
Textile mills, wood products and transportation equipment
were among the eight industries reporting a decline in orders.
Production at factories rebounded after contracting for
months. The survey's measure of prices paid by manufacturers
rose to 52.5 from 50.3 in November.
"Businesses likely pulled forward demand given uncertainty
around the future trade environment," said Jeffrey Roach, chief
economist at LPL Financial. Roach added that the rise in the
measure for prices paid was "a sign of nagging inflation
pressures."
Trump has vowed to impose a 25% tariff on all products from
Mexico and Canada, and an additional 10% tariff on goods from
China. Fears of higher tariffs were also evident in the rise in
the ISM's gauge of imports to 49.7 from 47.6 in the prior month.
Manufacturers are also building up stocks, with the survey's
measure of inventories at factories climbing to 48.4 from 48.1
in November.
Timothy Fiore, chair of the ISM's Manufacturing Business
Survey Committee, attributed the rise in both the imports and
inventory indexes to "advance material deliveries to avoid
potential tariffs," and companies acting "to better absorb any
potential tariff impact in the future."
The survey's gauge of supplier deliveries increased to 50.1
from 48.7 in November. A reading above 50 indicates slower
deliveries.
Factory employment contracted further, with the survey's
manufacturing jobs index falling to 45.3 from 48.1 in November.
This measure has not been a reliable predictor of manufacturing
payrolls in the government's closely watched employment report.
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Graphic-ISM Manufacturing PMI https://reut.rs/4fLxOdY
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(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Paul
Simao)
((mailto:Lucia.Mutikani@thomsonreuters.com))