U.S. Manufacturing Contracted at End of 2022, ISM Survey Says

Activity in U.S. factories contracted for the second month in a row in December, a survey showed Wednesday.

The Institute for Supply Management’s survey of purchasing managers indicated that manufacturing activity declined at year end as demand for goods declined amid higher interest rates and a slumping European economy. The results of the ISM survey confirmed similar findings released on Tuesday by S&P Global.

The ISM index of manufacturing activity fell to 48.4 in December, down from 49.0 in November. Both were below the 50.0 dividing line separating expansion from contraction. The reading was in line with the forecasts of Wall Street economists.

Consumer spending in the U.S. has been rebalancing toward services after a surge in spending on household goods during and after the pandemic. Consumer exhaustion with spending on durable goods, high and rising prices, and a decline in home buying have all contributed to the decline. In addition, consumers have been spending more on travel, dining out, and other services.

Output and new orders declined in December, according to the ISM data. The production index fell to 48.5 from 51.5, suggesting that factory output fell in December. The index of new orders dropped to 45.2 from 47.2.

The declines suggest that the contraction in manufacturing is picking up speed.

The prices paid by manufacturers for raw materials prices decreased for the third straight month after a 28-month period in “increasing” territory. This is the prices index’s lowest level since April 2020. This may not, however, do much to reduce overall inflation, which has already shifted into the services sector.

The report contained some bad news on the inflation front in that it suggested the labor market remains very tight. The index tracking employment had contracted in November but returned to expansion in December. The Federal Reserve has made it clear that softening demand for labor is a key step in taming inflation.

New export orders fell deeper below the 50 threshold in December, reflecting weak demand from abroad.