The Institute for Supply Management (ISM) came out with its Manufacturing Purchasing Managers’ Index (PMI) for December. It fell to 47.9, well below the consensus of 48.3. The increase in the reading from November’s 48.2 was marginal, as both new orders and production continued to contract. This still underscores the continued headwinds facing the U.S. manufacturing sector, which has contracted for nine consecutive months. The Institute of Supply Management (ISM) Manufacturing PMI is the most closely watched barometer of the business climate. It takes into account outlook for future production, new orders, inventories, employment, and deliveries.
The report, scheduled for release at 15:00 GMT on Monday, continues to attract significant attention from market participants, particularly in light of its implications for the U.S. dollar (USD) and overall economic activity. Foremost among those is a suite of employment-related indices, which analysts have been closely watching, given their predictive power. So everybody’s getting ready for Friday’s Nonfarm Payrolls (NFP) report.
Manufacturing Sector Challenges
The ISM Manufacturing PMI is known as the most reliable economic indicator of the health of the overall United States economy and the manufacturing sector. Any reading lower than 50 shows a contraction, and any number above that level reflects an expansion in activity. The December PMI reading of 47.9 reflects a continued downturn and underscores the ongoing pressures faced by manufacturers amidst an unpredictable economic landscape.
Stephen Stanley, an economist, noted that external factors are influencing the sector’s performance:
“The manufacturing sector continues to be weighed down by the unpredictable tariffs landscape.”
The New Orders Index, which is a key component of the PMI, has contracted for the third consecutive month. It is now at 47.4, having fallen from 49.4 in October. This is a significant decline because it’s indicative of manufactured goods demand falling on a regular basis. This trend is worrisome for the economics of the sector excavators and shakers.
Detailed Index Performance
While the composite PMI may have dropped, the underlying sub-indices painted a more positive picture in some areas. Most significantly, the Production Index increased to 51.4 from November’s 48.2, signaling a return-to-growth for production activities. This troublesome uptick indicates that at least some manufacturers are increasing production even in the face of a slowing economy.
Further, the Prices Index was still firmly into expansion territory, coming in at 58.5, up from 58 last month. This shows that, even as demand has begun to weaken, manufacturers are still under severe upward pressure on prices.
Not all the news was positive. In October, the Employment Index fell from 46 to 44. This marked decline is an indicator of further slowing in manufacturing hiring. This drop is worrisome, as it puts the stability and potential for future job growth at risk.
Implications for Currency and Economic Outlook
The ISM Manufacturing PMI’s drop represents increased downside risk for the U.S. dollar. Failure to meet expectations could not only place downward pressure on the currency in USDMX but in USDXX as well across FX markets. As highlighted by analyst Bednarik:
“If the ISM Manufacturing PMI comes below expected and even below the November reading, the USD is likely to edge sharply lower across the FX board.”
Market participants have identified important resistance levels in the currency pair technicals. The January 2 high at 1.1765 is the most important level, with additional resistance shortly above that at 1.1800. If further advances happen, the market watchers expect the rallies to target momentum toward the 1.1860 level.
Today’s reading above 50 will be even more important to supporting the USD. That’s a positive sign for the economy and reduces the chance for future interest rate cuts by the Federal Reserve. The outlook for economic activity in the manufacturing sector continues to be tepid. Future readings will be key in determining the path of monetary policy and impacting overall market sentiment.