Manufacturing PMI Points to Recession

By at 1 December, 2023, 3:25 pm

by Raymond J. Keating –

The latest Institute for Supply Management’s Manufacturing PMI indicated that the manufacturing recession continued in November, and that chances for an economywide recession increased.

The November reading of 46.7 percent, unchanged from October, indicated that the manufacturing sector had contracted for the 13th consecutive month. A measure below 50 percent indicates contraction.

But Timothy R. Fiore, chair of the Institute for Supply Management Manufacturing Business Survey Committee, went further: “The overall economy continued in contraction for a second month after one month of weak expansion preceded by nine months of contraction and a 30-month period of expansion before that.”

According to the ISM, “A Manufacturing PMI above 48.7 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the November Manufacturing PMI indicates the overall economy contracted for a second straight month after one month of growth preceded by nine consecutive months of contraction and 30 months of expansion from June 2020 to November 2022.

Fiore said, “The past relationship between the Manufacturing PMI and the overall economy indicates that the November reading (46.7 percent) corresponds to a change of minus-0.7 percent in real gross domestic product (GDP) on an annualized basis.”

Fourteen of 17 manufacturing industries reported contraction in November, with the three growth sectors being Food, Beverage & Tobacco Products; Nonmetallic Mineral Products; and Transportation Equipment.

Comments from respondents in the report either were clearly negative or leaned in that direction. For example, a respondent from the Computer & Electronic Products sector said:

“Economy appears to be slowing dramatically. Customer orders are pushing out, and all efforts are being made to right-size inventory levels, both to mitigate carrying costs on pushed-out orders and to load up on inventory where costs are exploding, like cold-rolled steel.” And a Chemical Products respondent declared, “Starting to feel softening in the economy, with labor still a challenge to backfill critical roles. The 2024 forecast looks challenging, specially from a cost perspective.” And a Wood Products sector respondent noted, “Elevated financing costs have dampened demand for residential investment. Our business has been negatively impacted through reduced new orders for our products and services. We are purchasing less for production and finished goods inventories.”

Finally, let’s keep in mind that manufacturing is overwhelmingly about smaller businesses, with 93.1 percent of employer firms (according to the latest Census Bureau) in manufacturing having fewer than 100 employees. So, when talking about a manufacturing recession, we’re talking about a recession for small businesses.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest books on the economy are The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist and The Weekly Economist II: 52 More Quick Reads to Help You Think Like an Economist.


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