Economy Watch: Sentiment Improves, But Economy Contracts a Bit–PMI

December was the fifth consecutive month of the Purchasing Managers Index (PMI) contracted at a faster rate compared to the prior month.

Demand contracted, with the New Orders Index contracting faster, the Customers’ Inventories Index remaining at ‘too low’ status and the Backlog of Orders Index contracting for the eighth straight month (and at similar rates to November). The New Export Orders Index contracted for the second month in a row, recording 10 months of poor performance and likely contributing to the faster contraction of the New Orders Index.

Consumption (measured by the Production and Employment indexes) contracted, due primarily to lack of demand, contributing negatively (a combined 7.4-percentage point decrease) to the PMI® calculation. Inputs — expressed as supplier deliveries, inventories and imports — improved in December, due primarily to slowing contraction in inventories and supplier deliveries remaining in expansion territory. Imports contraction eased slightly.

Overall, inputs indicate (1) supply chains began to stress in December and (2) companies remained cautious that materials received would be consumed by the end of the fourth quarter. Prices increased for the first time since May 2019, a positive for 2020.

“Global trade remains the most significant cross-industry issue, but there are signs that several industry sectors will improve as a result of the phase-one trade agreement between the U.S. and China. Among the six big industry sectors, Food, Beverage & Tobacco Products remains the strongest, while Transportation Equipment is the weakest. Overall, sentiment this month is marginally positive regarding near-term growth,” says Timothy R. Fiore, chair of the Institute for Supply Management Manufacturing Business Survey Committee.

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