Manufacturing Economy Sees Industry Spikes
After an abysmal year for the manufacturing economy, the January 2020 Manufacturing ISM® Report On Business® is out, showing much healthier numbers from the recent norm. But are these numbers representative of a new trend or the product of an end-of-year push in 2019? The report seems to indicate that it’s a spike, sure to settle back down in the first quarter. But what caused the spike and what’s responsible for the sudden uptick into expansion territory again?
Manufacturing starts 2020 trending up
For the first time since July 2019, the manufacturing PMI (Purchasing Managers’ Index) has crossed back above the 50% threshold, up 3.1% from 47.8% to 50.9%. The hearty push back into expansion territory comes from spikes in several key metrics — namely a 9.5-point increase in production. New export orders (6%), new orders (4.4%), customers’ inventories (2.7%), and imports (2.5%) all registered gains in January as well. Of the 10 key metrics factored into PMI, only inventories (-0.4%) fell slightly to start the year.
January represents a stark contrast to the latter half of 2019, when the manufacturing economy gradually sunk into contraction territory, mired by substantial headwinds like trade tension and employment gaps. Despite the resurgence, many analysts predict a return to contraction as early as the end of the first quarter.
The rough road ahead
Speculation on a strong holiday season and productive trade talks with China seem to be the driving factors behind manufacturing’s strong uptick. In addition, complications from China’s coronavirus epidemic have forced large contingents of short-term manufacturing contracts back to American soil. These speculations are supported by the rising import/export numbers in the January ISM, as well as production and new order figures.
But many believe these situational tailwinds will soon stop blowing. A generally mild winter thus far threatens to put domestic manufacturers behind schedule in the event of inclement weather in February or early March.
Coronavirus in the United States also is a growing concern, with a handful of cases reported in major metropolitan areas. If left to spread, U.S. manufacturing could be in for the same struggles Chinese manufacturing currently faces.
Historical data also suggests manufacturing’s contraction in the first half of the year. In 2017, the PMI saw a small slump from 56% to 48.9% over the first four months of the year. In 2018, the same slump occurred, lowering PMI from 59.1% to 57.3%. And, last year in 2019, the PMI dipped from 56.6% to 52.8% over the same period. Analysts expect this trend to continue in 2020.
Industry sentiment is cautious
The global manufacturing economy currently treads lightly. China’s focus is on maintaining operations amidst a full-blown virus epidemic. Brexit has thrown uncertainty into not only the U.K.’s future, but into European manufacturing as a whole. World events have begun creeping into manufacturing in unanticipated ways, leaving executives cautious about the year ahead:
“There is a drop in demand for steel products, which has had a major impact on steel prices and the domestic scrap market.” — Fabricated Metal Products
“Weakness in end markets accelerating rapidly. Continuing to reduce production based on weakening demand and declining current orders.” — Chemical Products
“General business trends are continuing to show signs of weakness resulting from tariffs and cost impacts of importing and exporting.” — Electrical Equipment, Appliances & Components
Optimists are celebrating January as a month of rejuvenation for manufacturing after a tough 2019. Pessimists are calling it a blip, waiting for the numbers to come back down. February is certain to be a catalytic month.