January PMI falls but remains in close range to estimates, reports ISM

Manufacturing output began 2023 where 2022 left off, contracting for the third consecutive month, according to the most recent edition of the Manufacturing Report on Business, which was issued today by the Institute for Supply Management (ISM).

The report’s key metric, the PMI, at 47.4 (a reading of 50 or higher indicates growth), down 1.0% from December’s 48.4, contracting, at a faster rate, for the third consecutive month. The last three months of contraction, through January, were preceded by a stretch of 29 consecutive months of growth. ISM also said that the overall economy contracted, at a faster rate, in January, for the second consecutive month, which was preceded by 30 consecutive months of growth.

The January PMI is at its lowest level since May 2020’s 43.5 reading. The January PMI is 5.3% below the 12-month average of 52.7, with February 2022 marking the high, for that period, at 58.4, and January 2023 marking the lowest.

ISM reported that two manufacturing sectors—Miscellaneous Manufacturing and Transportation Equipment—saw growth in January. On the other end, 15 sectors saw January declines, including: Wood Products; Textile Mills; Paper Products; Furniture & Related Products; Apparel, Leather & Allied Products; Plastics & Rubber Products; Electrical Equipment, Appliances & Components; Primary Metals; Nonmetallic Mineral Products; Fabricated Metal Products; Chemical Products; Machinery; Food, Beverage & Tobacco Products; Petroleum & Coal Products; and Computer & Electronic Products.

The report’s key metrics were largely down in January, including:

• New Orders, which are commonly referred to as the engine that drives manufacturing, fell 2.6%, to 42.5, contracting, at a faster rate, for the fifth consecutive month, with no manufacturing sectors reporting growth;
• Production, at 48.0, was down 0.6%, contracting, at a faster rate, for the second consecutive month, with one sector, Computer & Electronic Products, growing;
• Employment, at 50.6, fell 0.2%, growing, at a slower rate, for the second consecutive month, with five sectors reporting growth;
• Supplier Deliveries, at 45.6 (a reading above 50 indicates contraction), grew, at a faster rate, for the fourth consecutive month, following December’s 45.1 (its fastest supplier delivery performance going back to March 2009’s 43.2 reading, a 165-month stretch), with December and January marking the faster supplier delivery performance going back to March 2009, with two sectors reporting slower deliveries in January;
• Backlog of Orders, at 43.4, rose 2.0%, contracting, at a slower rate, for the fourth consecutive month, which followed 27 months of growth, with two sectors reporting growth;
• Inventories, at 50.2, fell 2.1%, growing, at a slower rate, for the 18th consecutive month, with nine sectors reporting higher inventories, and Customers’ Inventories, at 47.4, were down 0.8%; and
• Prices, at 44.5, headed up 5.1%, decreasing, at a slower rate, for the fourth consecutive month, with four sectors paying increased prices for raw materials

Comments submitted by the ISM member respondents again highlighted various themes, with a central focus slowing economic momentum.

“Business is still strong, but we have begun to see softening in some pricing, and lead times seem to be improving,” said a Computer & Electronic Products respondent. And a Transportation Equipment respondent said that supply chain issues continue to plague his company’s production schedules.

“Transportation from our overseas suppliers is also contributing to delays,” said the respondent. “Lead times have doubled for critical electronics, gaskets, sealants, and specialized steel.”

Tim Fiore, Chair of the ISM's Manufacturing Business Survey Committee, said in interview that the January PMI reading is slightly below of his 48-to-52 estimate, for the PMI.

“I still think we are sitting in a 48-to-52 environment,” he said. “In looking at the numbers, New Orders are still stubborn but is offset by New Export numbers [up 3.2%, to 49.4], with Backlog of Orders still contracting but not at the level it was back in November. Customers’ Inventories needs to get into the low 40s but was down only nearly one point.”

Addressing the New Orders number, Fiore said the decline, in recent months, is a function of some uncertainty over future demand, buyer/supplier disagreements on prices and lead times and an extended period of overordering in 2021 and 2022. On the Supplier Deliveries side, with January largely in line with December, he explained, that, at some point, the reading needs to get back to the 50 mark, with January’s mild increase potentially serving as an early indicator of that happening.

Looking at inventories, Fiore said that January’s 50.2 reading is “super low,” when considering the overordering, which was going on.

“I think what happened here was that we were effectively able to use the huge supply chain exposure we had to find out what our customers had of our product, what we have of our suppliers’ product and how many outstanding orders are out there that our suppliers are going to want to deliver to. The 50.2 [New Orders] and 47.4 [PMI] really show that that sector has managed this very well, with the damage being that the New Orders number being down, because we are still consuming orders that were placed a while back.”