December manufacturing output declines, to finish 2022, reports ISM

December manufacturing output finished 2022 falling below the baseline for growth, for the second 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, came in at 48.4 (a reading of 50 or higher indicates growth), down 0.6% from November’s 49.0, contracting, at a faster rate, for the second consecutive month. The last two months of contraction were preceded by a stretch of 29 consecutive months of growth. ISM added that the overall economy contracted in December, following 30 consecutive months of growth.

The December PMI is at its lowest level since May 2020’s 43.5 reading. And the PMI is 5.1% below the 12-month average of 53.5, with December marking the lowest reading over that period and February 2022’s 58.6 marking the highest.

ISM reported that two manufacturing sectors saw growth in December—primary metals and petroleum & coal products, with the latter representing the only manufacturing sector to see moderate growth in December. ISM said that 13 sectors reported contraction, including: Wood Products; Fabricated Metal Products; Chemical Products; Paper Products; Plastics & Rubber Products; Electrical Equipment, Appliances & Components; Furniture & Related Products; Apparel, Leather & Allied Products; Computer & Electronic Products; Machinery; Food, Beverage & Tobacco Products; Transportation Equipment; and Miscellaneous Manufacturing.

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

• New orders, which are commonly referred to as the engine that drives manufacturing, falling 2.0%, to 45.2, contracting, at a faster rate, for the fourth consecutive month, with three sectors reporting growth;
• Production, at 48.5, was off 3.0%, contracting after 30 months of growth, with four sectors up for the month;
• Employment, at 51.4, increased 3.0%, growing after contracting in November, with five sectors growing;
• Supplier Deliveries, at 45.1 (a reading above 50 indicates contraction), grew, at a faster rate, for the third consecutive month, turning in its fastest supplier delivery performance going back to March 2009’s 43.2 reading, a 165-month stretch, with three sectors reporting growth;
• Backlog of orders, at 41.4, increased 1.4%, contracting, at a slower rate, for the third consecutive month, following 27 months of growth, with two sectors reporting growth;
• Inventories, at 51.8, increased 0.9%, growing, at a faster rate, for the 17th consecutive month, with eight sectors reporting growth; and
• Prices, at 39.4, decreasing, at a faster rate, for the third consecutive month, with one sector paying increased prices for raw materials

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

A chemical products respondent said that customer demand continues to be depressed, as the 2023 pipeline looks positive and current demand being significantly down. And a food, beverage, and tobacco products respondent noted that lead times are returning to normal for most of its suppliers, with some of its smaller suppliers struggling to remain staffed up enough to keep up with orders.

Tim Fiore, Chair of the ISM's Manufacturing Business Survey Committee, said in an interview that the December reading came in at the lower end of its forecasted range of 48-to-52.

“We are at the lower end of that,” he said. “And I think a lot of that had to do with the fact that production came down, which was a bit of a surprise. It really came down, because people decided to let it come down, and with the backlog burned off so much it was more of getting stuff out in [early] 2023 instead of 2022.”

Fiore explained that the real story around manufacturing is related to demand, with lower levels of demand serving as a catalyst for lower prices, faster supplier deliveries, and lead times coming down but not enough.

“We are still 35% above trough lead times for raw materials, and we need that to head up so that buyers are much more encouraged to jump in and re-order their products,” he said. “The way things were done for the last year-and-a-half is going to go away, and sometimes that takes time for sellers to agree to go back to the way they used to do business. A lot of them tried to change the rules during the pandemic…power is shifting to the buyers’ side, with demand still weak. The last time backlog expanded was in September.”  

In its recently issued Semiannual Forecast, ISM said that the manufacturing outlook for 2023 would not be much different than 2022’s performance, which Fiore said was encouraging.

“In looking at the business comparison piece, from the first half to the second half, the first half of the year is going to be weaker than the second half of 2022, but the second half of 2023 is going to be stronger, with 5.4% revenue growth for the whole year, which is pretty incredible,” said Fiore. “You can almost argue we are going to see negative revenue growth for the first six months, and we are going to see significant growth over the second half of the year.”

While the December PMI was below its 50% growth benchmark, for the second straight month, Fiore explained that is not a reason for major concern.

“I would like to see demand come back,” he said. “Eighty percent of manufacturing is contracting and of that 31% is contracting at less than a rate of 45%. For context, 7% was contracting in November and of that 13% was contracting at less than 45%. In October, 59% was contracting overall, with 7% contracting at a rate less than 45%.”

With both inventories and customers’ inventories (down 0.5%, to 48.2) in similar ranges to November, Fiore said that the manufacturing sector is trying to burn off total supply chain inventory, for both “on book and off book,” with the latter representing orders sourced to suppliers, as well as customers. And he added that the new orders reading being down, for the last four months is an indication that the manufacturing sector is trying to eliminate over-ordering.