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U.S. Manufacturing Activity Rebounds in November

The Institute for Supply Management (ISM) manufacturing index rose 1.6 percentage points to 59.3 in November. Markets were expecting a tiny tick down to 57.6 from October’s 57.7 value.

With the exception of supplier deliveries, which has declined for two consecutive months, the main subcomponents of the index advanced in the month. New orders rebounded 4.7 points to 62.1, inventories rose 2.2 points to 52.9, and employment rose 1.6 points to 58.4. The rise in production was a bit subdued, rising 0.7 to 60.6.

The trade components of the report remained largely unchanged. New export orders held at 52.2, while imports fell 0.7 to 53.6. These levels remain well below those recorded at the time the U.S. administration levied tariffs on steel and aluminum imports this past March.

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Although volatile and not seasonally adjusted, the drop in prices paid index is worth a mention. The index dropped 10.9 points to 60.7 suggesting that prices are still rising but at the slowest pace since June 2017. The reduction reflected declines in some aluminum, steel, and copper commodities, while freight prices were cited as easing as well.

Thirteen of eighteen manufacturing industries reported growth in November. Three industries reported contraction: printing and related support activities, nonmetallic mineral products, and primary metals.

Key Implications

The headline and details of this report confirm that the U.S. manufacturing sector continues to expand at a healthy pace. That said, comments by survey respondents suggest that things may not be as hot as the numbers suggest. Capacity constraints and component shortages remain, as do labor shortages. Import tariffs remain a top concern, with some respondents citing price pressures affecting competitiveness and leading to a build-up in inventory in order to get ahead of potential increase in Chinese import tariffs on January 1st. Although easing freight costs are welcome by many, it appears to be driven by slowing demand and not an improvement in supply, a further sign that perhaps demand is softening.

In addition to concerns about slowing domestic demand, U.S. manufacturers have to contend with weaker foreign demand. Global manufacturing indices released earlier this morning continue to indicate that economic activity has broadly slowed in the last few months, and affirms the recent leg down in prices of commodities, especially oil. Although the deal between the U.S. and China at the G20 meeting this weekend may boost near-term sentiment, weaker foreign demand and the high U.S. dollar are factors that are likely to continue to weigh on demand for U.S. manufactured goods in the months ahead.

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