Factory Weakness Seen Weighing on 4th-Quarter GDP
Manufacturing sector contracts for second month in a row as ISM gauge at lowest since end of recession
ENLARGE
The Institute for Supply Management, a trade group of purchasing managers, reported Monday that activity in the manufacturing sector contracted for the second consecutive month. Here, a worker carries a roll of sub flooring to be installed in a school bus on an assembly line at Blue Bird Corp.'s manufacturing facility, in Fort Valley, Ga. Photo: Associated Press
The Institute for Supply Management, a group of purchasing managers, said Monday that its gauge of manufacturing activity fell to 48.2 last month from 48.6 in November. A reading below 50 indicates the sector is contracting.
December’s figure was the lowest since the end of the recession and marks the first time since 2009 for consecutive months in contraction territory.
“The very strong dollar, weak global growth, low oil prices severely depressing energy sector investment, and excessive inventories continue to weigh heavily on the manufacturing sector,” said Morgan Stanley economist Ted Wieseman.
The global outlook appeared even darker amid the latest indication that China’s manufacturers are struggling further. Caixin Media Co. said Monday that its China manufacturing purchasing managers’ index, a private measure of activity, was at 48.2 in December, the 10th straight month indicating contraction in the sector.
Manufacturing accounts for about 12% of U.S. economic output. Other sectors, fueled by domestic consumer demand, have appeared more robust. Still, the broader economy has been stuck in slow-growth mode since the latest recession ended 6½ years ago.
That appears unlikely to change. J.P. Morgan Chase on Monday downgraded its forecast for fourth-quarter economic output after the ISM report showed manufacturers drawing down inventories and a weaker-than-expected government report on construction spending in the U.S. The bank is expecting gross domestic product to grow only 1% in the final months of 2015, versus an earlier forecast of 2%.
The Federal Reserve Bank of Atlanta’s estimate for fourth-quarter GDP fell to 0.7% from 1.3% after incorporating data from Monday’s construction and manufacturing reports, and a trade report released in late December.
The start of 2016 isn’t expected to be so glum as the weather remains relatively mild, consumers get a boost from lower energy prices and businesses stop running down inventories. J.P. Morgan economist Michael Feroli is predicting 2.25% growth in the first quarter of 2016.
The manufacturing sector has slumped over the past 12 months and still faces headwinds including falling demand for oil, gas field and mining equipment, weakness overseas and shifting currencies. A strong dollar has curtailed demand for U.S. exports while also making imported goods cheaper.
While Monday’s ISM report offered one bright note—a measure of export demand expanded for the first time since April—that was outweighed by contractions for new orders, production and employment.
Sales at Joy Global Inc. fell by 24% in the fourth quarter of the year as prices for coal, copper and other commodities crashed. The Milwaukee-based mining equipment maker’s outlook for 2016 isn’t much better.
“The mining industry in 2016 will be defined by strained cash flows, further austerity measures and asset consolidation,” President and Chief Executive Ted Doheny told investors last month.
That’s led to job losses across the industry and promises of more to come this year. “We have plans to deliver $85 million in cost savings in 2016 as we optimize our staffing levels and footprint,” Mr. Doheny said.
