ISM Negative 4th Month, Employment Shows Significant Declines

Manufacturing in January continues its dismal track record with the latest ISM reading. Econoday reports …

Employment sank the ISM index in January which could muster no better than a 48.2 for what, following annual revisions to 2015, is the fourth sub-50 reading in a row. This is by far the worst run for this closely watched indicator since the Great Recession days of 2009.

Employment fell a very steep 2.1 points to 45.9 to signal significant contraction for manufacturing payrolls in Friday’s employment report, which however would not be much of a surprise given the sector’s prior payroll contraction. This is the third sub-50 reading for employment of the last four months and the lowest reading since, once again, 2009.

There is good news in the report and that’s a snapback for new orders, to 51.5 for only the second plus 50 reading of the last five months and which points to overall improvement in the coming reports. But backlog orders, at only 43.0, remain in deep contraction, and what strength there is in orders isn’t coming from exports which are in contraction for the seventh of the last eight months. Manufacturers have been working down backlogs to keep production up, which came in at 50.2 to signal fractional monthly growth. Inventories remain steady and low but the sample still say they are too high, sentiment that points to lack of confidence in the business outlook.

Confirming the weakness is breadth among industries with 10 reporting composite contraction against eight reporting monthly growth. If it wasn’t for strength in new orders, January’s data would be almost entirely negative. This report is a downbeat opening to 2016 which follows a definitively downbeat year for the factory sector in 2015.

ISM Manufacturing Index

Let’s further dive into the numbers straight from the ISM Report.

Index Jan Dec PP Change Direction Rate of Change Trend in Months
PMI® 48.2 48.0 0.2 Contracting Slower 4
New Orders 51.5 48.8 2.7 Growing From Contracting 1
Production 50.2 49.9 0.3 growing From Contracting 1
Employment 45.9 48.0 -2.1 Contracting Faster 2
Supplier Deliveries 50.0 49.8 0.2 Unchanged From Faster 1
Inventories 43.5 43.5 0.0 Contracting Same 7
Customers’ Inventories 51.5 51.5 0.0 Too High Same 6
Prices 33.5 33.5 0.0 Decreasing Same 15
Backlog of Orders 43.0 41.0 2.0 Contracting Slower 8
Exports 47.0 51.0 -4.0 Contracting From Growing 1
Imports 51.0 45.5 5.5 Growing From Contracting 1

Key Points

  • Backlog of orders in contraction 8 months
  • Exports back in contraction
  • Prices in contraction 15 months

In December I stated “There’s nothing in the ISM report to make the Fed want to hike, but the Fed will do what they want.

The Fed did indeed hike. And economists still believe no recession is coming.

For my take, please see Economists in Fantasyland: Economists See 20% Chance of Recession That’s at Least 20% Likely Already Here.

Mike “Mish” Shedlock