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ISM Forecast: Manufacturing Market to Improve in the First Half of 2025
Published: 11.15.2024
Stagnation for 7 consecutive months
The manufacturing sector has stagnated for 7 consecutive months. The main leading indicator of manufacturing activity - the Purchasing Managers' Index (PMI) of the Institute for Supply Management (ISM) - fell further by 0.7% in October this year to 46.5%, indicating that the manufacturing sector is contracting. A PMI below 50.0% represents a contraction in the manufacturing sector, and the October data was the lowest since July 2023.
Demand continued to be sluggish in October because the fiscal policies proposed by the two major political parties have made companies worried about the direction of federal monetary policy (such as the resurgence of inflation), and companies are reluctant to invest in capital and inventory. "Continued weak demand, falling factory output, and continued loose capital investment are not conducive to future growth," said Tim Fiore, chairman of the ISM Manufacturing Survey Committee.
New orders remained in the contraction range, but increased slightly, by 1% to 47.1%. But the trend of 24 consecutive months of growth ended in May 2022, and new orders have not shown sustained growth until now.
Overall, factory output fell 3.6% to 46.2%. "Inputs (supplier deliveries, inventories, prices and imports) generally continue to adjust to future demand growth, with inventories retreating to lower levels and suppliers continuing to face difficulties in meeting customer demand," Fiore said.
Imports contracted for five straight months after five straight months of expansion, following 14 straight months of contraction. Fiore said ISM panelists continued to limit investment in inventories as the overall growth outlook remained uncertain. "Maritime costs continue to rise and obtaining equipment remains challenging," he added.
However, prices rose 6.5% to 54.8%, according to the ISM, but this may be a short-term increase. "I think this is due to hurricane-related fuel surcharges, as I don't see any significant price increases in commodities," Fiore said.
During the hurricane, a lot of work is done to divert fuel from the hurricane's possible path and bring it back after the hurricane. This process leads to higher costs related to transportation, such as drivers needing to detour around damaged bridges during transportation, which may increase transportation expenses.
Fiore believes that this situation will not last long, so it is not a long-term problem. In addition, he also mentioned that the United States has enough oil and natural gas reserves, and even if there is instability in the Middle East, it will not lead to a significant increase in oil prices.
Expansion of computer and electronics industry
The computer and electronics industry was one of the five manufacturing sectors that expanded in October. A technology industry executive told ISM: "Business is getting better. The market outlook is positive, but not too outstanding." According to the latest financial reports released by many companies and the speeches of analysts at the October ECIA executive meeting, the electronics industry is still overstocked and the inventory reduction is slow. Distribution executives pointed out that customers are accustomed to on-time delivery of parts, so when there is too much inventory, they did not place new orders. This makes the channel lack understanding of future demand patterns.
The ISM employment index reached 44.4% in October, an increase of 0.5% from 43.9% in September. In addition, the output index (measured by the production and employment index) continued to decline: although the number of employees continued to decline, the decline slowed down, while the production index fell further. Panelists said their companies are sizing their workforces to align with forecasted demand.
Transportation, an important end market for the electronics industry, also saw weakness in October. “While inflation has stabilized and returned to historical levels and interest rates are falling, there seems to be a general pessimism in the economy that is prompting clients to be more cautious in capital spending, including on commercial vehicles,” an industry executive told ISM. “Before the election results were announced, we conducted a series of risk analysis studies, with a particular focus on electric vehicle adoption trends and the future direction of trade restrictions/penalties.”
Declining factory production levels also kept employment low (44.4% in October). Fiore explained that companies may cut spending until demand recovers. “Companies may have sized their workforces to what they deem necessary while they watch how inflation develops under the next administration.” As for overall manufacturing activity, ISM does not expect improvement until the first half of next year.
