Two closely watched surveys of U.S. manufacturing activity painted sharply divergent pictures in November, with one showing continued expansion and the other reporting accelerating contraction, highlighting deep uncertainty about the sector’s health amid ongoing adjustment to the new rules of global trade.
The S&P Global U.S. Manufacturing PMI registered 52.2 in November, marking the fourth consecutive month above the 50 threshold that separates expansion from contraction. However, the reading slipped from 52.5 in October.
By contrast, the ISM Manufacturing PMI fell to 48.2, down from 48.7 in October and marking the ninth consecutive month of contraction. The divergence places the two surveys on opposite sides of the expansion-contraction divide, an unusual occurrence that suggests significantly different conditions across the manufacturing landscape.
Both surveys agreed on one troubling development: manufacturers produced more goods in November even as demand weakened, leading to a substantial buildup of unsold inventory. S&P Global reported the steepest rise in warehouse stocks in the survey’s 18-and-a-half-year history, while companies reported that sales volumes fell short of expectations.
“Manufacturers are making more goods but often not finding buyers for these products,” said Chris Williamson, chief business economist at S&P Global Market Intelligence. “This unplanned accumulation of stock is usually a precursor to reduced production in the coming months.”
The ISM survey showed new orders contracting for a third straight month, falling to 47.4 from 49.4 in October. S&P Global also reported a sharp slowdown in demand growth, though its measure remained in expansion territory.
Export performance proved particularly weak across both surveys. ISM reported new export orders at 46.2, marking nine consecutive months of contraction. S&P Global noted the steepest decline in export orders since July, with sales to neighboring countries and key Asian economies dropping off.
The Labor Market: Deteriorating or Reboudning
The surveys sharply diverged on employment. S&P Global reported job growth accelerated to a three-month high, while ISM showed employment contracting at 44.0, down two percentage points from October and marking the tenth consecutive month of job losses. ISM noted that 67% of panelists reported managing head counts rather than hiring.
One potential explanation for the divergence lies in the composition of the survey panels. ISM surveys tend to include larger manufacturers with more substantial international exposure, while S&P Global’s panel includes a broader cross-section of companies, including smaller, more domestically-focused firms.
This difference could matter significantly given the state of global demand. European economic growth has proven sluggish, with the eurozone expanding just 0.2% in the third quarter. More critically, EU goods exports to the United States dropped more than 25% in August following implementation of a 15% tariff, according to European data, with Germany and Italy—major manufacturing economies—seeing their GDP growth stall.
If large, export-oriented U.S. manufacturers are facing weak demand from abroad while smaller domestic producers fare better serving the U.S. market, the two surveys could accurately reflect different segments of the manufacturing sector.
Tariffs Drive Costs Higher, Squeeze Margins
Both surveys reported that tariffs continued to drive input costs higher, with metals prices particularly elevated. However, manufacturers struggled to pass these costs through to customers. S&P Global reported selling price inflation among the lowest of the year so far, citing intense competition and weak demand.
Comments from ISM survey respondents painted a picture of mounting pressure and uncertainty. A transportation equipment manufacturer reported instituting “reduction of staff, new guidance to shareholders, and development of additional offshore manufacturing that would have otherwise been for U.S. export.”
An electrical equipment manufacturer said conditions were “more trying than during the coronavirus pandemic in terms of supply chain uncertainty,” while a wood products company noted that “planning has been undermined by unpredictability due to inconsistent messaging from Washington.”
ISM also reported that supplier delivery times improved to 49.3 from 54.2, indicating faster deliveries. While the change partially reflected resolution of some tariff-related border delays, faster deliveries also typically signal that suppliers are less busy—a sign of weakening demand in the supply chain.
Inventory Buildup Raises Recession Concerns
The unprecedented inventory accumulation reported by S&P Global represents a significant warning sign. When manufacturers produce more than they can sell, the typical response is to cut production in subsequent months to work down stock levels. Such production cuts often lead to reduced employment and can contribute to broader economic weakness.
ISM reported a different but related concern: customers’ inventories registered 44.7, indicating they remain “too low.” Normally this would signal coming strength as customers restock, but with new orders falling, it suggests customers are reluctant to build inventory despite depleted stocks—a sign of caution about future demand.
Despite current weakness, both surveys showed some improvement in business confidence. S&P Global reported optimism reached its highest level since June, with manufacturers citing expectations of improved policy support, lower interest rates, and greater political stability following the end of a federal government shutdown.
However, S&P Global noted that “uncertainty remains elevated and a drag on business growth in many firms, holding confidence well below levels seen at the start of the year.”
The conflicting signals leave the outlook for manufacturing uncertain. Production remained positive in both surveys, but the combination of weakening new orders, mounting inventories, and depressed export demand suggests potential challenges ahead, particularly for manufacturers dependent on international trade.
Read the full article here