Manufacturing sector in U.S. contracts in November

REAL ECONOMY BLOG | December 01, 2023

Authored by RSM US LLP

The manufacturing sector contracted for the second month in a row in November as lower overall demand and persistent labor shortages took their toll, the Institute for Supply Management reported on Friday.

The overall index stayed unchanged at 46.7%, implying a decline. Any figure below 48.7% indicates a contraction.

We think that another key driver for the recent decline was the inventory buildup that took place this year as businesses prepared for the holiday season. Many respondents reported a higher-than-needed inventory level, which caused activities to slow.

If that turns out to be the case, we think the sector is poised for a rebound next year. At the same time, we don’t find the recent weakness in manufacturing sentiment a sign that a recession looms; most manufacturers are still doing much better than before the pandemic.

Hiring was much weaker in November as the employment subindex fell to 45.8% from 46.8%, most likely because of the auto workers strike and the overall shortage of labor.

That does not seem to signal a particularly good jobs report for the sector when the November jobs data is released next week. The prices paid component rose to 49.9%, still showing a slowdown but at a lower rate.

The takeaway

According to the most recent RSM US Middle Market Business Index survey, executives at middle market firms said they had already made preparations for a recession and that over the next six months they would increase investments in anticipation of a rebound.

Manufacturing has been heavily affected by high interest rates over the past two years. With investors and analysts anticipating that the Fed will lower rates next year, a rebound is only a matter of time in our opinion.