Manufacturing sector nears contraction

REAL ECONOMY BLOG | December 01, 2022

Authored by RSM US LLP

The manufacturing sector grew for the 30th month in a row but barely hovered above contraction in November, according to data released by the Institute for Supply Management on Thursday.

The ISM’s overall index slowed to 49%, barely above the contraction threshold at 48.7%. It was the third straight decline as demand for manufactured goods stalled.

The slowdown was broad-based as production, inventories, new orders, prices paid and employment all slowed down on the month.

Except for the prices-paid component, which suggests that more relief from goods inflation is coming, the overall decline of the sector signals that a goods and manufacturing recession is imminent.

Manufacturing employment fell for the second time in three months, suggesting a softer manufacturing number when the highly anticipated jobs report is released on Friday.

That slowdown, however, is expected as the Fed continues to raise rates to combat inflation. Together with housing, the manufacturing sector is often one of the most rate-sensitive sectors.

We should expect the sector to contract even more as most of the impact from rate hikes has not yet been felt. While our forecast points to a potential recession in the second half of next year, a manufacturing recession might happen earlier.

The takeaway

With so much uncertainty in the economy, we believe businesses should proceed with caution in their investment and hiring decisions. There are reasons to believe that the next recession will be brief and shallow. Any overcorrection in business plans might not be desirable in case the market turns positive quickly.