ISM Manufacturing Index Screeches to Slowest Pace in a Year

The US manufacturing sector lost steam in January and is growing at its most sluggish rate since January 2014, according to the Institute for Supply Management's latest purchasing managers index (PMI) released on Feb 2.

The January PMI by the ISM, watched closely across the nation, fell from 55.1% in December to 53.5%, suppressed by drops in new orders, export demand, and production activity. The index fell a full point under economists' forecasts of a 54.5% expansion for the first month of the year.

The ISM Index has stayed positive (over the median reading of 50) for 20 straight months, meaning US manufacturing has not shrank during that time. But momentum has eroded since last summer, and more recently in the three months following a still-robust 57.9% reading in October.

Difficulties in the global economy have negatively impacted US manufacturing growth, but ISM also indicated that the West Coast dock slowdown has caused problems, as well. Unionized dockworkers at ports from southern California to Washington State are continuing to negotiate a new contract with cargo companies and terminals.

ISM said the instability at the ports, which have continued to operate since July under looming strike threats, have delayed shipments out of the West Coast and created logistical challenges for businesses, relaying comments from its PMI survey respondents.

Meanwhile, economic slumps at key trade partners have hampered momentum in US manufacturing sector growth as a result of a downswing in exports. The PMI's export orders index dropped 2.5 points to 49.5, signaling a contraction in demand for manufactured goods from overseas customers for the first time in more than two years.

"Weak export and weakening inventory building is going to be the early 2015 story," Michael Montgomery, US economist for IHS Global Insight, wrote in an analysis following the release of the ISM data. Montgomery added that the strong dollar, in addition to weak foreign demand, will also be a drag on export growth. "The key for us for several months will be exports, and the story there was not good in January. That story is not going to change soon."

Montgomery termed the January data as the worst performance for the PMI since last January, when the 2014 polar vortex cut down on manufacturing and economic activity.

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New business growth has also worsened domestically. ISM's new orders index in January cooled 4.9 points to a mere 52.9%; the index was as high as 63% back in October. The production index slowed 1.2 points to 56.5, compared with last October's 62.8%.

Slower growth in new orders was partly attributable to the plunge in backlogs in January. The index of unfilled orders fell under 50 by a sizable margin, registering just 46% for the month. Employment growth in manufacturing also softened, as the jobs index ticked in at 56.5%, a 1.9-point decrease from December.

Meanwhile, Markit Economics, which also tracks US manufacturing with its own proprietary PMI, released its final January data indicating a flat month. At 53.9, its index remained the same as in December, which marked a one-year low that was similar to the one seen with the ISM index. Markit Economics earlier pointed to a slight 0.2-point decrease for the month with a January flash reading of 53.7.

In his outlook, Montgomery noted that he expects US manufacturing to turn sluggish and even "erratic and spotty" but added that the sector will go through an "adjustment process" of four to six months rather than a long-term downturn.

"The ultra-near-term outlook for the US is rather bland," he wrote, "but that still beats most of the world where bland would be an improvement."

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Will Ng is a perfectionist who has been in business journalism for more than 15 years, many of which have been devoted to covering manufacturing, technology, and industry. A writer first, he loves to tell a good story and enjoys reporting on market trends and news.