US Factory Activity Shrinks for 14th Straight Month

Contraction Extends Longest Stretch of Shrinking Since 2001
Eaton Corp. factory
Truck transmissions move along the assembly line at an Eaton Corp. manufacturing facility. (Mauricio Palos/Bloomberg News)

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A measure of U.S. factory activity remained stuck in contraction territory for a 14th straight month at the end of 2023, restrained by weaker orders.

The Institute for Supply Management’s manufacturing gauge edged up 0.7 point to 47.4 in December, helped by a pickup in production, according to data released Jan. 3. Readings below 50 indicate contraction, and the figure was near economists’ expectations.

The December result extends the longest stretch of shrinking activity since 2000-2001, when the dot-com bubble burst and sparked a recession.

Manufacturers were beset last year by high borrowing costs and waning demand for goods that prompted some companies to rethink capital spending plans. While the ISM gauge still shows contraction — and almost all industries shrank during the month — it is holding in a range that suggests activity has stabilized at a weak level.

Factory purchasing managers are more upbeat about this year’s prospects as the Federal Reserve has signaled a pivot to lower interest rates.

US manufacturing chart

In the ISM’s latest semiannual economic forecast, 15 of 18 manufacturing industries project that revenue will increase, while capital expenditures are seen rising almost 12%.

“We felt that we’re going to have a good year in 2024,” Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said on a Jan. 3 call with reporters. “We’ve closed the year on a very good note.”

A separate Labor Department report Jan. 3 showed U.S. job openings eased in November, fewer workers voluntarily quit their positions and the number of hires fell, adding to evidence of cooling labor demand.

Cheaper commodities are benefiting many of the nation’s producers. The Jan. 3 ISM data showed a measure of prices paid for materials declined in December from a month earlier by the most in seven months. The prices paid index decreased by 4.7 points to 45.2, helped by a drop in oil prices to an almost six-month low in December.

The ISM’s factory employment index contracted in December but at the slowest pace in three months. Production expanded, even as new orders contracted for a 16th straight month.

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“The ISM Manufacturing index improved slightly in December, but ongoing softness in demand limits the need to ramp up production or hiring,” said Bloomberg economist Eliza Winger. “Continued contraction in the order backlog points to spare capacity and subdued inflationary pressures.”

Anecdotal comments showed some surveyed companies were optimistic over rising demand and the potential for capital investment to pick up in 2024, while others reported slowing business and higher costs for financing.