The US manufacturing sector experienced a deeper contraction in December, according to the latest S&P Global Flash PMI data. Factory output plummeted to a 4.5-year low, raising concerns about the potential impact of anticipated tariffs on imported raw materials. Conversely, the services sector flourished, reaching a 38-month high driven by post-election optimism.
The flash manufacturing PMI registered at 48.3, down from 49.7 in November and below economists’ expectations of 49.8. A reading below 50 signifies contraction. This decline marks a further weakening of the manufacturing sector, which constitutes 10.3% of the US economy. The production gauge within the manufacturing PMI nosedived to 46.0, its lowest point since May 2020, indicating a significant slowdown in factory activity.
This contraction comes amidst announcements of potential tariffs on goods from Mexico, Canada, and China, key US trading partners. While these policies aim to bolster domestic industries, concerns are mounting about the inflationary pressures resulting from increased import costs.
In stark contrast, the services sector experienced a surge in activity. The flash services PMI soared to 58.5, its highest level in 38 months, fueled by optimism surrounding the recent presidential election and anticipated deregulation and tax cuts. This positive sentiment propelled the composite PMI Output Index, encompassing both manufacturing and services, to a robust 56.6, its peak since March 2022.
The divergence between manufacturing and services underscores the complex economic landscape. While businesses anticipate benefits from the incoming administration’s policies, the manufacturing sector grapples with potential disruptions from tariffs and rising input costs. Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, noted the dampening effect of tariff concerns on the initial post-election euphoria in manufacturing.
New orders in the manufacturing sector also declined, falling to 47.6 from 49.3 in November. Simultaneously, supplier delivery times extended slightly, attributed to ongoing labor shortages. A significant jump in the prices paid by manufacturers for inputs, reaching a high of 59.1, further highlights the inflationary pressures building within the sector. This surge in input costs reflects both supplier-driven price increases and higher shipping expenses.
The recent period of goods price deflation, facilitated by normalizing supply chains, contributed to a significant slowdown in inflation. This allowed the Federal Reserve to initiate interest rate cuts in September. However, economists caution that the proposed tariffs and immigration policies could reignite inflationary pressures. Williamson emphasized the sharp rise in raw material prices in December, attributing it to increased supply chain activity ahead of potential protectionist measures.
In conclusion, the December flash PMI data reveals a bifurcated US economy. The services sector thrives on post-election optimism, while the manufacturing sector faces headwinds from potential tariffs and rising input costs. The contrasting performance of these two key sectors highlights the complex economic challenges and opportunities that lie ahead. Moving forward, monitoring the interplay between these forces will be crucial for understanding the overall trajectory of the US economy.
