U.S. Manufacturing Recovery in December

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. manufacturing showed signs of recovery in December, with production rebounding and new orders on the rise. However, the outlook remains clouded by potential higher tariffs that could increase the costs of imported raw materials.

Despite the increase in the Institute for Supply Management’s (ISM) Purchasing Managers Index (PMI) to its highest level in nine months, the survey’s tone was tempered. Terms like “volume decreases” and “significant slowdown” appeared in comments from respondents, indicating that none of the six largest manufacturing sectors reported growth last month.

Sal Guatieri, a senior economist at BMO Capital Markets, noted, “Manufacturers ended the year with a hint of optimism, but they could face some pretty stiff challenges in the new year.”

The ISM reported a PMI of 49.3 for December, up from 48.4 in November. A PMI below 50 signifies a contraction in manufacturing, which comprises 10.3% of the economy. December marked the ninth consecutive month below the threshold of 50. Economists had predicted no change.

Seven industries, including primary metals, electrical equipment, and paper products, showed growth, while sectors like textile mills and transportation equipment faced declines.

Food, beverage, and tobacco manufacturers are noticing a “softening in sales” during peak season, while transportation equipment makers reported reduced volumes. Machinery manufacturers cited a notable slowdown in production requirements towards year-end.

Conversely, manufacturers of electrical equipment and appliances reported increased new orders, with some plants operating at full capacity. Producers of miscellaneous goods indicated a favorable outlook for 2025.

The manufacturing sector has been impacted significantly by the Federal Reserve’s monetary policy tightening to counter inflation in 2022 and 2023. However, sentiment surveys have overstated the production decline. Official data revealed a manufacturing growth rate of 3.2% in the third quarter, contributing to a 3.1% economic expansion.

Last month, the Fed reduced the benchmark interest rate by 25 basis points to a range of 4.25%-4.50%. This marked the third consecutive rate cut since the easing began in September. Previous hikes of 5.25 percentage points in 2022 and 2023 highlighted the Fed’s robust policy response.

Trump’s administration plans to cut taxes, potentially benefiting manufacturing, though higher tariffs on imported goods might increase raw material costs. Fed policymakers adjusted their projection of rate cuts this year, from four to two, to reflect economic resilience and uncertainty with Trump’s proposed policies.

Despite mixed signals, Wall Street stocks were up, while the dollar weakened against other currencies. Treasury yields remained steady.

PRODUCTION REBOUNDS

The ISM’s new orders sub-index rose to 52.5 from 50.4 in November, signaling the first expansion since March. Electrical equipment and primary metals industries reported order growth. However, textile mills and transportation equipment industries saw declines.

Factory production rebounded after previous contractions, as the prices manufacturers paid for inputs rose to 52.5 from 50.3, indicating persistent inflation pressures.

Jeffrey Roach, chief economist at LPL Financial, stated, “Businesses likely pulled forward demand given uncertainty around the trade environment.”

Trump’s proposed 25% tariff on goods from Mexico and Canada, along with a 10% tariff on items from China, intensified fears of rising costs. This concern was reflected in the ISM’s imports gauge rise to 49.7 from 47.6.

Manufacturers are increasing inventory levels, with the index climbing to 48.4 from 48.1. Timothy Fiore of ISM linked this to “advance material deliveries to avoid potential tariffs.”

The supplier deliveries index rose to 50.1 from 48.7, indicating slower delivery times. Meanwhile, factory employment decreased again, with the jobs index dropping to 45.3, a continuation of unreliable payroll predictions in government employment reports.