Written by Lucia Mutikani
WASHINGTON (Reuters) – The U.S. manufacturing sector moved closer to recovery in December, with production rebounding and new orders rising, but the outlook remains uncertain amid the threat of higher tariffs that could push up prices of imported raw materials.
Although the Institute for Supply Management's (ISM) Purchasing Managers' Index (PMI) rose to a nine-month high last month, the tone of the survey was less optimistic, with phrases such as “declining volume” and “significant slowdown” appearing in Some comments from respondents. None of the six major manufacturing industries saw growth last month.
“Manufacturers finished the year with a hint of optimism, but they may face some very tough challenges in the new year,” said Sal Guatieri, chief economist at BMO Capital Markets.
The Institute for Supply Management said on Friday that its manufacturing PMI rose to 49.3 last month, the highest reading since March, from 48.4 in November. A PMI reading below 50 indicates a contraction in the manufacturing sector, which represents 10.3% of the economy.
December was the ninth month in a row that the PMI remained below the 50 threshold. Economists polled by Reuters had expected the PMI to remain unchanged at 48.4.
Seven industries, including primary metals, electrical equipment, appliances and components as well as paper products and miscellaneous manufacturing, registered growth last month. Among the seven industries that recorded a contraction were textile factories, machinery, and transportation equipment.
Some food, beverage and tobacco product manufacturers said they were “seeing a decline in sales”, adding that this was “worrying, because it is our peak season”.
Transportation equipment makers reported “a decline in automotive and powersports volume.”
Machinery manufacturers reported a “significant slowdown in production requirements in the last two months of the year.” In the fabricated metal products industry, some companies reported that “demand levels are well below expected expectations.”
However, the mood was somewhat upbeat among manufacturers of electrical equipment, appliances and components, with some saying that “the increase in new orders has kept our factory running at full capacity.” Miscellaneous commodity makers cited “a combination of seasonal factors as well as rising demand expectations for 2025.”
“There is definitely a slight uptick this month, although it is not stable,” primary metals producers said.
Manufacturing has been hit hard by the Federal Reserve's tightening monetary policy in 2022 and 2023 to curb inflation. But opinion polls, including the Purchasing Managers' Index, have exaggerated the size of the decline in factory output.
Government data last month showed manufacturing grew at an annual rate of 3.2% in the third quarter and contributed to the pace of the economy's expansion by 3.1% during that period.
The US central bank cut its benchmark overnight interest rate by 25 basis points to a range of 4.25%-4.50% last month. This was the third straight rate cut since the Fed began its easing cycle in September.
The Fed's interest rate was raised by 5.25 percentage points in 2022 and 2023. The incoming administration of President-elect Donald Trump's pledge to cut taxes could provide a boost to manufacturing. But other political promises, including higher tariffs on imported goods, could lead to higher prices for raw materials.
Fed policymakers expected two interest rate cuts this year, compared to the four they expected in September, due to the economy's resilience and uncertainty about the impact of the incoming Trump administration's policies.
Stocks on Wall Street were trading higher. The dollar fell against a basket of currencies. US Treasury yields were largely unchanged.
Production recovery
The ISM survey's forward-looking new orders sub-index rose to 52.5 from 50.4 in November, marking the first expansion since March. Six industries, including electrical equipment, appliances and components as well as primary metals and miscellaneous manufacturing, recorded growth in orders.
Textile mills, wood products and transportation equipment were among the eight industries that recorded a decline in orders.
Production in factories recovered after contracting for months. The survey's measure of prices paid by manufacturers rose to 52.5 from 50.3 in November.
“Companies are likely to push demand forward given uncertainty about the future trading environment,” said Jeffrey Roach, chief economist at LPL Financial (NASDAQ). Roach added that the rise in a measure of prices paid was “a sign of troubling inflation pressures.”
Trump pledged to impose a 25% tariff on all products coming from Mexico and Canada, in addition to an additional 10% tariff on goods coming from China. Fears of higher tariffs were also evident in the rise in the ISM measure of imports to 49.7 from 47.6 the previous month.
Manufacturers are also building inventories, with the survey's measure of inventories at factories rising to 48.4 from 48.1 in November.
Timothy Fury, chairman of the Institute for Supply Management's Manufacturing Business Survey, attributed the rise in both import and inventory indicators to “advanced materials delivered to avoid potential tariffs,” and companies acting to “better absorb any potential impact of future tariffs.”
The survey's measure of supplier deliveries rose to 50.1 from 48.7 in November. A reading above 50 indicates slowing deliveries.
Factory employment contracted further, with the survey's manufacturing jobs index falling to 45.3 from 48.1 in November. This measure was not a reliable indicator of manufacturing jobs in the closely watched government employment report.
