Raw Finance

On January 2, 2009, the Institute for Supply Management™ announced that its index of factory activity contracted for the fifth consecutive month to 32.4 in December, down from 36.2 in November.  Generally, for a single report, if the index is above 50 percent, the economy is expanding because manufacturing is growing; a reading below 50 precent indicates economic contraction.  The reading for December is the lowest since 1980.

None of the manufacturing industries reported growth.  According to Norbert J. Ore, C.P.M., chair of the Institute for Supply Management™ Manufacturing Business Survey Committee, “Manufacturing activity continued to decline at a rapid rate during the month of December. The decline covers the full breadth of manufacturing industries, as none of the industries in the sector report growth at this time. New orders have contracted for 13 consecutive months, and are at the lowest level on record going back to January 1948. Order backlogs have fallen to the lowest level since ISM began tracking the Backlog of Orders Index in January 1993. Manufacturers are reducing inventories and shutting down capacity to offset the slower rate of activity.”

On an annualized basis, a manufacturing index reading corresponds to a 2.7 percent decrease in gross domestic product (GDP).  And that is just the negative contribution from manufacturing.  So, estimates of a GDP decline of 4 to 5 percent are reasonable.

A look at the ISM’s manufacturing index readings for the past year shows that economic activity was in decline after July, but really fell of the cliff when the credit crisis hit home in September:

THE LAST 12 MONTHS

Comments from respondents to the ISM’s survey are interesting:

• “Slowest month in years.” (Chemical Products)
• “Soft economy continues to decrease sales volume and price.” (Fabricated Metal Products)
• “Business remains steady and sales are good.” (Computer & Electronic Products)
• “North and South America are slow but not off substantially from plans. Europe has slowed down dramatically, while Asia — particularly China — has virtually shut down.” (Machinery)
• “Power generation industry is still strong, but there is an unsettled feeling because of the general economy.” (Transportation Equipment)

The ISM’s Report on Business® for December 2008 may be read here.

As the one comment from the Machinery sector indicates, the rest of the world is now receiving the brunt of the credit crisis.  Here are some details courtesy of RGEMonitor:

• Eurozone: The current Euro-area recession is far worse in 1992/93, with the Eurozone economy contracting by 2½% in 2009. The Eurozone’s higher manufacturing share makes it more sensitive to cyclical swings and to falling import demand from abroad (EMs, U.S.)–> December manufacturing PMI plunged to a record low 33.9 consistent with a decline in industrial production of around 12% y/y in December (Spain 28.5; Germany 32.7; Italy 35.5; France 34.9)  (BNP) Orders continue to decline at a significantly higher pace than output suggesting further cuts in production are likely over the coming months.
• Asia: Japanese Industrial production in November plunged 8.1% m/m following a 3.1% m/m fall in October – the sharpest monthly contraction in industrial activity since Japan started recording monthly industrial production in the 1950s.
• Chinese PMI has been in contraction for five months and industrial production has been slowing sharply in many Asian countries as external and domestic demand weaken. Thus, slight recovery in Chinese and HK manufacturing PMI based on an improvement in export orders  in December was a relief.  Inventories are being cut aggressively, suggesting that while Chinese growth may be very weak in H109 (below 6% y/y) it is not in freefall.
• India: Industrial production declined -0.4% (first time in 15yrs) in Oct-08 after 4.8% growth in Sep; Manufacturing sector dropped -1.2% in Oct (5.6% in Sep)
• Brazil: Dec’s PMI should show further weakness of manufacturing activity in Brazil. after falling from 45.7 to 41.6, well below the 50 neutral level. The sharp deterioration of leading indicators in Q4’08 indicates that Q1’09 activity data will come in the negative territory
• Russia: manufacturing PMI contracted for a fifth month in Dec to 33.8 from 39.8 in November, lower than during the 1998 economic collapse, as slumping foreign and domestic demand led to production and jobs cuts. Employment in manufacturing, which has declined since May, fell at the fastest pace since the survey began in September 1997. (Bloomberg, VTB)