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U.S. manufacturing slows at fastest pace in six years

January 4, 2016

Manufacturing in the United States contracted in December at the fastest pace in more than six years as factories, hobbled by sluggish global growth, cut staff at the end of 2015.

The Institute for Supply Management’s index declined to 48.2, the weakest since June 2009, from 48.6 a month earlier, the Tempe, Arizona-based group’s report showed Monday. Readings lower than 50 indicate contraction. The median forecast in a Bloomberg survey of 72 economists was 49.

“Manufacturing’s struggles are going to extend into 2016,” Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, said before the report. “We still have the stronger dollar and there’s been another leg down in energy prices.”

Struggling overseas demand and declines in commodity prices that are hurting investment in energy and agriculture continue to limit orders for American manufacturers. At the same time, robust domestic growth buoyed by labor-market momentum and burgeoning wage gains are supporting consumers’ spending power and preventing U.S. factory activity from slowing even more.

Estimates for the manufacturing index from economists in the Bloomberg survey ranged from 46.6 to 51.

Factories globally ended the year on a weak note, contributing to a selloff in stocks worldwide on Monday morning.

Manufacturing in China contracted in December for a fifth consecutive month as the world’s second-largest economy is poised to grow in 2016 at the slowest pace since 1990. In the United Kingdom, manufacturing unexpectedly cooled in December, suggesting it made little contribution to the economy in the final quarter of 2015.

Some good news

The euro area provided one bit of good news as the region’s factories expanded in December at the fastest pace in 20 months. Manufacturing grew in all nations covered, including Greece, for the first time since April 2014.

In the U.S., ISM’s gauge of new orders improved to 49.2 last month, from 48.9 in November, but it still showed bookings were falling. Order backlogs thinned to the smallest in three years.

The measure of export orders showed foreign demand surprisingly climbed in December for the first time in eight months, signaling the worst may be over. The index rose to 51, from 47.5 in November.

Weakness in the ISM’s factory employment index was behind the drop in the overall measure. The hiring gauge fell to 48.1 in December from 51.3 the prior month, Monday’s report showed. The production gauge improved to 49.8 from 49.2 in November.

Payroll forecast

A jobs report due Friday from the Labor Department is projected to show employment made further strides in December, with hiring building on gains in 2014 that made it the best year since 1999. Economists are predicting payrolls climbed by about 200,000 last month after a 211,000 increase in November.

The ISM report also showed gauges of factory inventories contracted at a slower pace in December, rising to 43.5 from 43 in November. Manufacturers also said their customers still held too much in stockpiles.

An index of prices paid dropped to 33.5, the lowest since April 2009, from 35.5. The prices measure has been in contraction since October 2014.

The drop in joblessness over the past year is projected to lead to bigger wage gains, which will probably spur a pickup in consumer spending and inflation. Unemployment held at a more than seven-year low of 5 percent in November.

The Federal Reserve last month increased the benchmark interest rate for the first time since 2006, indicating confidence that the economy is strong enough to withstand higher borrowing costs and that price growth is set to accelerate.

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