The year hasn’t started off well in terms of news for the manufacturing sector. While the first official numbers for 2020 won’t be out for several more weeks, the ISM (Institute for Supply Management) has released its December 2019 Manufacturing ISM Report On Business, which suggests economic activity in manufacturing contracted in December, despite overall growth in the U.S. economy. One reason could be continuing uncertainties about tariffs and trade with China.
The ISM’s index registered a 47.2 in December, down 0.9 percentage points from November 2019. This is the lowest reading since June 2009 (46.3). According to ISM’s index, anything less than 50 indicates a general economic contraction, and the manufacturing sector has registered less than 50 for five straight months. In fact, the institute says the low point in December marks nine months in a row during which the manufacturing industry has “softened” or contracted. The high in 2019 was 56.6 in January.
Despite the overall economic contraction within the manufacturing sector, three of 17 segments within the industry saw growth in December. These include miscellaneous manufacturing; food, beverage, and tobacco products; and machinery. Employment in manufacturing also decreased in December, according to the institute’s latest data. ISM’s Employment Index read 45.1%, the lowest since January 2016.
Much has been written on the effects of tariffs on the U.S. manufacturing sector in 2018 and 2019. Even though one goal of the U.S. government in increasing tariffs was to boost the manufacturing sector, it seems like the opposite has happened. China has often been at the center of this discussion, because of some of the nation’s particular trading practices, which in some cases have been deemed “unfair.” In a study released December 23 by economists Aaron Flaaen and Justin Pierce, Flaaen and Pierce write that the use of trade policy as a tool for the protection and promotion of domestic manufacturing is “complicated by the presence of globally interconnnected supply chains.” Retaliation and higher costs in downstream industries, for instance, present a more complicated picture.
Could new developments in U.S./China trade turn the tide for 2020 and beyond? On January 15, President Trump signed the Phase One trade deal with China. The Phase One Trade Agreement was first announced in December. According to the White House, the agreement calls for structural reforms to China’s economic and trade regime. Specific provisions address topics such as intellectual property, technology transfer, agriculture, financial services, currency, expanding trade, and dispute resolution.
Many in the industry are speculating how Phase One will affect the rest of the year for manufacturing. China’s promise to buy billions of dollars worth of U.S. products may put some minds at ease, but others remain skeptical, since Phase One leaves most of the Trump Administration’s tariffs on Chinese goods in place. In reality, the agreement probably will not turn the tide on nine months of general slump in American manufacturing—at least not right away. Nevertheless, it’s generally heralded as a step in the right direction. Perhaps the January ISM index, when it’s released next month, will provide a glimpse of how the industry will fare in 2020.