The manufacturing index unexpectedly dropped in November 2015 for the first time since 2012. This key indicator, the Institute for Supply Management purchasing managers index, fell to 48.6, down from 50.1 the previous month. Any number above 50 indicates growth in manufacturing, and any number below indicates contraction.
An inventory drawdown is the main reason for this contraction, which means more people are buying from manufacturers, and demand outstrips supply. Firms had already slowed production, and then customers bought items at unexpectedly lower prices. When customers bought more, their own inventories increased, which led to fewer orders later as companies had plenty of supplies on hand. The manufacturing index also dropped because energy prices dipped, other areas of the world declined and the dollar is weaker in foreign exchange markets.
When energy prices fall, oil and gas companies cut back on their needs and don't place large orders for goods. Manufacturers don't need to make pipes, drill bits and expendables for the gas and oil industry because there's too much oil in the world economy. Low oil and gas prices may continue for some time into 2016.
China and Europe simply don't have the same demand for goods as the United States. The purchasing managers index in other countries had hovered around 50 for several months ahead of the numbers for November 2015, so these foreign manufacturing markets brought America's manufacturing index down instead of propping it up as before. When foreign markets decline in a global economy, it affects everyone's manufacturing ability.
This unexpected development goes against the growth numbers seen over the past six years when the economy turned to recovery mode. The manufacturing index, as of November 2015, was at its lowest level since June 2009, and that occurred just as the United States moved away from the recession that started in 2007. New orders for goods and orders for raw materials fell in 10 of 18 manufacturing sectors, and the inventories of customers were too high for four months before this contraction occurred. Manufacturers had to cut back production, which led to the inventory drawdown.
The good news is that employment continues to rise and that manufacturing accounts for just 12 percent of the overall U.S. economy. The industry also supports 10 percent of the country's employment figures, and the service industry is faring better than manufacturing. The manufacturing index indicates the health of many factors, including whether companies hire support teams.
Manufacturers employ 12 million workers in the United States, but the industry is responsible for more than 17.4 million jobs. These companies, and their customers, need administrative personnel, sales teams, managers, accountants and account managers aside from workers on the factory floor. Support personnel need software, hardware and the right tools to do their jobs. IT departments need computers and engineers need to design next-generation automation. When manufacturers succeed, other industries grow, thanks to the needs of factories.
The manufacturing index rises again eventually. As Americans spend less on gasoline at the pump, they have more disposable income on hand. This extra income eventually goes toward goods produced in American factories, creating a symbiotic relationship that ebbs and flows.
Photo courtesy of David Castillo Dominici at FreeDigitalPhotos.net
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