Economic Watch: Manufacturing Shrinks Again; Construction Remains Strong

Activity in the nation’s manufacturing sector has contracted for the second month in a row, and at the fastest rate in six years. Meanwhile, construction spending unexpectedly fell, but remains a bright spot compared to a year ago.

The monthly manufacturing survey index of the nation’s purchasing executives by the Institute for Supply Management shows a 0.4 of a percentage point decline in December from the month before. The 48.2% reading is the lowest reading since June 2009.

A reading above 50% indicates that the manufacturing economy is generally expanding, while below 50% shows it is generally contracting.

ISM’s New Orders Index registered 49.2% in December, an increase of 0.3 of a percentage point when compared to the November reading. That indicates a contraction in new orders for the second consecutive month, though not as much as the previous month’s pace.

Only seven of 18 industries reported growth in new orders last month.

The measure of manufacturing production increased 0.6 of a percentage point in December from November, but showed it was still contracting.

The bulk of the overall pullback was due to the measure of manufacturing employment falling by 3.2 percentage points.

“While unexpected acceleration in the pace of decline was disappointing, an uptick, albeit modest, in each of the new orders and production components was encouraging and hinted at potentially brighter prospects on the horizon for the struggling manufacturing sector,” said Laura Cooper, economist at RBC Economics.

“Lingering external headwinds are likely to limit the manufacturing rebound in the near term; however, we expect ongoing strength in the domestic economy to keep overall fourth-quarter 2015 gross domestic product (GDP) growth close to the 2.0% rate recorded in the third quarter of 2015.”

Such a performance in manufacturing during December could delay future interest rate hikes by the U.S. Federal Reserve, after its Federal Open Market Committee pushed them slightly higher last month for the first time in many years, according to Stifel Fixed Income Chief Economist Lindsey Piegza.

“Let's just say this is not the story line monetary policymakers were hoping for as we embark now on a rising rate environment,” she said. “Going forward, the domestic economy desperately needs to stir some underlying momentum to meet and withstand the committee’s intended path of rising rates. After all, the Fed based liftoff – and will continue to base subsequent rate hikes – on expectations rather than current conditions, which leaves the potential for a significant disconnect between what the U.S. economy can withstand and what the Fed intends to deliver.”

Construction Spending

Meantime, a separate report from the U.S. Commerce Department shows total construction spending in the country during November fell 0.4%, the biggest downturn in activity since June 2014.

Additionally, October's construction spending was revised downward from the previous 1.0% reported growth to a smaller 0.3% monthly gain, and from a 0.6% gain in September to just a 0.2% improvement in September. However, year-over-year, construction spending increased 10.5% in November.

A 0.8% decline in non-residential construction spending in November accounted for the headline deterioration, while residential spending advanced 0.2% to match the pace recorded in the previous month.

According to Reuters, the government revised construction data from January 2005 through October 2015 because of a "processing error in the tabulation of data," which showed activity was not as strong as originally reported for last year. It reported this could lead some economists to lower their fourth-quarter gross domestic product estimates.