US ISM manufacturing index points to further contraction in December

The ISM manufacturing index declined to 48.2 in December from 48.6 in November, marking the second month of outright contraction in national manufacturing activity. The release was lower than forecast (49.5) and consensus (49.0) expectations. The US manufacturing sector is likely to trend slightly negative for some time as manufacturing continues to adjust to the strength in the dollar.

The report showed ongoing declines in production (49.8, previous: 49.2) and new orders (49.2, previous: 48.9), although the speed of decline moderated somewhat relative to November. The report also suggests an outright decline in manufacturing employment in December, with the employment index falling to 48.1 (previous: 51.3). Supplier deliveries at 50.3 (previous: 50.6) deteriorated modestly.

The ongoing decline in the inventories (43.5, previous: 43.0) may show a substantial drag from inventories in the fourth quarter. In addition, the manufacturing sector is likely to be a source of deflationary pressures in the US economy, as the prices paid index fell to its lowest level since 2009 (33.5, previous: 35.5); only 4% of respondents reported higher prices paid in December.

On the positive side, new export orders jumped to 51.0 (previous: 47.5), indicating an increase in December exports.

"We view, this jump is likely a temporary respite, as the international environment and strength of the dollar will pose headwinds for manufacturing exports for some time", says Barclays.