US Manufacturing: Near-Term Pain, Long-Term Gain?

Robust manufacturing and construction data suggest a solid base for activity as we head into year-end, but rising COVID-19 cases and hospitalizations threaten more movement restrictions that are particularly bad news for the service sector. With mounting concerns over jobs we could see growth temporarily dragged into negative territory.

Manufacturing's solid fundamentals

The US ISM manufacturing index dropped back to 57.5 in November from October's 59.3 reading (consensus was 58). New orders and production continue to point to robust activity given they both remain above 60 – remember 50 is break-even. Further supportive news comes from the fact that inventory levels are at a new 10-year low and the backlog of orders rose, both of which indicates demand should remain very firm for the next few months at least. As the chart below shows, we should soon see manufacturing output return to positive year-on-year growth.

ISM & production growth

(Click on image to enlarge)

Source: Macrobond, ING

But COVID-19 presents near-term risks

However, there is a surprisingly weak employment number, which dropped into contraction territory at 48.4 versus 53.2 in October. This perhaps hints at caution in the manufacturing sector as it could face constraints from rising COVID-19 cases or it could experience a drop-off in demand in response to containment measures.

This was borne out in the accompanying text that suggested: “companies and suppliers continue to operate in reconfigured factories, but absenteeism, short-term shutdowns to sanitize facilities and difficulties in returning and hiring workers are causing strains that will likely limit future manufacturing growth potential”.

Europe chose not to close manufacturing when it returned to lockdowns and we doubt very much that US authorities would shutter US manufacturing. Nonetheless, it suggests we should be prepared for some softness in economic data for the December-January period. Moreover, if there are jobs are being lost in the manufacturing sector despite activity booming, there will certainly be jobs lost in the services sector, which is far more likely to face containment measures.

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