Manufacturing’s Sluggishness Not as Severe in December

Manufacturing slowed in December amid overall economic sluggishness, but the contraction was not as deep as in November, according to a survey of purchasing managers released Tuesday.

Business activity at industrial companies weakened for the fifth consecutive month, with new orders tumbling and inventories building up at some firms, the National Assn. of Purchasing Management said.

The group’s overall index of manufacturing growth inched up to 47.3% in December from 46.6% in November.

An index reading of more than 50% indicates an expansion of factory activity, and a reading of less than 50% indicates a decline.

Association officials said the small increase means business for manufacturers, such as makers of electronics and apparel, was declining at a slower pace than for others.

But “more companies said business was slow rather than up or good,” said Ralph Kauffman, chairman of the group’s business survey committee. The purchasing managers association, based in Tempe, Ariz., surveys managers at more than 300 industrial firms nationwide.

The monthly report is closely watched by economists and financial market analysts as a barometer of the economy. But the survey took on added significance this time because the government, which provides monthly readings on the labor market and business inventories, has not released data since the federal shutdown began in mid-December.

Economists were analyzing the report for any hints about the job market and overall future business activity.

“This is all we have to go on,” said Mike Carey, an economist at Maria Fiorini Ramirez Inc., a New York financial markets research firm. “The report has taken on greater market focus.”

Traders said the bond market reacted favorably to the report because the data supported the view that economic weakness would trigger lower interest rates from the Federal Reserve Board. But persistent worries about the budget battle in Washington offset the report’s impact, and bond prices remained depressed.

The association’s production index improved to 49.6% from 45.8%.

Components of the report examining new orders and inventories suggest that manufacturing will continue to soften in the coming months, Carey said.

The new-orders index tumbled to 45.9% from 50.1%. The only bright spot was in new export orders, which climbed to 57.4% from 56.3% in November.

The inventory index rose to 44.6% from 43.2%, meaning the pace at which inventories are being depleted slowed in December. Factory growth will be stalled until inventories are drawn down and demand picks up, Carey said.

“Companies still feel uncomfortable with the amount of inventory on hand versus their expectations of sales,” Carey said. “I wouldn’t expect to see activity pick up any time soon.”

Slow demand has led to lower prices for raw materials, the survey shows. The association’s price index fell to 40.8% from 44.5% in November, the lowest level since July 1991. The decrease means that fewer companies saw price increases for raw materials.

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Purchasing Index

The purchasing managers index tracks business activity at 300 companies:

Dec. 1995: 47.3%

Source: National Assn. of Purchasing Managers