U.S. manufacturing contracted further in December, but weakening demand amid higher borrowing costs pushed a measure of prices paid by factories for inputs to the lowest level in more than 2-1/2 years, signaling that goods disinflation was underway.
The Institute for Supply Management said on Wednesday that its manufacturing PMI dropped to 48.4 last month from 49.0 in November, contracting for a second straight month.
But with the labor market still pumping out jobs at a solid clip and sustaining consumer spending, it is unlikely that the economy is in recession. A PMI reading below 50 indicates contraction in manufacturing, which accounts for 11.3% of the U.S. economy. Economists polled by Reuters had forecast the index slipping to 48.5.
The ISM survey's forward-looking new orders sub-index tumbled to 45.2, the lowest reading since May 2020, from 47.2 in November. It was the fourth straight month that this measure has contracted. Unfinished work has virtually dried up, a function of both weakening demand and improved supply chains. Fed officials and economists have always viewed supply chains, which were stretched early in the pandemic, as key to bringing inflation down to its 2% target. The significant improvement in supply as well as waning demand are already translating into monthly price decreases for goods. On a year-on-year basis, goods price increases have slowed considerably. Economists expect goods deflation this year.
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