• The ISM Manufacturing PMI declined to 48.4 in December 2022
• New Orders, Production, and Supplier Deliveries subcomponents are all now in contractionary territory
• Manufacturing hiring increased modestly in December 2022, according to the ISM Manufacturing PMI’s Employment component index
• Manufacturers’ cost pressures are in full retreat, posting a sharp net contraction in December 2022

The ISM Manufacturing PMI report posted a second consecutive sub-50, contractionary reading in December 2022, coming in at 48.4 for the month. This follows a 49.0 result for November 2022. The index steadily weakened throughout 2022 after readings around 60 to closed out 2021. This diffusion index indicates the net percentage of manufacturers who are experiencing expanding or contracting activity across various categories, with a reading below 50 revealing net contraction across the manufacturing sector. Among component measures, only Employment and Inventories now remain in expansionary territory – and both only barely so, at 51.4 and 51.8 results for December, respectively.

The component New Orders index of the ISM Manufacturing report fell to 45.2 in December 2022. Disregarding the U.S. economy’s collapse during the initial stages of the COVID-19 pandemic (March – May 2020), this is the lowest New Orders reading since the 2008 Financial Crisis (41.3, March 2009). New Orders is a forward-looking component of the ISM Manufacturing report, and continuing deterioration in this measure reveals weak demand for manufacturers’ output. Manufacturers now face the task of navigating what PNC is forecasting will be a 3-quarter recession from 2023Q2 through 2023Q4, while keeping in mind the resource constraints faced during the post-pandemic ramp-up in economic activity and how not to get caught short on labor and inputs on the other side of the coming year’s downturn.

The ISM Manufacturing report’s component index measuring prices facing manufacturers for their raw materials and inputs fell sharply in December 2022, posting a reading of 39.4 for the month. Again, discounting the pandemic-induced chaos of early 2020, manufacturers’ cost pressures have not been this weak since early 2016, when overall consumer price inflation had been below 1% throughout the entire year prior (2015) and deflation concerns were front-page news.

Manufacturers’ costs are a key pipeline for overall inflation in the economy, as they translate commodity price trends such as oil directly into their own products and the transportation of goods to market. With manufacturers’ cost pressures clearly in retreat and oil prices well below the levels seen even before Russia invaded Ukraine, there appears to be no new inflationary pressure on the horizon as 2023 gets underway.

PNC is forecasting that the Federal Reserve will continue to raise rates at its first two meetings of 2023, by 25 basis points (0.25 percentage points) in each case. But, as has been intimated by the Fed themselves, these moves will be made in an effort to ward off any potential reignition of inflationary embers, rather than as a response to evidence of undue momentum in consumer price growth.