but Remains in Contraction

• The ISM Manufacturing Index improved to 49.3 in December, a nine-month high, but it remains below the 50 level that indicates expansion in the sector.
• The improvement was led by expansionary readings in the Production and New Orders Indexes.

• The Employment Index slipped 2.8 points to 45.3, pointing to layoffs in manufacturing.
• The Prices Paid Index jumped 2.2 points, supporting the case for a more modest easing in monetary policy this year.
  
  PNC expects the FOMC to cut the fed funds rate by 50 basis points in the first half of this year, but manufacturing activity will be challenged by potential tariffs and a strong dollar.
  
  The ISM Manufacturing Index, which measures the health of the manufacturing sector, climbed 0.9 points to 49.3 in December. Despite the modest improvement, the index has been in contraction territory (below 50) for nine consecutive months and 25 of the last 26 months amid high interest rates and a strong U.S. dollar. The improvement was led by a jump of 3.5 points in the Production Index to 50.3 – the first expansionary reading since May 2024. The New Orders Index increased 2.1 points to 52.5, matching the highest reading since May 2022. The Backlog of Orders index rose 4.1 points to 45.9 but remains firmly in contraction territory, while the New Export Orders Index improved 1.3 points to the break-even level of 50.0.
  
  The Employment Index slipped 2.8 points to 45.3, suggesting the manufacturing sector shed jobs in December; the Bureau of Labor Statistics will release the employment report for the month on January 10. The Supplier Deliveries Index indicated marginally slower delivery times with a reading of 50.1, 1.4 points higher than the 48.7 print in November (a reading of above 50.0 points to slower delivery times, a sign of stronger demand). The Prices Paid Index rose 2.2 points to 52.5, supporting PNC’s call for the FOMC to ease monetary policy at a more gradual pace in 2025.
  
  While the ISM Manufacturing Index surprised to the upside in December with a reading of 49.3 – the consensus forecast was for a print of 48.4 – the manufacturing sector continues to struggle under the weight of still-high interest rates and a strong dollar. PNC expects the FOMC to cut the fed funds rate by a total of 50 basis points in the first half of this year. Although lower interest rates will support a modest recovery in the manufacturing sector, activity will be challenged by potential tariffs and strong dollar.

PNC Bank, National Association, is a member of The PNC Financial Services Group, Inc. (NYSE: PNC). PNC is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; wealth management and asset management.