Activity in the U.S. manufacturing sector expanded at the slowest pace since November 2016, according to a report released Thursday.
The Institute for Supply Management said its manufacturing index fell to 54.1 in December, the lowest reading in over two years. Economists had expected a smaller decline to 57.9 from 59.3 in November.
While the steep fall in the ISM index was unexpected, the index still indicates expanding activity. That’s a contrast with China, where manufacturing contracted at the end of 2018.
“The manufacturing community continues to expand, but at much lower levels and at a sharp decline from November,” said Timothy Fiore, chair of the Institute for Supply Management, in statement. “Consumption continued to strengthen, with production and employment still expanding, but at much lower levels compared to prior periods.”
Despite the ongoing trade disputes, there is no evidence this is taking a toll on manufacturing. Instead, the fall decline is entirely based on domestic demand and is likely linked to falling energy prices.
Exports continue to expand, ISM reported. New orders for exports from the U.S. grew in December and that growth represented an acceleration from the prior month.
But the drop in the price of oil is a negative for U.S. manufacturing because a significant part of U.S. manufacturing is tied to the energy sector. A separate report on Thursday showed private payrolls in mining and drilling fell by 2,000 jobs in December.
The steepest decline came in new orders, which fell from 62.1 to 51.1 in the ISM index. Employment fared better, declining from 58.4 to 56.2. That matches other data showing that the labor market remains tight and a source of strength for the economy.
Customer inventories rose a bit but remain at what the ISM describes as “too low” a level. That is a positive for the coming months, as inventories will have to be rebuilt unless consumer demand falls sharply.