A narrative began to emerge among investors and policymakers in the last quarter of 2019 that a global economic re-acceleration was at hand, thanks to an expected rebound in manufacturing. But the December ISM Manufacturing report, released on Friday, coupled with the fallout from rising tensions in the Middle East, have put a significant dent in that thesis. The result will most likely be a reduced appetite for risk and lower global asset prices in the coming days.
And it doesn’t end there. The ISM report implied that the coming impact from the shutdown of Boeing’s 737 Max production has yet to materially influence manufacturing sentiment. As a result, investors and policymakers should anticipate further declines in sentiment and hard data in the manufacturing ecosystem throughout the first half of 2020.
The ISM Manufacturing report declined to 47.2 from 48,1 on the month, while the forward-looking new orders component also fell to 46.8 from 47.2, both suggesting that the January report will show further contraction at an accelerating pace in domestic industrial production.
The employment component, which many economists use to estimate monthly hiring, declined to 45.1 from 47.9. Backlogs increased to 43.3, inventories to 46.5 and imports to 48.8. New export orders declined to 45.1 from 46.6.
Of particular significance was the increase in backlogs because of a lack of new orders, which was noted in the verbatim section of the reports and underscores our expectation that soft sentiment and hard production data in the early portion of 2020 will continue to contract.
This warrants a re-evaluation of the optimistic direction of share prices in the equity markets across the materials and production sectors. This data also tends to reaffirm our evaluation of the unbalanced state of the U.S. economy, which is still adjusting to the 18-month trade war despite the tenuous phase-one trade deal with China.