World Economy

US Manufacturing Slowdown Stokes Fears

US Manufacturing Slowdown Stokes Fears US Manufacturing Slowdown Stokes Fears

Growing signs of weakness in the US economy are helping keep oil prices under pressure even as tensions escalate across North Africa and the Middle East.

US manufacturers reported business activity contracted for the second month running in December, according to the Institute of Supply Management, Reuters reported.

ISM’s composite manufacturing index was below 50 in both November and December 2015 for the first time since November 2012 and before that July 2009.

The Institute contacts around 300 purchasing managers each month to enquire about changes at their firms in production, new orders, employment, inventories and the speed of supplier deliveries.

Results are used to produce the purchasing managers’ index. In the past, index readings below 50 have generally been associated with a contraction in manufacturing activity.

The index is strongly cyclical and not every slowdown heralds an economic recession (not least because manufacturing now accounts for less than 15% of GDP).

But US manufacturers have reported slowing growth since the middle of 2015 which turned into an outright contraction towards the end of the year.

Drop in the index is consistent with other indicators pointing to a pronounced slowdown in manufacturing activity in the second half of 2015.

Freight movements by road, rail, barge and pipeline have been flat for the past year, ending five years of strong growth, according to the US Bureau of Transportation Statistics.

On the railroads, total freight movements fell 4.5% in the second half of 2015 compared with the same period a year earlier.

Containerized rail freight was flat between July and December compared with the prior year, according to the Association of American Railroads.

Inventories of raw materials, work in progress and finished products held by manufacturers, wholesalers and retailers rose sharply towards the end of 2014 and businesses had failed to reduce them by October 2015, according to the US Census Bureau.

It is still not clear whether the current weakening in US manufacturing is a temporary pause that will be quickly reversed or heralds a lengthier slowdown.

But slowing growth in the US industrial economy matters because the United States was one of the bright spots for oil demand in 2015.

After the strongest summer driving season since 2007, gasoline demand growth slowed in the final quarter of the year and ended roughly unchanged from the end of 2014, though still at a seasonally high level.

Distillate demand, however, slid to the lowest level for more than a decade towards the end of 2015, and in the final four weeks of 2015 was almost 460,000 barrels per day, 9%, lower than at the end of 2014.