Summary: ISM manufacturing PMI up in December, above expectations; ISM: US manufacturing contracts for past nine consecutive months; short-term US Treasury yields decline, longer-term yields rise; expectations of Fed rate cuts soften; ISM: reading corresponds to 1.9% US GDP growth annualised.
The Institute of Supply Management (ISM) manufacturing Purchasing Managers Index (PMI) reached a cyclical peak in September 2017. It then started a downtrend which ended in March 2020 with a contraction in US manufacturing which lasted until June 2020. Subsequent month’s readings implied growth had resumed, with the index becoming stronger through to March 2021. Readings then declined fairly steadily until mid-2023 and have since generally stagnated at contractionary levels.
According to the ISM’s December survey, its manufacturing PMI recorded a reading of 49.3%, above the generally expected figure of 48.2% and November’s reading of 48.4. The average reading since 1948 is roughly 53.0% and any reading below 50% implies a contraction in the US manufacturing sector relative to the previous month.
“After breaking a 16-month streak of contraction by expanding in March, the manufacturing sector has contracted for the last nine months,” said Timothy Fiore of the ISM Manufacturing Business Survey Committee.
Short-term US Treasury bond yields slipped on the day while longer-term yields rose. By the close of business, the 2-year Treasury bond yield had declined 1bp to 4.24%, the 10-year yield had gained 4bps to 4.60% while the 30-year yield finished 2bps higher at 4.81%.
In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months softened, although another 25bp cut is still fully priced in. At the close of business, At the close of business, contracts implied the effective federal funds rate would average 4.405% in February, 4.37% in March and 4.20% in April. December 2025 contracts implied 3.945%, 38ps less than the current rate.
Purchasing managers’ indices (PMIs) are economic indicators derived from monthly surveys of executives in private-sector companies. They are diffusion indices, which means a reading of 50% represents no change from the previous period, while a reading under 50% implies respondents reported a deterioration on average. A reading “above 42.5%, over a period of time, generally indicates an expansion of the overall economy” according to the ISM’s most-recent estimate.
The ISM’s manufacturing PMI figures appear to lead US GDP by several months despite a considerable error in any given month. The chart below shows US GDP on a “year on year” basis (and not the BEA annualised basis) against US GDP implied by monthly PMI figures.
According to the ISM and its analysis of past relationships between the PMI and US GDP, December’s PMI corresponds to an annualised growth rate of 1.9%, or about 0.5% over a quarter. Regression analysis on a year-on-year basis suggests a 12-month GDP growth rate of 2.3% five months after this latest report.
The ISM index is one of two monthly US PMIs, the other being an index published by S&P Global. S&P Global produces a “flash” estimate in the last week of each month which comes out about a week before the ISM index is published. The S&P Global December flash manufacturing PMI registered 48.3%, down 1.4 percentage points from November’s final figure.