U.S. Factory Activity Slides Unexpectedly ISM says its purchasing managers index of manufacturing activity fell to 47.9 in the month, compared with 48.2 in November
(…) “In December, U.S. manufacturing activity contracted at a faster rate, with pullbacks in the production and inventories indexes,” said Susan Spence, chair of the ISM.
The indexes recording new orders, order backlogs and employment all crept up, but remained in contraction territory.
“Of the six largest manufacturing industries, only computer and electronic products expanded in December,” Spence said.
Meanwhile the prices index continued to expand at the same pace as in November, indicating that raw materials prices increased for the 15th straight month. (…)
S&P Global: Manufacturing operating conditions improve at slower pace as demand weakens
The headline index from the report, the seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI®), recorded 51.8 in December. That was down from 52.2 in November and signaled the weakest expansion of the manufacturing economy in the current five-month growth sequence.
Weaker growth emanated from a contraction in new order intakes. The decline was mild, but nonetheless the first in a year. Exports were also a source of demand weakness, falling for the seventh successive month. Tariffs were reported to have weighed on export sales, especially to Canada.
A reduction in demand led to weaker output gains in December, the softest in three months. Amid a reduction in sales, production increased sufficiently for firms to continued adding to their stocks of finished goods for the fifth month in a row, though the rate of accumulation moderated noticeably from November’s survey record.
Work outstanding declined for the fourth month in a row during December, partly due to an expansion in labor capacity. Latest survey data showed that employment rose solidly as firms filled vacancies in anticipation of a stronger 2026. (…)
Tariffs continued to push up input prices during December, with vendors reportedly raising charges. Although input cost inflation weakened since November to an 11-month low, it remained historically elevated. Similarly, manufacturers also recorded their least pronounced uplift in charges since the start of 2025, but inflation was again comfortably above trend.
Higher prices and weak demand discouraged purchasing activity in the latest survey period, as input buying stalled over the month. Where buying rose, this was linked to efforts to bolster inventories to protect against further price rises, contributing to a fifth consecutive accumulation in pre-production inventories. Meanwhile, difficulties receiving inputs due to supplier capacity constraints were noted to have driven average lead times higher in December. The latest lengthening of lead times was the most marked in seven months.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence
“Although manufacturers continued to ramp up production in December, suggesting the goods producing sector will have contributed to further robust economic growth in the fourth quarter, prospects for the start of 2026 are looking less rosy.
“Something of a Wiley E Coyote scenario has developed, whereby – just like the cartoon character continues to run despite chasing the roadrunner off a cliff– factories are continuing to produce goods despite suffering a drop in orders. The gap between growth of production and the drop in orders is in fact the widest seen since the height of the global financial crisis back in 2008-9. Unless demand improves, current factory production levels are clearly unsustainable. Payroll numbers will also be adversely impacted if production capacity has to be scaled back.
“A key factor causing concern over sales is the extent to which producers are having to pass higher costs on to customers in the form of raised prices, with higher costs continuing to be overwhelmingly blamed on tariffs.
“Some encouragement comes from input cost inflation moderating in December to the lowest recorded since last January. However, while this cost trend suggests the tariff impact on inflation peaked back in the summer, costs are still rising month-on-month at an elevated rate to suggest that US firms continue to face higher cost growth than competitors in most other major economies.”
Canada: Manufacturing sector downturn sustained
(…) Solid declines in both output and new orders were recorded in December. Panellists reported that market uncertainty remained a key depressor of sales, especially in relation to tariffs. This was again especially the case for exports, which declined steeply and at the quickest rate since July.
In line with the dominant theme of 2025, tariffs also continued to impact supply chains and prices at year end. Average lead times for the delivery of inputs lengthened to a solid degree amid customs delays, especially in relation to
US imports. Due to tariffs, firms in some instances reported sourcing inputs from suppliers based in countries outside of the US, which also led to a deterioration of delivery times.
Mexico: Sharpest fall in factory orders since June
Falling from 47.3 in November to 46.1 in December, the headline S&P Global Mexico Manufacturing Purchasing Managers’ Index™ (PMI®) indicated the quickest deterioration in the health of the sector since April. Moreover, the latest contraction was the fourth in consecutive months.
As was the case in November, new orders placed with manufacturers decreased at the end of 2025. Not only was the downturn marked, but it also accelerated to the fastest since June. When explaining the latest drop, panellists remarked on fierce competition, projects on hold and US tariffs.
New export orders decreased further, thereby stretching the current sequence of reduction to 22 months. The pace of contraction was solid and the quickest since July. Europe and the US were cited as the main sources of weakness in international demand.
Amid reports of constrained investment, lower sales volumes, and weaknesses in sectors like construction and mining, factory production remained on a downward path. December’s contraction was sharp and the most pronounced since April.
Despite a challenging demand environment, goods producers in Mexico lifted their selling prices further amid intense cost pressures: on average, output charges increased to the greatest extent in over a year. Although moderate, the rate of inflation was above its long-run average.
Pollyanna De Lima, Economics Associate Director at S&P Global Market Intelligence, said:
“Manufacturers in Mexico ended 2025 on weaker footing, registering reductions in output, new orders and input purchasing that were among the sharpest since early-2021. They made further cuts to headcounts and found little to be optimistic about when thinking about 2026.
“Exports continued to dent total sales, with international demand worsening to the greatest extent since July. Most of the weakness stemmed from lower sales to the US, according to the survey’s panel comments, with some mentions of subdued order intakes from clients in Europe.
“The PMI data showed that goods producers foresee tough times in 2026, with survey participants listing several headwinds to growth. Among them, they expect inflation, insecurity, subdued investment, tariffs and tax uncertainty to constrain output volumes in the year ahead.”
North American manufacturing is clearly in a funk. US manufacturers need a quick revival in demand to unload their excess inventories. Otherwise …
- GM, Toyota Hint at Tough Year Ahead for U.S. Auto Sales Sales are expected to slow after three years of gains as consumers push back on rising prices
General Motors and several rivals reported year-end sales slumps, an ominous sign that U.S. auto sales will slow this year as consumers push back on higher prices.
GM, the biggest automaker in the U.S. by sales and a bellwether for the U.S. industry, said Monday that sales fell 7% in the final quarter of 2025. Honda, Hyundai, Mazda and Nissan also said on Monday that their U.S. sales fell toward the end of the year.
The slowdown is expected to extend into this year. Analysts and automakers predict U.S. annual sales will fall in 2026 following three straight years of gains as belt-tightening American car buyers collide with tariff costs that companies probably won’t keep absorbing.
Executives at Toyota, which notched an 8% increase in U.S. sales during the fourth quarter, said they are preparing for a bruising year ahead.
Toyota was able to maintain sales momentum at the end of last year by absorbing the costs of U.S. tariffs, and because car buyers gravitated toward the company’s entry-level models like the Corolla sedan. Yet executives said companies won’t be able to keep footing the bill for tariffs.
“Prices are going to go up for us and for our competitors,” David Christ, Toyota’s U.S. sales chief, said on a call with reporters.
Last year’s U.S. auto sales defied the industry’s worst-case scenarios, triggered by the Trump administration’s initial tariff plans. Instead, the administration eased the tariffs, and consumers rushed to buy electric vehicles ahead of the end of federal tax credits in September.
Overall U.S. auto sales rose about 2% from 2024, to about 16.3 million, according to J.D. Power.
For 2025, General Motors said total sales were up 6%. Nearly a quarter of its volume represented vehicles that start under $30,000, such as the popular Chevrolet Trax compact crossover.
Yet the reticence from car buyers toward the end of 2025 portend a potentially volatile year marked by uncertainty around tariffs and the broader economy.
“What we saw in 2025 is going to bleed into 2026,” said Randy Parker, chief executive of Hyundai Motor America, which reported sales slid 1% in the fourth quarter. “The way consumers’ mindsets are right now, we’re still dealing with inflation, with negative consumer sentiment.”
The world’s biggest automakers took multibillion-dollar hits on tariff costs in 2025, though the Trump administration walked back some automotive duties.
Toyota swallowed higher tariff costs to avoid a hit to sales, but the move came at a cost. The company’s North American business swung to a loss in the six months ended Sept. 30, from a year-earlier profit.
“There is a lot of question on our side whether the consumer could handle” higher prices offsetting tariff costs, Toyota’s Christ said. “If we priced it all in, what would our sales look like?”
Consumers also face more expensive insurance, financing and maintenance expenses, in addition to higher new-car prices. The average monthly payment on a new vehicle hit a record $776 in December, J.D. Power said.
“The cumulative weight of all these increases has pushed total vehicle ownership costs beyond reach for many middle- and lower-income households,” Cox Automotive economist Jeremy Robb said.
Honda suffered one of the biggest quarterly sales slides, with U.S. sales down 9.5% in the fourth quarter. Honda’s production was hit hard by a shortage of semiconductor chips stemming from turmoil at the Chinese-owned, Dutch-based Nexperia. (…)
Further cuts to interest rates could lower the cost of car payments and bolster demand. President Trump’s new tax deduction for auto-loan interest could also spur demand for vehicles assembled in the U.S.
In addition, automakers are looking for a U.S. trade deal with Canada and Mexico that would reduce the current 25% tariff on vehicles assembled in those countries.
“We are very hopeful that something happens with Mexico and Canada so at least we can establish, ‘OK, this is the new normal, and then plan for it,’” Toyota’s Christ said.
Modest US Hiring to Cap a Sluggish Year for the Job Market
Economists project nearly 60,000 jobs were added for the month, based on the median of a Bloomberg survey ahead of Bureau of Labor Statistics data out Friday. That would leave payrolls up about 670,000 for 2025, far below the 2 million jobs added in 2024. The jobless rate probably eased to 4.5% in December from a four-year high. (…)
The rapid adoption of artificial intelligence may also be a limiting factor for payrolls growth as companies seek to bolster productivity. But while the pace of hiring has slowed, there are also few signs of widespread layoffs. (…)
In addition to the December jobs report, the BLS on Wednesday will issue November figures on job openings, quitting and layoffs.
LinkUp is not so optimistic on December jobs:
China’s Services Gauge Slows Again With Growth at Six-Month Low
The RatingDog China services purchasing managers’ index slipped slightly to 52 in December [from 52.1], slowing for a fourth straight month, according to a statement published Monday.
A smaller number of tourists — especially from Japan — was “primarily” responsible for the renewed drop in new export business, said Yao Yu, founder at RatingDog. Tokyo and Beijing have been at loggerheads for weeks as tensions rose after Japanese Prime Minister Sanae Takaichi’s remarks on Taiwan. (…)
The services sector has been a rare bright spot in China’s sluggish consumer market for much of last year. Retail sales in services have consistently outpaced growth in goods sales, with an increase of 5.4% in the first 11 months of 2025.
The government has sought to revive household spending by promoting the consumption of services such as sports, travel and entertainment. In September, it announced a new initiative to boost that effort, rolling out measures to extend the operating hours of museums and tourist sites, host more sporting events, and allow more companies to enter such industries as high-end medical care. (…)
In truth, the small decline was mainly tourist related, “particularly from Japan”.
Higher new business contributed to the sustained expansion in services activity. According to panellists, promotional activities and greater customer interest supported the latest upturn in sales. The rate of new order growth was the softest in six months, however, as new export business declined.
New business from abroad shrank in December amid reports of reduced tourist numbers. Although marginal, the contraction contrasted with an increase in overseas sales in November.
OIL
President Trump told NBC News yesterday that the U.S. may subsidize an effort by oil companies to rebuild Venezuela’s energy infrastructure — saying the project could take less than 18 months, Axios’ Ben Geman writes. “A tremendous amount of money will have to be spent and the oil companies will spend it, and then they’ll get reimbursed by us or through revenue,” he said.
Venezuela’s crude output has dwindled to well under 1 million barrels per day after years of underinvestment, mismanagement, and sanctions — a far cry from around 3.5 million per day in the late 1990s. Researchers with Columbia University’s energy think tank estimate that reaching even 2.5 million barrels per day would take $80–90 billion of investment in oil infrastructure over six or seven years.
Beware Venezuela’s reported “huge” oil reserves. The current 300 Bn or so reserves jumped after oil prices exploded in 2008-2011 as Venezuela self-reclassified Orinoco reserves which became economic at over $100 for crude oil. Will US oil companies rush in Venezuela at current prices, and uncertainties, when the world is in no urgent need for more oil?
FYI:
Partisan Bias in Professional Macroeconomic Forecasts
- The evidence is clear: partisan identity systematically affects GDP growth projections. Specifically, we find that Republican-affiliated forecasters project higher GDP growth relative to their Democratic counterparts when there is a Republican president in office.
- Using a novel dataset linking professional forecasters in the Wall Street Journal Economic Forecasting Survey to their political affiliations, we document a partisan bias in GDP growth forecasts. Republican-affiliated forecasters project 0.3–0.4 percentage points higher growth when Republicans hold the presidency, relative to Democratic-affiliated forecasters.
- Forecast accuracy shows a similar partisan pattern: Republican-affiliated forecasters are less accurate under Republican presidents, indicating that partisan optimism impairs predictive performance. This bias appears uniquely in GDP forecasts and does not extend to inflation, unemployment, or interest rates.
- Finally, we show that Republican forecasters become more optimistic when tax cuts are salient in public discourse, suggesting that partisan differences reflect divergent beliefs about the economic effects of fiscal policy.
- Partisan differences in forecasts emerge specifically during Republican presidencies, whereas under Democratic presidents, average forecasts from Republican and Democratic forecasters are statistically indistinguishable.
- Our findings raise a natural question: does partisan optimism signal superior insight or a distortion that degrades forecast accuracy? If forecasters aligned with the party in power had better understanding of policy impacts, their optimism would translate into greater predictive accuracy.
- Instead, we find that Democratic-affiliated forecasters are more accurate on average, producing lower mean absolute forecast errors for GDP projections under both Democratic and Republican presidents.
- Both forecaster groups perform worse during Republican administrations, but Democratic forecasters maintain a relative advantage.
- Importantly, applying the same difference-in-differences strategy used to study forecast levels, we find that Republican forecasters make relatively larger forecast errors when their preferred party is in office—about 0.15 percentage points higher in mean absolute error, representing roughly 10 percent of the typical forecast error.
- This pattern suggests that partisan optimism comes at the expense of accuracy, indicating a distortion in professional judgment rather than privileged insight into policy effects.
- Republican-affiliated forecasters systematically view tax cuts as more expansionary than Democrats, and this belief appears central to the bias we document.
Did you miss yesterday’s The “AI” or “Aïe, Aïe, Aïe” Year.?