U.S. Manufacturing Activity Declines in December

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. manufacturing activity contracted further in December, with a measure of factory output dropping to the lowest level in over 4-1/2 years amid worries that higher tariffs would raise prices of imported raw materials next year.

S&P Global reported that its flash manufacturing PMI dropped to 48.3 this month from 49.7 in November. Economists polled by Reuters had forecast a flash reading of 49.8. A PMI reading below 50 indicates contraction in manufacturing, which represents 10.3% of the economy.

A measure of production at factories declined to 46.0, the lowest since May 2020, compared to 47.9 in November.

President-elect Donald Trump announced intent to impose a 25% tariff on all products from Mexico and Canada and an additional 10% tariff on goods from China, the U.S.'s primary trade partners.

Euphoria over the outcome of the Nov. 5 presidential election, however, elevated the services sector flash PMI to a 38-month high of 58.5 from 56.1 in November. This boosted the composite PMI Output Index, tracking manufacturing and services, to 56.6 from 54.9 in November, marking its highest level since March 2022.

Businesses are anticipating fewer regulations and more tax cuts under the Trump administration. However, optimism in the manufacturing sector has been tempered by concerns over tariffs and potential inflation from the increased cost of imported materials, as noted by Chris Williamson, chief business economist at S&P Global Market Intelligence.

The survey also indicated that new orders received by factories fell to 47.6 from 49.3 in November, while supplier delivery times lengthened, attributed to labor shortages.

A gauge of prices paid by manufacturers for inputs surged to 59.1, the highest since November 2022, following 52.3 in November.

Goods price deflation due to normalizing supply chains has contributed to the sharp reduction in inflation from the multi-decade highs of 2022, prompting the Federal Reserve to start cutting interest rates in September. Economists warn that tariffs, combined with plans to deport millions of undocumented immigrants, may lead to inflation.

Williamson stated, "December saw raw material prices spike sharply higher amid supplier-led price rises and increased shipping costs, reflecting busier supply chains ahead of potential protectionism in the new year."