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Data released today showed an unexpected decline in the US Manufacturing ISM index to 47.2 in December. According to analysts at Wells Fargo, the fifth consecutive month of manufacturing contraction and worst print since 2009 in today’s ISM may not be as awful as it looks.

Key Quotes: 

“The ISM manufacturing index came in at 47.2 for December, signaling that industrial activity shrank in each of the last five months of the year. Even worse is the fact that this marks the lowest headline for the ISM since the recession. Various subcomponents also plumbed lows that haven’t been touched in a decade, including most notably employment which fell to 45.1.”

“An argument could be made that the ISM has offered a glass-half-empty look at the industrial sector in recent months. That’s not to say there has not been pressure, a number of other purchasing manager surveys have indicated a softening, but the ISM looks decidedly worse than others.”

“The trade war has been a significant headwind and factor in the trend decline since 2018.” 

“If 2019 was a year of escalation in the trade war, perhaps 2020 will at least be a year in which things stop getting worse. On January 15, the detailed terms of the Phase I trade deal with China are set to be released with a formal signing at the White House.”

“We are not so sanguine as to suggest this is the end of the trade war, but it is certainly a de-escalation and that is a start. To the extent that trade policy put downward pressure on the manufacturing sector, each phase of détente ought to relieve that pressure; if so today’s report may mark the low point.”