US manufacturing grows but demand slump drives record inventories

Output growth strengthened to its fastest pace since August, supported by gains in new orders from both new and existing clients. However, overall demand rose only modestly and far more slowly than in October, with international markets particularly weak. Manufacturers cited tariffs as a key factor behind a fifth straight monthly fall in new export orders, with declines recorded across neighbouring markets and major Asian economies. The drop in external sales was the steepest since July.

A mismatch between solid production growth and softer-than-expected sales resulted in an unintended build-up of finished-goods stocks. Inventory accumulation accelerated sharply, exceeding October’s previous record and marking the steepest rise in the survey’s 18-and-a-half-year history.

Inflationary pressures remained elevated. Tariff-linked cost increases continued to drive up input prices, especially metals, while logistical delays at borders lengthened supplier delivery times for a third month. Despite higher costs, manufacturers raised selling prices at one of the slowest rates seen this year amid weak demand and strong competitive pressures, S&P Global said in a press release.

Business confidence strengthened to its highest level since June, with firms planning to expand investment, launch new products and benefit from expected increases in government spending following the end of the federal shutdown. Employment rose at the fastest pace in three months as companies filled vacancies and prepared for anticipated future growth. Backlogs declined for a third consecutive month, reflecting improved capacity to manage workloads.

Purchasing activity increased only marginally, with many firms cautious given earlier stock-building and ongoing supply chain friction.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said: “Although the headline PMI signalled a further expansion of factory activity in November, the health of the US manufacturing sector gets more worrying the more you scratch under the surface. The main impetus came from a strong rise in factory production, but growth in new order inflows slowed sharply, hinting at a marked weakening of demand growth.

“In short, manufacturers are making more goods but often not finding buyers for these products. This combination of sustained robust production growth alongside weaker than expected sales led to a worryingly steep rise in unsold inventories. For two successive months now, warehouses have filled with unsold stock to a degree not previously seen since comparable data were available in 2007. This unplanned accumulation of stock is usually a precursor to reduced production in the coming months.

“Profit margins are meanwhile coming under pressure from a combination of disappointing sales, stiff competition and rising input costs, the latter widely linked to tariffs. Encouragingly, manufacturers have grown more optimistic about the year ahead, with the ending of the government shutdown helping lift confidence from the sharp drop suffered in October. Optimism is being fuelled by hopes of improved policy support, including lower interest rates, as well as greater political stability, though it is clear that uncertainty remains elevated and a drag on business growth in many firms, holding confidence well below levels seen at the start of the year.”

ALCHEMPro News Desk (KD)