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Are Fed rate cuts starting to help manufacturing yet?

Unfortunately, Fed rate cuts are too modest and too recent to be helping the highly cyclical manufacturing industry right now. The latest manufacturing survey tells us industry conditions remain challenging.

Manufacturing Continues to Contract

According to the ISM Manufacturing Purchasing Managers Index (PMI). manufacturing activity contracted for the tenth straight month in December. This is par for the course after aggressive Fed rate hikes and yield curve inversion. So are recessions.

The ISM PMI ticked down from 48.2 to 47.9, below expectations of 48.3 and the key neutral level of 50, indicating contraction. That was its lowest reading in 2025. ISM said 85% of manufacturing GDP is contracting, up from 58% in November, and 43% of manufacturing GDP is in strong contraction with PMIs at or below 45.

The New Orders index, which leads S&P 500 earnings and capital spending, ticked up slightly by 0.3 points to 47.7. The Employment index rose 0.9 points to 44.9. New Orders have been contracting for four months and Employment for 11 months. As the chart below shows, historically, the ISM PMI (orange line) and S&P 500 year-to-year change (purple line) are highly correlated, but that correlation has broken down since the AI bubble kicked off in late 2022.

PMI

The Prices Paid index held steady at 58.5, so “stagflation” remains the best word to summarize the manufacturing sector right now.

Here are key takeaways from the survey from Susan Spence, Chair of the ISM Manufacturing Business Survey Committee:

"In December, U.S. manufacturing activity contracted at a faster rate, with pullbacks in the Production and Inventories indexes leading to the 0.3-percentage point decrease of the Manufacturing PMI. Those two subindexes increased in November, so their contraction this month continues the short-term "bubble" of improvement indicative in the last several months of PMI data — and a hallmark of recent economic uncertainty in manufacturing.
Although the demand indicators are still in contraction, improvement in three indexes (New Orders, Backlog of Orders and New Export Orders) and the Customers' Inventories Index remaining in 'too low' territory (and at an accelerated rate) are positive signs for December, but several consecutive months of gains in these indicators are necessary for a longer-term recovery. A 'too low' status for the Customers' Inventories Index is usually considered positive for future production.
The Employment Index contracted at a slower pace, with 63 percent of panelists indicating that managing head counts is still the norm at their companies, as opposed to hiring.
Looking at the manufacturing economy, 85 percent of the sector's gross domestic product (GDP) contracted in December, compared to 58 percent in November, and the percentage of manufacturing GDP in strong contraction (defined as a composite PMI of 45 percent or lower) increased to 43 percent, compared to 39 percent in November. The share of sector GDP with a PMI at or below 45 percent is a good metric to gauge overall manufacturing weakness.
Of the six largest manufacturing industries, only Computer & Electronic Products expanded in December."

This table shows the details for all of the PMI indexes:

PMI table

Manufacturers Are Struggling With Tariffs, Inflation & Weak Demand

With manufacturing continuing to contract, it’s not surprising than manufacturers are downbeat on their business. Here are some key comments from manufacturers in this month’s ISM report:

"Winding up the year with mixed results. It has not been a great year. We have had some success holding the line on costs; however, real consumer spending is down and tariffs are ultimately to blame. I hope for some return to free trade, which is what consumers have 'voted for' with their spending." [Chemical Products]
"Trough conditions continue: depressed business activity, some seasonal but largely impacted by customer issues due to interest rates, tariffs, low oil commodity pricing and limited housing starts." [Machinery]
"Things are quieter regarding tariffs, but prices for all products remain higher. Our costs have increased, so we have increased prices for our customers to compensate. Margins have deteriorated, as full pass through (of cost increases) is not possible." [Computer & Electronic Products]
"Things are not improving in the transportation equipment market. Many customers are ordering for 2026, but those orders are 20 percent to 30 percent below their historical buying patterns. Some large fleets are still completely on hold for 2026, with zero capital expenditures money available to fleet budgets. Truck rental utilization, which is a good benchmark for the health of the economy, is still below historically stable levels. The general mood of the industry is that the first half of 2026 will be another bust, and we're now hoping things pick up in the second half, even as the North American truck fleet continues to age." [Transportation Equipment]
"In the current environment, our company is struggling with customer orders and financially overall. Our senior leaders are struggling to focus our business and get the company on track with quality products. In November, layoffs impacted about 9 percent of our workforce, affecting all locations in the U.S. and Europe." [Machinery]
"Orders continue to drop for most of our businesses. Many plants are not running near full capacity. Make to order being utilized where possible." [Chemical Products]
"Order levels have continued to decline: We had a bad October, an awful November and a dismal December. January and February don't look too good, as bookings are down 25 percent compared to the first two months of 2025." [Fabricated Metal Products]
"Morale is very low across manufacturing in general. The cost of living is very high, and component costs are increasing with folks citing tariffs and other price increases. It's cold in our area of the country, absenteeism is worse around the holidays, and sales were lower than we expected for November. So, things look a bit bleak overall." [Electrical Equipment, Appliances & Components]
"Global logistics remains sensitive to geopolitical shifts. Tariffs are influencing equipment pricing and procurement strategies. Large-scale data center programs are absorbing and reducing availability of resources for other sectors." [Food, Beverage & Tobacco Products]
"2025 revenue was down 17 percent due to tariffs. The lost revenue has inhibited our ability to offer bonuses to employees or create and hire for new positions." [Miscellaneous Manufacturing]

Investment Implications

Manufacturing and housing are two of the most interest rate sensitive and cyclical sectors of the economy. Both remain in contraction. They need lower interest rates, but materially lower rates are unlikely unless unemployment gets much worse and a recession appears more likely. By then it will be too late.

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