U.S. manufacturing slowdown stokes fears about oil demand

Growing signs of weakness in the U.S. economy are helping keep oil prices under pressure even as tensions escalate across North Africa and the Middle East.

U.S. manufacturers reported business activity contracted for the second month running in December, according to the Institute of Supply Management (ISM).

The ISM’s composite manufacturing index was below 50 in both November and December 2015 for the first time since November 2012 and before that July 2009.

The Institute contacts around 300 purchasing managers each month to enquire about changes at their firms in production, new orders, employment, inventories and the speed of supplier deliveries.

The results are used to produce the purchasing managers’ index. In the past, index readings below 50 have generally been associated with a contraction in manufacturing activity.

The index is strongly cyclical and not every slowdown heralds an economic recession (not least because manufacturing now accounts for less than 15 percent of GDP).

But U.S. manufacturers have reported slowing growth since the middle of 2015 which turned into an outright contraction towards the end of the year.

The drop in the index is consistent with other indicators pointing to a pronounced slowdown in manufacturing activity in the second half of 2015.

Freight movements by road, rail, barge and pipeline have been flat for the past year, ending five years of strong growth, according to the U.S. Bureau of Transportation Statistics.

On the railroads, total freight movements fell 4.5 percent in the second half of 2015 compared with the same period a year earlier.

Containerised rail freight was flat between July and December compared with the prior year, according to the Association of American Railroads.

Inventories of raw materials, work in progress and finished products held by manufacturers, wholesalers and retailers rose sharply towards the end of 2014 and businesses had failed to reduce them by October 2015, according to the U.S. Census Bureau.

It is still not clear whether the current weakening in U.S. manufacturing is a temporary pause that will be quickly reversed or heralds a lengthier slowdown.

But slowing growth in the U.S. industrial economy matters because the United States was one of the bright spots for oil demand in 2015.

After the strongest summer driving season since 2007, gasoline demand growth slowed in the final quarter of the year and ended roughly unchanged from the end of 2014, though still at a seasonally high level.