ISM printed 48.6 for November. On the surface, it seems a little strange for the Fed to be hiking when manufacturing is below the critical 50 level. However, manufacturing is not what it once was. Just as the agricultural sector went from having 80% of jobs to 2% of jobs in the past 200 years, you can’t expect the US economy to stop evolving.
On the right is a chart of the non-farm payrolls and manufacturing payrolls. Since manufacturing jobs peaked in 1979, there has been an obvious downward trajectory in employment in this sector, especially when compared to the increasing overall employment pool. Manufacturing jobs went from being 22% of all non-farm jobs to just 8.6%. You can “blame” it on cheap foreign labor, robotics, China, regulation, unionization, trade policies, etc. At the end of the day, it is suboptimal from a resource allocation perspective for a highly developed nation to engage in many forms of manufacturing.
I’m not saying manufacturing is unimportant. There could be other reasons to have a manufacturing presence (i.e. national security, strategically important products, logistical issues, marketing, etc). But for the most part, manufacturing is going to become a less and less important driver of the US economy. While some may be bemoaning the state of manufacturing in the US, I look at the 0.3% gain in manufacturing employment (+42K jobs) over the past 12 months as a solid “win.” Keep in mind this is against a backdrop of weak global growth, a strong dollar, and a collapse of some commodities sectors. So sub-50 on ISM is not great, but it is not so terrible when looking at the bigger economic picture – and certainly not so terrible when deciding on a rate increase for the entire country.