At 10:00 A.M. (EST) this morning, the Institute for Supply Management, a Tempe, Arizona-based trade group, issued its latest reading on manufacturing activity, and it was not a good report for a manufacturing sector that has been lackluster over the last half year.

Specifically, the November PMI came in at 49.5, which was a decrease of 2.2 percentage points from October’s reading of 51.7 and below what economists were expecting. A reading below 50 indicates contraction in the sector, which now has been the case in four of the last six months. More significant, last month’s PMI was the lowest level since July, 2009, when the U.S. was just beginning to recover from the latest recession.

A closer look at the accompanying data showed that of the nation’s 18 manufacturing industries, only six reported growth in November, while 11 other industries witnessed contraction last month. More significant, the new orders, employment, inventories, customer inventories, and prices indexes all fell sharply from the prior month. However, the new orders and prices readings were still slightly above 50.0, which indicate that growth is still taking place in those metrics, though at a rather uninspiring pace right now.

Meantime, several respondents noted that the looming “fiscal cliff” of mandated tax increases and spending cuts is weighing on the manufacturing sectors. Businesses are fearful of ramping up spending on manufacturing products with the lingering uncertainty regarding the federal government tax and budgetary policies. If an accord can’t be reached by the January 2, 2013 deadline, and the automatic taxes and spending cuts are put in motion, the possibility of the economy falling back into another recession exists. With this kind of backdrop, it is easy to understand why manufacturing activity remains subdued at this juncture. Investors should also be aware that the impact of Hurricane Sandy is likely to be felt in the next months’ report on manufacturing activity as well.

All in all, this weak data from the manufacturing sector, which is a vital cog in the nation’s economic output, does not augur well for GDP growth in the final quarter of 2012. Our sense, which was confirmed by the latest contraction in manufacturing activity, is that GDP growth in the final quarter may come in between 1.0% and 1.5%, which could be less than half the 2.7% growth witnessed in the prior quarter. Investors should also be aware that the Institute for Supply Management’s companion report on nonmanufacturing (services) activity is scheduled to be released this Wednesday. That reading, along with the series of data due out this week on the labor market, is likely to provide greater clarity about the U.S. economy is faring as 2012 quickly draws to a close.  

At the time of this article's writing, the author did not have positions in any of the companies mentioned.