The December manufacturing report was disappointing overall, though there were bright spots. That mixed result points to the need for distributors to focus on areas of the economy that remain strong, particularly those related to the building of data centers for AI processing.
The Manufacturing Purchasing Managers Index of the Institute for Supply Management came in at 47.9 for December, down from 48.2 in November and below the consensus forecast of 48.3 among economists surveyed by the Wall Street Journal. Following release of the report, the Federal Reserve Bank of Atlanta lowered its forecast for U.S. gross domestic growth for the fourth quarter of 2025 to 2.7% from 3.0%.
“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,” said Susan Spence, chair of ISM’s Manufacturing Business Survey Committee. “Of the six largest manufacturing industries, only Computer & Electronic Products expanded in December.”
Among the encouraging signs were improvements in new orders, backlogged orders and new export orders, as well the index of customer inventories remaining at a level ISM deems “too low,” suggesting companies will have to order more in the future to build up their stock.
Like the ISM report, the U.S. economy overall is mixed, says Alex Chausovsky, president and CEO of consulting firm 3DM.
“Macro-economic growth appears solid, yet hiring is sluggish, and the unemployment rate has ticked up,” Chausovsky says. “Overall consumer spending is still rising, but American businesses are less confident. AI-related data center construction is soaring while nonresidential construction and the housing sector are in recession.
“This conflicting narrative underscores the need for companies in the distribution industry to remain nimble and to pivot to the outperforming sectors of the market, while mitigating the downside pressure and risks associated with the underperforming sectors.”
What the manufacturing PMI means for wholesale sales
While the manufacturing PMI has remained below 50 for 10 months, indicating contraction in factory activity. It’s still well above the 42.3 level that’s historically related to growth in the overall U.S. economy. As manufacturing is only about 10% of the economy, overall growth can be maintained even as manufacturing activity declines.
For the same reason, the manufacturing PMI does not necessarily predict trends in overall wholesale sales. For the first nine months of 2025, for example, the manufacturing PMI fell 3.5% while U.S. wholesale sales increased 4.1%.
Nonetheless, wholesales and distributors benefit when factories are booming as that means manufacturers need to purchase more inputs and they are producing more goods that the wholesale industry can distribute. Thus, the generally downbeat comments of manufacturing executives quoted by ISM in its December report figure to introduce a note of caution to the outlook for distributors.
Several of the comments reference higher costs from the higher tariffs the U.S. government has implemented in the past year. The ISM’s index of prices for manufacturing inputs remained at 58.5, the same as November, and well above the 50-point level that indicates rising prices.
Here are some examples of the comments from executives surveyed by ISM:
- “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.” [From an executives in the Electrical Equipment, Appliances & Components sector.]
- “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]
- “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. 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]
- “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]
That downbeat mood among manufacturers, at least those quoted by ISM, can’t be a positive sign for distributors.
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