- Manufacturing PMI falls 1.9 points to 50.9 in September
- New orders, employment contract
- Price pressure in factories, easing of supply bottlenecks
- Construction spending falls 0.7% in August
WASHINGTON, Oct 3 (Portal) – U.S. manufacturing activity grew at its slowest pace in nearly 2-1/2 years in September as new orders fell amid aggressive Federal Reserve rate hikes to cool demand and to tame inflation.
Monday’s Institute for Supply Management (ISM) survey also showed a measure of manufacturing employment, which was completed last month for the fourth time this year. An inflation gauge on the factory gate slowed for the sixth straight month.
ISM Manufacturing Business Survey Committee Chair Timothy Fiore said: “Companies are now managing headcount through hiring freezes and turnover to lower tiers, with mid- and long-term demand more uncertain.”
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However, Fiore noted that there have been no comments from companies on large-scale layoffs, which he says suggests “companies are confident in near-term demand.” The Fed’s tightening monetary policy campaign has fueled fears of a recession next year and prompted a sharp sell-off in stock markets.
“In many ways, this is the slowdown in the economy that the Fed would like to see,” said Will Compernolle, senior economist at FHN Financial in New York. “However, it may merely reflect a consumer shift away from goods and towards services.”
The ISM Manufacturing Purchasing Managers’ Index fell to 50.9 this month from 52.8 in August, its lowest reading since May 2020. ISM said the decline in the index “reflects companies adjusting to potential future lower demand “. A reading above 50 indicates expansion in manufacturing, which accounts for 11.9% of the US economy.
Economists polled by Portal had forecast the index to fall to 52.2. Nine manufacturing industries, including machinery, transportation equipment, and computer and electronics products, reported growth. Furniture and related products as well as textile mills and wood products were among the seven industries that reported a decline.
ISM Purchasing Managers Index
Part of the slowdown in manufacturing reflects the rotation of spending from goods to services. Government data last Friday showed that spending on durable goods rose little in August, while spending on services rose.
The US Federal Reserve has raised interest rates since March from near zero to the current range of 3.00% to 3.25%, and last month signaled more big hikes were on the way this year.
The higher cost of credit undercuts spending on expensive items, such as appliances and furniture, that are typically purchased on credit.
No savings were made on the construction either. A separate report by the Department of Commerce on Monday showed that construction spending fell by the most in a year and a half in August as single-family home construction fell 2.9%.
“It’s all due to higher borrowing costs and weaker demand,” said Jennifer Lee, senior economist at BMO Capital Markets in Toronto. “The call for a mild recession is still valid.”
Stocks on Wall Street traded higher. The dollar fell against a basket of currencies. US Treasury bond prices rose.
construction expenses
ORDERS, EMPLOYMENT CONTRACT
Transportation equipment manufacturers said “production is stable, allowing for backlog reduction with slightly weakened demand.” Metal product makers reported that “business is flat to down due to inflation and interest rates.”
Manufacturers of electrical appliances, appliances and components said “business remains strong.”
The ISM survey’s forward-looking new orders sub-index fell to 47.1 last month from 51.3 in August, also its lowest reading since May 2020. It was the third time this year that the index had shrunk.
Export orders also shrank amid weak demand in Europe, a sluggish Chinese economy and a strong dollar. Order backlogs are also being reduced and inventories at manufacturers and their customers are approaching normal levels.
While shrinking backlogs pointed to a further slowdown in manufacturing, it was also a function of reducing supply chain bottlenecks. The ISM gauge of supplier shipments fell to 52.4 from 55.1 in August, the lowest reading since December 2019. A reading above 50% indicates slower shipments to factories.
The views on the offer were mixed. Manufacturers of electrical appliances, appliances and components said “some commodities within the supply chain are beginning to stabilise, while others are still causing production disruptions”.
However, machine manufacturers reported that “supply chain constraints are still an issue for many items,” also noting that “manufacturing-side staffing remains a significant concern.” Similar views were shared by manufacturers of computer and electronics products, who reported that “supply chain issues for all electronic components and custom build-to-print materials are tight due to capacity and skills shortages”.
The loosening of supply chains meant that inflationary pressures at the factory gate continued to ease.
A measure of prices paid by manufacturers fell to 51.7 from 52.5 in August, the lowest since June 2020. The slowdown is largely being driven by the fall in commodity prices. Annual consumer and producer inflation slowed in August, raising hopes that prices had peaked.
The ISM survey’s measure of factory employment fell to 48.7 from 54.2 in August. Though the index has shrunk four times this year, it has been a poor predictor of manufacturing payrolls in the government’s closely-watched jobs report, which have been growing steadily.
While job growth slows, labor demand remains strong. At the end of July there were 11.2 million job vacancies across the economy, with two vacancies for every unemployed person. Initial applications for unemployment benefits remain low.
“Employees may have simply voluntarily left manufacturing jobs for other types of jobs,” said Isfar Munir, an economist at Citigroup in New York.
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Reporting by Lucia Mutikani; Edited by Chizu Nomiyama and Andrea Ricci
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