–ISM: New Orders Remain in Contraction; Employment at Breakeven Point
–ISM: Firms Using Hiring Freezes, Attrition to Cope with Softer Demand in Future
–ISM’s Fiore: Survey Indicates Contraction Ahead, Not Necessarily Recession; Collapse of New Orders Unlikely
–Fiore: Contracting New Export Orders Concerning; China Down, Worst for Europe Yet to Come
By Max Sato
(MaceNews) – U.S. manufacturing activity growth continued decelerating in October as aggressive tightening by major central banks is dampening global demand and domestic supply is catching up with reopening demand, data from the Institute for Supply Management released Tuesday showed.
Companies are putting hiring plans on hold and not replacing workers when they quit as firms brace for a future drop in demand, ISM said, repeating its analysis from last month.
The sector index compiled by the ISM, which shows general direction, dipped to
50.2 in October from 50.9 in September, just above the median economist forecast of 50.0. The index has been on a gradual downtrend after holding at 52.8 in August and slipping in July from 53.0 in June. October’s 50.2 remains the lowest since May 2020, when the index at 43.5 was recovering from a recent low of 41.6 the previous month during the first wave of the pandemic. The all-time low was 29.4 in May 1980.
The main index stayed just above the breakeven point of 50, indicating that the overall economy expanded for the 29th consecutive month, but the expansion streak may end soon.
“The U.S. manufacturing sector continues to expand, but at the lowest rate since the coronavirus pandemic recovery began,” Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in statement. “With panelists reporting softening new order rates over the previous five months, the October index reading reflects companies’ preparing for potential future lower demand.”
“Like in September, mentions of large-scale layoffs were absent from panelists’ comments, indicating companies are confident of near-term demand. As a result, managing medium-term head counts and supply chain inventories remain primary goals,” he said. “With the decline in the backlog of orders Index, buyers and sellers will begin to shore up order books and order streams to reduce share loss in the medium-to-long term.”
The new orders index remains in contraction territory at 49.2 in October, up 2.1 points from September, when it slumped 4.2 points to 47.1 from 51.3 in August following 48.0 in July and 49.2 in June.
But Fiore told reporters, “I don’t see a collapse of new orders. I don’t see a collapse of the PMI.”
“I think we are going to have contraction but that doesn’t mean heading into recession,” he said. “We may not grow for a period of time.” Fiore noted that the ISM manufacturing PMI posted contraction just before the pandemic hit the global economy, from August to December 2019.
Slowing demand is widespread among U.S. industries as higher borrowing costs amid credit tightening by the Federal Reserve first hit the interest-rate sensitive housing market six months ago and the effect has spread to producers of chemicals, electronics, autos and machinery, Fiore said.
“But I don’t think it’s interest rate directly related,” he added. “It’s just that we’ve caught up with a lot of demand .… now prices are coming down and we are waiting for the lead times to come with it.”
A transport equipment maker told the ISM survey: “Challenges with labor and parts delivery are easing. Order levels are slowing down after pent-up demand in the previous month.”
“We have seen a general pullback in available capital budgets from our customers, and that is having a significant impact on our sales in the fourth quarter,” said a machinery maker.
A chemical producer said: “Customers are canceling some orders. Inventories of finished goods increasing. Expect some bounce back as some customers may be waiting for commodity prices to decline (further).”
Looking ahead, Fiore said many panelists commented that they are concerned about recession, primarily because of interest rate growth.
A company in the food, beverage and tobacco products category told the ISM: “Growing threat of recession is making many customers slow orders substantially. Additionally, global uncertainty about the Russia-Ukraine (war) is influencing global commodity markets.”
Fiore also said slowing export demand is “concerning” as Chinese demand is slumping and the worst for Europe has yet to come.
The new export orders index is below the breakeven point of 50 for a third consecutive month, falling 1.3 points to 46.5 in October from 47.8 in September and hitting the lowest since May 2020, when it rose to 39.5 from 35.3 the previous month.
The customers’ inventories index remains low at 41.6, unchanged from the previous month, while the index of backlog orders slipped into contraction, falling 5.6 points to 45.3 from 50.9.
By contrast, the production index continued showing growth, rising 1.7 points to 52.3 in October from September, when it rose 0.2 point to 50.6 (it was below 53.5 in July).
The employment index rose 1.3 points to 50.0 in October after dipping into contraction for the first time in three months in September, when it plunged 5.5 points to 48.7 after rising 4.3 points to 54.2 in August.
The supplier deliveries index indicated faster deliveries as it fell 5.6 points to 46.8 from 52.4 for the lowest since 43.2 in March 2009. The inventories index dropped 3.0 points to 52.5 as panelists’ companies continued to manage the total supply chain inventory.
The prices index indicated decreasing prices for the first time since May 2020 as it slipped 5.1 points to 46.6 in October from 51.7 in September for a seventh straight monthly drop and is now in contraction territory, which should encourage buyers.