–ISM’s Fiore: Manufacturers See Stable Business Plans, Fed Policy Not Heavily Restrictive
–ISM’S Fiore: US Manufacturers Expect Dollar to Firm in 2023; Stronger Dollar Net Negative for Exports
–ISM’s Nieves: Both Manufacturing, Service Sectors See Continued Growth into 2023
By Max Sato
(MaceNews) – Supply management executives at U.S. manufacturers and service providers continue to expect their revenues will grow in 2023 despite higher borrowing costs and lower but elevated inflation, Institute for Supply Management officials said Thursday, based on the ISM’s semiannual survey.
But Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, told reporters that supply managers appear to be uncertain about the outlook. “This is a very unclear period,” he said.
The survey showed manufacturing supply managers have a mixed outlook, with 27% of respondents predicting 2023 will be better than 2022 and 27% of them predicting 2023 will be worse than 2022. Services supply managers are positive in their outlook, with 31% of respondents predicting 2023 will improve compared to 2022.
Anthony Nieves, chair of the ISM Services Business Survey Committee, agreed, saying the outlook may become “clearer,” after seeing business performance in the first quarter of 2023: How the current contraction in the manufacturing sector will evolve and how the service sector, which is showing slower growth but not in contraction, will fare.
“Manufacturing’s purchasing and supply executives expect to see overall growth in 2023,” Fiore said in a statement. “They are pessimistic about overall business prospects for the first half of 2023, but project growth returning in the second half.”
The ISM’s semiannual survey released Thursday showed respondents expect raw materials pricing pressure to increase in 2023, but still see their first-half 2023 profit margins improving over the second half of 2022. Manufacturers expect employment in the sector to grow by 3.9% in 2023 relative to December 2022 levels, while labor and benefit costs are expected to increase an average of 5.8%
Manufacturers also predict growth in both exports and imports in 2023.
The panel predicts that prices paid for raw materials will increase 2.5% during the first five months of 2023, with an overall increase of 2% for the year, which would be slower than a reported 11.4% increase in raw materials prices between the end of 2021 and 2022, Fiore said.
“Services supply executives report operating at 89.9% of normal capacity, slightly less than the 91% reported in May 2022,” Nieves said in a statement. “They are optimistic about continued growth in the first half of 2023 and expect more growth in the second half, with a projected increase in growth rate for capital reinvestment.”
“They forecast that their capacity to produce products and provide services will rise by 3.4% during 2023, and capital expenditures will increase by 2.8%. Services panel members also predict their overall employment will increase by 1% during 2023,” Nieves said.
Services survey respondents predict purchases in the first five months of 2023 will cost an average of 5.4% more than at the end of 2022, which would be less than the 11.0% increase reported for 2022.
Asked if there are any assumptions among respondents in the ISM survey as to how the Federal Reserve will slow the pace of its credit tightening and whether it will start cutting interest rates, Fiore said manufacturing panelists appear to believe that the level of interest rates set by the Fed is “very close to restrictive and it might go into restriction, but it’s not going to be heavy restriction, so business plans are going to be stable in 2022 to 2023.”
To the same question, Nieves noted that the U.S. labor market remains tight. The latest jobs data showed the unemployment rate was unchanged at 3.7% and employment grew at a more-than-expected pace of 263,000 in November.
“So, we are not having those deep cuts (in employment) that we would normally see going into a deep trench of a recessionary period,” Nieves said. “What respondents are telling us in both sectors is that there is still continued growth out there, moving forward.”
The Federal Open Market Committee raised the target range for the federal funds rate by 50 basis points to a range of 4.25% to 4.50% on Wednesday, as expected, slowing the pace of its tightening from the 75-point hikes conducted at the previous four meetings. Tuesday’s CPI data showed easing price pressures.
The ISM survey also showed that the U.S. dollar is expected to strengthen versus the currencies of seven major trading partners in 2023, which Fiore said would have a net “negative” impact on the manufacturing sector as a stronger dollar makes U.S. exports more expensive. For multinational firms, the dollar’s strength also means lower revenues when sales in the euro, for example, are converted into the U.S. currency, he added.
On the bright side, however, Fiore noted that when the dollar gets stronger, commodities markets tend to get weaker. “Maybe that’s why we are seeing oil prices at lower levels and so are (the prices for) steel and aluminum.”
U.S. manufacturing activity slipped into the first contraction since the initial stage of the pandemic as aggressive tightening by major central banks is slowing global growth and there are signs of a cooling labor market, although supply chains continued improving while price pressures may be easing. The sector index compiled by the ISM, which shows general direction, fell further to 49.0 in November after sliding to 50.2 in October from 50.9 in September.
The new export orders index is below the breakeven point of 50 for the fourth straight month amid slower demand from China and the European Union, although it rose to 48.4 in November after falling from 47.8 in September to 46.5 in October, which was the lowest since 39.5 in May 2020.
By contrast, U.S. service sector growth picked up slightly in November after slowing in the previous two months, backed by holiday season demand and at the initial stage of the government’s new fiscal year that began in October. The main ISM index indicated the sector continued growing for the 30th straight month, staying above the key 50 line. It rose 2.1 percentage points to 56.5 from October, when it dipped 2.3 points to 54.4.