–ISM Manufacturers Predict Prices Paid to Rise 1.9% in 2024; Services Firms See Stickier 3.2%
–ISM’s Fiore: No Firms See Urgent Need to Expand Capacity When Demand Forecast Is Still Weak
–ISM’s Nieves: Firms Wary of Spending on Capex, Labor amid Uncertainties Over US Election, Geopolitical Risks, Inflation
By Max Sato
(MaceNews) – The U.S. economy is expected to continue expanding “softly” for the rest of 2024 as both manufacturers and services providers project lower revenue growth, and thus slower capital spending, amid sticky inflation and lingering geopolitical risks, according to the twice-annual survey by the Institute for Supply Management released Wednesday.
Recent financial market predictions of a delayed interest rate cut by the Federal Reserve until later this year didn’t seem to have a big impact on the survey results because heightened expectations for an earlier and more frequent policy easing had not emerged when the previous semiannual survey was conducted in November to early December.
Positive for supply managers and Fed policymakers is that manufacturing companies in the ISM’s semiannual survey expect that the prices they pay will increase by 1.9% in 2024, slower than the 3.3% rise they forecast in December and in line with the Fed’s 2% inflation target. By contrast, services firms forecast a 3.2% climb in the prices paid this year, easing only slightly from the 3.4% predicted late last year.
“With 12 manufacturing industries expecting revenue growth in 2024 and nine industries expecting employment growth in 2024, panelists forecast that recovery will continue the rest of the year, albeit somewhat softer than originally expected,” Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement.
Sentiment in each industry was generally consistent with the ISM sector report for April and the semiannual economic forecast conducted in December, he said.
“The services sector will continue to grow for the rest of 2024,” Anthony Nieves, chair of the ISM Services Business Survey Committee, said. “Thirteen industries forecast increased revenues, down from the 16 industries that predicted increases in December 2023.”
Fiore said there is not much difference in Fed rate cut expectations between now and about five months ago (Dec. 15, 2023), when the ISM’s last semiannual report was issued. At the time, he called remarks by Fed Chairman Jerome Powell made earlier that week a “Christmas gift” as they suggested that the U.S. central bank appeared to be done with rate hikes and that the economy might be able to avoid recession.
Asked about the lack of rate relief support from the Fed, Fiore told reporters that firms didn’t have the benefit of heightened rate cut expectations during the previous semiannual survey period, either. Nieves said it is still uncertain whether the Fed will lower its policy rate in September as some market participants expect but noted that at least the Fed didn’t hike rates in the past six months.
The panel of purchasing and supply executives in the manufacturing expects a 2.1% net increase on average in overall revenues for 2024, much slower than the 5.6% rise projected in the December but higher than the 0.9% increase reported for 2023.
Fiore noted that the manufacturing sector’s revenue growth forecast at 2.1% is similar to their prices paid prediction at 1.9% for this year, which means much of the revenue will reflect a pass-through of higher costs during a “slow growth period.” On the upside, he told reporters, the U.S. earnings season has seen good results.
Services survey respondents forecast that business revenues for 2024 will grow by an average of 2.9%, down sharply from the 6.9% increase projected in December and lower than the 4.2% increase reported for 2023.
Manufacturers expect capital expenditures to increase a modest 1.0% in 2024, down sharply from the 11.9% surge forecast in December. Surveyed firms are being “conservative” about their capex plans, Fiore said, adding, “Nobody is seeing the urgent need to go ahead and expand their capacity when the demand forecast is still weak.”
Services providers also expect a slower increase of 1.4% in capex for 2024, compared to a 2.9% predicted late last year. The services sector is being “wary” about their spending on equipment and labor, Nieves said. “There are so many variables involved right now as we are going through this election period as well as geopolitical concerns, and inflation again is paramount,” he said.
Companies in the manufacturing sector are currently operating at 82.8% of normal capacity, down slightly from 83.0% in the December survey but up from 82.0% in the May 2023 report. Services firms are operating at 88.6% of normal capacity, up from 86.5% reported in December but down from 91.0% seen a year earlier.
Respondents in the manufacturing sector reported a net average increase in prices paid was 1.6% for the first four months of 2024, below the 3.2% rise predicted in December. Services respondents said purchases during the same period cost an average of 2.3% more than at the end of 2023, also down from the 3.7% increase forecast in the previous report.
Employment growth for 2024 predicted by ISM manufacturers is a slight 0.3% increase, revised down from a 2.0% rise forecast in December. Services providers expect a 0.8% rise, unchanged from their December projection. Nieves repeated his recent assessment that employment conditions for the services sector remain “a mixed bag” as some firms are still struggling to fill vacancies.
The ISM’s latest monthly survey showed that U.S. manufacturing activity slipped back into slight contraction in April (the key index at 49.2) after posting the first expansion in 17 months in March (50.3), hit by a “disappointing” decline in new orders and a renewed surge in raw materials costs, but employment conditions continued improving toward growth.
The ISM’s other monthly report also showed business activity in the U.S. services sector unexpectedly slipped back into slight contraction in April after 15 months of growth, hit by sluggish demand and still mixed but cooling employment amid lingering concerns over inflation and geopolitical risks. The ISM sector index slumped 2.0 percentage points to a 16-month low of 49.4 in April after falling 1.2 points to 51.4 in March.