–ISM’s Fiore: May Have Turned Corner on Soft Orders; Expect Pickup in 2nd Half of 2023
–Fiore: Firms Keeping Headcounts to Prepare for Recovery in 2nd Half
–Fiore: Manufacturing Relies on Domestic Demand but Firmer China Demand Positive
By Max Sato
(MaceNews) – U.S. manufacturing activity was in contraction territory for the third straight month in January on lower new orders and production as sellers and buyers remained deadlocked over lead times and pricing, but firms are maintaining headcount in expectation of a pickup in the second half of 2023, data from the Institute for Supply Management released Wednesday showed.
The sector index compiled by the ISM, which shows general direction, stood at 47.4, down from a revised 48.4 in December, 49.0 in November and a revised 50.0 in October and coming in below the median economist forecast of 48.0.
“Regarding the overall economy, this figure indicates a second month of contraction after a 30-month period of expansion,” Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement. “With Business Survey Committee panelists reporting softening new order rates over the previous nine months, the January composite index reading reflects companies slowing outputs to better match demand in the first half of 2023 and prepare for growth in the second half of the year.”
The ISM has said a manufacturing PMI reading above 48.7, over time, generally indicates an expansion of the overall economy.
The index has been on a gradual downtrend since the end of 2021. The latest figure remains the lowest since May 2020, when the index at 43.5 was recovering from a low of 41.6 the previous month during the first wave of the pandemic. The all-time low is 29.4 hit in May 1980.
The new orders Index slumped 2.6 points to 42.5 in January from a revised 45.1 in December, staying in contraction territory for five months in a row. The production index slipped 0.6 point to 48.0 after posting an unexpectedly sharp
drop to a revised 48.6 in December from a revised 50.9 in November.
“I think sellers and buyers still agree to disagree in terms of the lead times and pricing structure,” Fiore told reporters, basically repeating his assessment made last month that the current situation is a temporary standoff between suppliers and buyers amid falling prices and softer demand.
“The interesting thing is that commodity markets were reversing at yearend and that’s going to put more pressure on sellers actually to arrive at prices,” he said.
The prices index rose to 44.5 in January from 39.4 in December, but remained in contraction for the fourth straight month.
“Business is still strong, but we have begun to see softening in some pricing, and lead times seem to be improving,” a firm among the makers of computer and electronic products told the ISM. A company in the miscellaneous manufacturing category said, “Customers are being quite aggressive in pursuing price decreases, far beyond the price relief we are actually receiving from our suppliers.”
“Some business segments showing demand softening globally,” said a firm in the electrical equipment, appliances and components industry. “Many materials showing improved lead times as well as cost deflation.”
Also on the upside, the new export orders index was still below the key 50 level, but improved 3.2 points to 49.4 in January after falling to 46.2 in December from 48.4 in November. Fiore noted more active Chinese demand.
The customers’ inventories index contracted slightly from 48.2 to 47.4, a positive for future production. The backlog orders index at 43.4 versus 41.4 in the prior month posted a second straight rise but is still in strong contraction.
Fiore said firms are positive about a pickup in the economy in the second half of 2023, and that business conditions for manufactures for the year are likely to be similar to those seen in 2022 based on projections in the latest corporate earnings reports.
“We have 25% of headline comments indicating that order rates are so soft, down from 31% in December, so we may have turned the corner on that and see what February says,” Fiore said.
He also said about only 20% of the sector was reducing headcounts in the January survey.
“The only reason why they retain headcounts is in preparation for something in the future…towards the second half of the year,” he said. “I think what’s happened is that companies decided not to lay them (workers) off because it’s hard to get them back and they are going to miss the upside in the second half.”
Fiore noted that the U.S. manufacturing sector relies about 80% on domestic demand but recovering Chinese demand is “positive” for the sector overall.
The employment index edged down to 50.6 in January after unexpectedly returning to expansion territory in December, surging to a revised 50.8 from a revised 48.9 in November.
The supplier deliveries index reading continued to show faster deliveries. It rose
0.5 point to 45.6 from 45.1 the previous month, which was the lowest since 43.2 seen in March 2009.
The manufacturing sector is in the sixth contracting phase in the past 20 years. Previously, the ISM manufacturing PMI posted contraction just before the pandemic hit the global economy, from August to December 2019 and from March to May 2020. The deepest slump in the past two decades was recorded from September 2008 until July 2009 (the bottom was 34.5 in December 2008) triggered by the U.S. credit crisis.