–ISM: Some Firms Now Using Layoffs in addition to Hiring Freezes
–ISM’s Fiore Sees Index in Range of 48 to 52, around Breakeven Point of 50
–Fiore: Protests in China No Major Impact on Supply, More of Issue for US Exports
–Fiore: Demand Pickup May Not Necessarily Need Lower Interest Rates
By Max Sato
(MaceNews) – 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, data from the Institute for Supply Management released Thursday showed. The monthly survey also indicated 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 slipping to 50.2 in October from 50.9 in September. It was weaker than the median economist forecast of 49.9. Of the five subindexes that directly factor into the index, two (production and inventories) were in growth territory, though both eased. Only six out of the 18 manufacturing industries reported growth in November.
The index has been on a gradual downtrend after holding at 52.8 in August and slipping in July from 53.0 in June. The latest figure 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 is 29.4 hit in May 1980.
The ISM noted that a manufacturing PMI reading above 48.7, over time, generally indicates an expansion of the overall economy. Therefore, the November figure of 49.0 indicates the overall economy grew in November for the 30th consecutive month following contraction in April and May 2020.
The past relationship between the manufacturing PMI and the overall economy indicates that the manufacturing PMI reading for November corresponds to a modest 0.1-percent growth rate in real gross domestic product (GDP) on an annualized basis, Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in statement.
“Manufacturing contracted in November after expanding for 29 straight months,” Fiore said. “Order backlogs, prices and now lead times are declining rapidly, which should bring buyers and sellers back to the table to refill order books based on 2023 business plans,” he said.
The new orders index remains in contraction territory at 47.2 in November, down from 49.2 in October. It had slumped 4.2 points to 47.1 in September from 51.3 in August.
“Customer demand is softening, yet suppliers are maintaining high prices and record profits,” a firm in the computer and electronic products industry told the ISM. A chemical maker said, “Future volumes are on a downward trend for the next 60 days.”
“Looking into December and the first quarter of 2023, business is softening as uncertain economic conditions lie ahead,” a firm in the plastics and rubber products category said.
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.
“Consumer goods are slowing down in several of our markets, although the U.S. economy seems decent,” a company in the food, beverage and tobacco products industry told the ISM survey. “Cannot say the same for the European economy.”
Fiore said he had been predicting contraction in the manufacturing index in the last few months, with the PMI expected to settle in range of 48 to 52. “At this point, I don’t see that changing much,” he told reporters.
The manufacturing sector is in its sixth contracting phase in the past 20 years, he said. 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.
Asked about the protests in some Chinese cities against the government’s strict zero-Covid policy, Fiore replied, “I don’t think it is impacting our ability to access materials from China into the U.S.,” he said, adding that there is a plenty of inventories in the U.S. for now. “I don’t think it’s an import issue, it’s more of an export market issue for us.”
In response to questions, Fiore said interest rates do “not necessarily” have to come down from the current high levels for demand for manufactured goods to come back.
“I don’t think interest rate is primarily restricting future demand,” he said, although adding that the construction industry has been hit by higher borrowing costs. “We are in a post-pandemic era … we are now entering into the period of (forecasting) what’s the future demand for 2023,” he said. Last month, he said lower orders came mainly from supply catching up with reopening demand.
Later, Fiore told Mace News via email, “I don’t see any evidence that panelists are reacting to Fed policy. Their reaction is based solely on a decline in new orders.”
He was asked whether the outlook for less aggressive Fed tightening as well as the recent slight easing in inflation data in the U.S. and some other countries are helping support sentiment among manufacturers.
In the latest data, the production index continued showing growth but at a slower pace as it dipped 0.8 point to 51.5 in November after rising 1.7 points to 52.3 in October from September.
The employment Index returned to contraction territory in November at 48.4, down 1.6 points, after rising 1.3 points to 50.0 in October and dipping into contraction for the first time in three months in September, when it plunged 5.5 points to 48.7.
The supplier deliveries index indicated faster deliveries. It edged up to 47.2 in November from 46.8 in October, when it fell from 52.4 in September for the lowest since 43.2 in March 2009.
The auto industry has benefited from easing supply bottlenecks, Fiore told Mace News. Global semiconductor shortages “continue to be an issue but less so compared to a year ago,” he said.
Amid signs that global inflation may be peaking, the prices index continued falling to 43.0 in November from 46.6 in October, when it slipped into contraction from 51.7 in September. It is the index’s lowest reading since May 2020 (40.8).