–ISM Manufacturing Index Falls to 4-Month Low of 46.7 After 3 Months of Gains
–ISM’s Fiore: Sector Still in Trough; Main Index Unlikely to Fall Back to 45
–Fiore: Concerned About Weak New Orders, Hit by Tight Monetary Policy
–Fiore: ‘I Wouldn’t Say’ Cumulative Effects of Rate Hikes to Block Recovery in New Orders
By Max Sato
(MaceNews) – U.S. manufacturing activity was in contraction territory for the 12th straight month in October, slowing at a faster pace than in September, as demand remains soft, leading to a sharp drop in new orders, slower growth in production and more aggressive layoffs, data from the Institute for Supply Management released Wednesday showed.
The sector index compiled by the ISM, which shows general direction, slumped 2.3 percentage points to 46.7 after rising 1.4 points to a 10-month high of 49.0 in September, which was led by higher new orders and production indexes as well as a surprise pickup in employment. It followed a 1.2-point rise to 47.6 in August, a 0.4-point rise to 46.4 in July and a 0.9-point fall to 46.0 in June. The latest figure was much weaker than the median economist forecast of 49.0. It remained below 50, which indicates contraction in the sector.
The index has been on a gradual downtrend since June 2022 but it seems to have hit a bottom in June at 46.0, which was the lowest since May 2020, when the index at 43.5 was recovering from a recent low of 41.8 the previous month during the first wave of the pandemic. The all-time low is 29.4 hit in May 1980.
“Demand remains soft, but production execution is stable compared to September as panelists’ companies continue to manage outputs, material inputs and — more aggressively — labor costs,” Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement. “Suppliers continue to have capacity.”
Last month Fiore told reporters that the U.S. manufacturing sector seems to have hit a bottom of around 46 in the ISM index, but also said higher interest rates for a longer period would be a source of concern for the sector.
“I think we are still in a trough,” Fiore said on Wednesday, based on the October survey results. “I don’t see us reversing here and dropping to 45 and less.”
Fiore told reporters that he is particularly “concerned” about the weakness in new orders, with the subindex for that category down at a five-month low of 45.5, but also said that he is not surprised by a decline in employment conditions and is confident that low backlog orders will pick up.
New order levels contracted at a faster rate compared to September as a result of sluggishness in three capital-focused industries (computer & electronic products; machinery; and fabricated metal products), which have been hit by tight monetary policy and uncertainty over the business outlook, he said.
“Companies are not really seeing the need to expand their capacity at present,” Fiore said. “It will be very interesting to see capex forecasts for 2024.” The ISM’s semi-annual survey on both manufacturers and service providers, due on Dec. 15, will indicate capital investment plans by member firms for next year, he said.
Asked whether the cumulative effects of the past interest rate hikes by the Federal Reserve that are set to emerge months ahead would prevent a meaningful recovery in new orders, Fiore replied, “No, I wouldn’t say that yet. We are going to have to wait and see here.”
Backlog orders have been contracting for 13 months and they will eventually run out, Fiore said.
“Backlog is starting to dip a bit,” a transport equipment maker told the ISM. “We’re hearing of cutbacks in 2024 ordering, but it’s still very strong compared to historical averages.” A machinery maker said, “Seeing a slowdown on bookings, and our backlog is down to five days from 15 weeks earlier this year.”
Labor management sentiment continues to indicate a slowdown in hiring and, in October, an increase in staff reduction activity. “Attrition, freezes and layoffs to reduce head counts increased during the period, with layoffs the primary tool, indicating a more urgent need to reduce staffing,” Fiore said in the ISM report.
Fiore said he is “okay with the employment number,” even though it fell a sharp 4.4 points to 46.8 in October after an unexpected 2.7-point jump to 51.2 in September.
One positive sign in the October ISM report is that the production subindex has been at or above the key 50 line for three months, he said, adding, “I would be very concerned if that number was in the 47 range.” It was in that range in February and March and even below 47 in June.
“A slow fourth quarter, and we’re clearly in a mild industry recession,” said a fabricated metal producer. “However, demand is down less than 5 percent, and customer confidence of a recovery in the second half of 2024 is solid.”
To assess the overall economic climate, the latest ISM survey indicates the overall economy contracted after one month of growth preceded by nine consecutive months of contraction and 30 months of expansion from June 2020 to November 2022. The ISM’s manufacturing PMI reading above 48.7, over time, generally indicates an expansion of the U.S. economy.
The October survey showed that 75% of manufacturing gross domestic product GDP contracted, up from 71% in September and 62% in August but down from 92% in July, Fiore said.
Among the five subindexes that directly factor into the manufacturing PMI, the new orders Index contracted for the 14th consecutive month, staying below the neutral line of 50. It plunged 3.7 percentage points to 45.5 in October after rising 2.4 points to 49.2 in September (the highest since 50.4 in August 2022) and dipping 0.5 point to 46.8 in August. It is the lowest since May, when it fell 3.1 points to a four-month low of 42.6.
The production index reading of 50.4 in October is a 2.1-point decrease from 52.5 in September, when it rose 2.5 points from 50.0 in August after rising 1.6 points to 48.3 in July. The index slumped 4.4 points to 46.7 in June, hitting the lowest since 34.2 in May 2020 at the initial phase of the pandemic.
The employment index slipped back to contraction after being into expansion for the first time in four months in September. It fell 4.4 points to 46.8 in October after rising 2.7 points to 51.2 in September, climbing 4.1 points to 48.5 in August and slipping to a three-year low of 44.4 in July. Previously, the index rose 1.2 points to 51.4 in May after popping into expansion territory for the first time in four months in April at 50.2. An employment index above 50.4, over time, is generally consistent with an increase in the Bureau of Labor Statistics data on manufacturing employment.
The delivery performance of suppliers to manufacturing organizations was faster for the 13th straight month amid generally improving supply chains. The supplier deliveries index at 47.7 is a 1.3-point rise from 46.4 in September, when it fell 2.2 points from 48.6 in August. The May figure of 43.5 is the lowest since 43.2 in March 2009. This is the only ISM subindex that is inversed; a reading of above 50 indicates slower deliveries, which is typical as the economy improves and customer demand increases.
Among other subindexes, the customers’ inventories index rose 1.5 points to 48.6 in October after falling 1.6 points to 47.1 in September, being unchanged at 48.7 in August and rising 2.5 points to 48.7 in July. It remains “too low” after plunging 5.2 points to a “too low” level of 46.2 in June (an eight-month low) from a “too high” level of 51.4 in May. The May figure is the highest in more than six years since September 2016, when it registered 52.5. The all-time high is 56.0 hit in January 2001.
The prices index indicated decreases for the sixth consecutive month. It rose 1.3 points to 45.1 in October after falling 4.6 points to 43.8 in September, rising 5.8 points to 48.4 in August, edging up 0.8 point to 42.6 in July and falling 2.4 points to a six-month low of 41.8 in June. The index has stayed below the key 50 level since it slumped 9.0 points to 44.2 in May.
The backlog orders index was in contraction for 13 months, falling 0.2 point to 42.2 in October after slipping 1.7 points to 42.4 in September, rising 1.3 points to 44.1 in August and climbing 4.1 points to 42.8 in July. It followed a 1.2-point gain to 38.7 in June and a 5.6-point drop to 37.5 in May, which is the lowest since the Great Recession (33.6 in February 2009).
The new export orders index was in contraction for the fifth straight month. It rose 2.0 points to 49.4 in October after rising 0.9 point to 47.4 in September, edging up 0.3 point to 46.5 in August and falling 1.1 points to 46.2 in July, slipping 2.7 points to 47.3 in June and edging up 0.2 point to the neutral level of 50.0 in May, which was preceded by nine straight months in contraction territory and 25 months of expansion from July 2020 to July 2022.
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.