MNI INTERVIEW: High Fed Rates Keeping A Lid On Factories-ISM

The prospect of higher for longer interest rates from the Federal Reserve is casting a pall over the manufacturing sector's growth outlook this year, ISM survey chair Timothy Fiore told MNI Monday.

U.S. manufacturing activity slowed for a second straight month in May as new goods orders dropped by the most in nearly two years, and Fiore said the weakness is directly linked to high official rates that are biting into capital expenditures.

"There is not a lot of optimism for growth in the next quarter without some movement on the Fed rate side," said Fiore, downgrading his assessment of this year's growth. "It's caused by higher interest rates and the uncertainty associated with" Fed policy, he said.

ISM survey respondents' description of the outlook ranged from "stagnant" to "picking up." Fiore said the sector is both "stalled" and "stable," but downgraded his near-term expectations for the PMI to a range of 47 to 51, from 49 to 53 last month.

The ISM composite slipped to 48.7 from 49.2, below market expectations of 49.7. The measure has languished in contraction territory for 18 of the past 19 months, but ISM's Fiore had expected a bit of a pick up in the first half of the year. In May, the new orders index fell 3.7 percentage points further into contractionary territory to 45.4, a 12-month low.

PLATEAUED

Overall, Fiore said "I think we plateaued" but "I don't see a decline yet." Higher-for-longer Federal Reserve interest rate policy is putting a hold on capex spending and the lack of rate movement has been a top comment in the survey, he said. (See: MNI POLICY: Fed Officials Clash On Extent Of Rate Restraint)

Interest rate uncertainty has caused companies to focus more on liquidity and become more reluctant to invest in working capital, Fiore said.

"The lack of new orders is definitely concerning," Fiore added, downplaying the increase in the unemployment index in May. The employment index rose 2.5 percentage points to 51.1, growing for the first time since last September.

"The uncertain demand here and the lack of new orders coming in, there's no really significant hiring entity going on. Don't overread the 51.1," Fiore said. The prices index fell 3.9 percentage points to 57.0.

"Nobody wants to get stuck with the hot potatoes, whether it be excess employees, too much inventory, or commitment on the capex side that they don't know how they're going to finance," he said. "Without some kind of movement on the monetary side here, we're probably sitting where we're going to sit for quite some time."

The ISM chief also downplayed the chance of a surge in manufacturing growth if the U.S. economic outlook changes, making it possible for the Fed to begin rate cuts in September rather than later. In addition, rate cuts would not cause an "explosion of growth," Fiore said. "We are kind of stuck."