MNI INTERVIEW: No Recession In Sight As ISM Poised For Gains

ISM's gauge of U.S. manufacturing activity will likely take another step up in June and July as China reopens, Institute for Supply Management chair Timothy Fiore told MNI Wednesday, noting continued strong consumer demand and rebuffing fears of a possible recession.

U.S. manufacturing activity picked up in May as demand for goods remains strong, and the reopening in China and surge in goods transport later this month may only push the ISM PMI higher, Fiore said.

The ISM manufacturing index increased in May 0.7ppts to 56.1, against consensus expectations for a slight decrease, led by new orders, export orders, and inventories that were up 4.3ppts to 55.9. "We're still running on inventory," he said.

"I really think we're gonna run 55 or 58 all the way through the end of this year and hopefully into Q1," he said about the headline PMI.

HIGHER ON DELIVERIES

While U.S. manufacturers have started to experience some pain due to the shutdowns in China as part of Beijing's zero COVID-19 policy, Fiore said the reopening that is getting underway in China will only unleash a wave of ships to American ports.

"You'd see the PMI number going up with the ports getting backed up," he said. "It's the reverse effect of what you would expect but as suppliers struggle more, the indexes get higher," he said, suggesting supplier delivery numbers could shoot higher this summer "probably into the 90s," as inventory numbers draw down.

"When you have situations like this, similar to a hurricane, it drives that number up, indicating that essentially inputs are blocked somehow, and that drives the supplier delivery number up because you are not getting the deliveries," he said. "This is uncoupled from demand."

Fiore also again pressed against recession talk, even as he said he expects some West Coast port slowdown this summer and greater supply chain tumult.

"This is going to be a tumultuous supply chain, transportation sector all the way through the end of the year, through the Lunar New Year 2023," he said. Fiore didn't express much confidence in labor negotiations to be settled soon at West Coast ports in which the current bargaining agreement expires on July 1.

But Fiore maintained a positive tone. "As long as you have demand everything else is just a challenge," he said, still noting that some manufacturers have commented on seeing signs of some softening demand.

Non-metallic materials, chemical products and fabricated metal products, which make up less than 25% of manufacturing GDP, reported softening demand but it is primarily due to extended lead times and still-high prices, Fiore said. "I'm not even really worried about demand but over the longer-term there could be an impact from the Fed in housing."

LABOR'S SLOW SLOG

The ISM's May report also showed employment dropping 1.3ppts to 49.6, showing a contraction for the first time in nearly a year. A reading above 50 indicates expansion.

Fiore said that the number of businesses reporting easier hiring conditions has risen, but still nearly a third commented on the number of employees quitting.

"Labor is still top of mind," he said. "There is some improvement, but it has a long way to go and I think on the employment side here it's going to be a slow slog."