MNI INTERVIEW: ISM Manufacturing Seen Contracting Until March

U.S. manufacturing is likely to remain in contraction for several months but growth appears likely in the second quarter after the Federal Reserve signaled interest-rate cuts, survey chair Timothy Fiore told MNI Wednesday.

Three out of four respondents in December still indicated positive sentiment, Fiore said, even before the Fed's last meeting where it indicated three 25 basis point cuts by the end of this year. "The manufacturing community is saying they are going to be moving forward. They're not waiting for the sky to fall," he said.

The ISM manufacturing index rebounded slightly more than expected to 47.4 in December, also just above the trailing 12-month average of 47.1. The composition of the report was softer with a decline in the forward-looking new orders component.

FED PIVOT

The ISM new orders gauge fell 1.2 points to 47.1 in December. Fiore said he is expecting new order levels to surge starting in a few months.

"Given the situation with interest rates improving in 2024, what does that mean to our business? Anybody who supports capital equipment is going to build," Fiore said. "It's going to take a couple of months and then people are going to put in new plans with the current economic environment that shows a three step reduction in interest rates."

"That's going to open up the gates here on new orders and we're going to see that new order index come up," he said. "Things were already starting to get there on their own. The Fed cutting interest rates is just pure tailwind. I'm not going to say it's a gale force but it's pretty good tropical storm."

"Given things where they were without Fed acting and consistent with the forecasts, I would expect that the new order numbers are going to get into into the 50s by March but less than 55," Fiore said. "With interest rates coming down, we could be looking at something in the 55 to 60 range."

INFLATION RISK

The December ISM report also showed the prices subindex tumbling 4.7 points to 45.2, largely due to energy and reversing the jump the previous month.

Continued disinflation isn't a sure thing and market pricing of nearly 150 basis points of Fed cuts could be foiled, Fiore said. (See: MNI INTERVIEW: Bullard Says March Is Too Early For Fed To Cut)

"The biggest risk to 2024 is the return to unacceptable levels of inflation," he said. "If prices go up again, the Fed will withdraw those three rate reductions."