MNI INTERVIEW: ISM Mfg Chief - Technical Recession Possible

U.S. manufacturers are experiencing weaker business growth in the face of global disruptions and, while data suggest the sector should be able to sustain moderate growth levels through yearend, there is a risk that widening concerns about growth could become self-fulfilling, Institute for Supply Management chair Timothy Fiore told MNI Friday.

Fiore maintained his view that U.S. manufacturing will see steady growth through the end of the year, attributing June's surprising 3.1ppt drop in the PMI to 53.0 to the 8.4ppt drop in supplier deliveries to 57.3 and weaker-than-expected new orders.

But he acknowledged that sentiment is turning and could cause future demand to sour even though it is not showing up now in his report. "We'll talk ourselves into it," he said about a recession. "Even if Q2 is negative GDP growth, big deal. Does it really feel like a recession? No. Are we laying people off left and right? No. It could be a technical recession."

OVERHANG

The ISM manufacturing index fell sharply versus consensus expectations for a small decrease. But despite the 5.9ppt fall in new orders and the 2.3ppt decline in employment, Fiore projected a positive outlook, pointing to the 0.7ppt increase in production to 54.9.

"If you look at the PMI sub-indexes, the two that brought down the headline number was supplier deliveries with that 8.4ppt decline - if that had stayed solid then you'd see probably two additional points on the PMI - and then the new order number coming down," he said. "I believe based on the comments that I have is its overordering, its not lack of demand in the near-term."

"We all know that we've overordered for all of 2021 and the first quarter of 2022," he said. "So, we're sitting here with record lead times, with prices starting to come down, and so I'm not sure why that's a bad story."

"I'm still very good about this year. I'm not less confident at all," he said. "This is all supported by the fact that hardly a single company talks about letting people go or stopping hiring. Companies don't say the sky is falling and then continue to hire."

Asked about what he'd be looking for in the ISM report to signal an economic downturn, Fiore pointed to lead times and employment. "I'd be looking for lead times to collapse and for indications of a hiring freeze to really be convinced that there's something that's going to happen in Q4," he said. "I don't think there's anything here in Q3."

The ISM manufacturing chief noted risks coming from the Fed, and its front-loading strategy including another potential 75bp hike this month and the projected path to move the fed funds rate above 3% by yearend. Fiore said he expects the ISM prices subindex to fall to under 70 by yearend, from 78.5 today.

(See: MNI INTERVIEW: US Inflation Has Likely Peaked-Fed’s Andolfatto)

EAGER TO HIRE

The June report showed employment dropping 2.3ppt to 47.3, but Fiore dismissed it as a sign of any weakness. "The fact that we have 47.3, is a product of the quits rate and people retiring out," he said.

"In employment, around 85% of the comments were around wanting to hire," he added. "It means that we've had a slight reduction in our ability to retain staff on the factory floor for the month of June."