MNI INTERVIEW: Rising Risk Of Sharper US Factory Slowdown-ISM
MNI speaks with manufacturing chair of the Institute for Supply Management.
U.S. manufacturing activity and employment could face a more severe slowdown later this year as the Federal Reserve's higher-for-longer interest rate policy takes a toll on investment, ISM survey chair Timothy Fiore told MNI Monday.
"The statement that we're going to hold rates where they are higher for longer isn't doing enough to spur confidence for people to go ahead and invest in capex and inventory, and longer term -- meaning second half of this year -- that's going to have a real impact on our performance," the ISM chief said in an interview.
ISM's headline manufacturing index fell short of expectations in June, edging down marginally to 48.5, from 48.7, partly driven by declines in production (-1.7ppts to 48.5) and employment (-1.8ppts to 49.3).
"The key here is production. As long as production stays 50 or above, then the revenue level is manageable, and therefore companies can take their time deciding on expanding any kind of employment or reducing their headcount and they've been reducing headcount for quite some time now," Fiore said.
"If that number gets much weaker, then that could precipitate a number of other things, and I think it's a great indicator for a number of other things, meaning employment," he said. "Anything south of a 46.5, that could precipitate an employment reduction a lot more aggressive than what we've seen so far."
HOLDING PATTERN
Soft manufacturing is reflecting headwinds from the Fed’s high interest rate policy as well as a relatively strong U.S. dollar and the consumer’s ongoing reallocation of disposable spending power toward experiences and away from things, Fiore said.
While there are rising risks of a slowdown, Fiore said his new base case is for a moderate decline in manufacturing in the coming months, with the PMI slightly negative, but maintained manufacturing remains in a growth cycle, albeit slow. "We're still in a very weak expansion cycle," he said.
"In the near-term, I don't see us getting to 52 or 53 without some fairly significant rate reductions. I think we're sitting here at 48 or 49 and I don't see anything that would change that trajectory in the next three months. I don't think anybody's talking about a rate cut inside of September and perhaps December is more likely at the earliest." (See: MNI INTERVIEW: Fed Will Stay Patient On Rocky Road To 2%-Evans)
It was encouraging that the new orders gauge rebounded 3.9 percentage points in June to 49.3, reversing the sizable drop in May, he said. Still, the new orders index remained below 50 for a third straight month and Fiore suspects a meaningful increase in demand won't come back until there are interest rate reduction.
Absent an increase in new orders, "we're kind of just going to sit here and and drift along," Fiore said. "We need demand to come back, and without demand, we're just kind of holding the fort."
PRICES EASING
One encouraging aspect of the June report was a decline in the prices measure to a six month low of of 52.1.
There were 9 commodities reported up in price versus 7 reported down in price, and 3 reported in short supply. The index was lower mainly due to notable price reductions for steel-related products, Fiore said.
"Having pricing kind of stabilize is consistent with our May forecast expecting 1.9% price growth for the entire 2024 year, of which we've seen 1.6% through May," Fiore said.