MNI INTERVIEW: U.S. Mfg Could Be On Path To Contraction - ISM

U.S. manufacturing could be on a path to a contraction in the first half of 2023 after activity grew at the slowest pace in more than two years in September, Institute for Supply Management chair Timothy Fiore told MNI Monday.

"We definitely have a slowdown here and I wouldn't be surprised if we have contraction," he said. "The data supports that we are in a transition."

Fiore, who in the summer said U.S. manufacturing would see steady growth through the end of the year, has downgraded his outlook and isn't ruling out a recession in the next six to nine months. The ISM manufacturing PMI is unlikely to exceed 50 for the next six months, he said.

The ISM manufacturing index decreased 1.9pp to 50.9 in September, worse than expectations and the lowest since May 2020. The new orders sub-index fell 4.2pp to 47.1, with prices easing 0.8pp to 51.7. Readings below 50 indicate contraction.

WEAKNESS LINKED TO FED HIKES

Some weakness is linked to the Fed's tightening campaign that started in March, Fiore said. "The Fed is doing what they want to do pretty much, they're slowing things down. It will take a while for that to really be felt and we're finally starting to feel it now," he said. Survey respondents haven't said one way or another whether the Fed is overdoing it.

Officials have warned the FOMC will raise interest rates to dampen demand and see inflation fall back to target. (See: MNI INTERVIEW: Fed Needs To Hike To At Least 5%- Bordo)

The ISM chief expressed concern demand is already weaker with new orders on a downward path that is unlikely to bounce back in coming months. "Order streams, lead times, and total inventory need to come into alignment for the manufacturing community to continue to expand," he said. Inventories are also elevated after some "over-ordering" and the stockpiles will take some time to clear out.

The September ISM report showed employment falling 5.5pp to 48.7 and there are other signs of reduced confidence such as a decline in the quit rate of workers as companies pull back, Fiore said.

"They don't want to overstaff down the road," he said. "People are putting their playbooks in play and that could mean that if two people quit then you only hire one. We'll see more of that in the October report."