MNI INTERVIEW: US Factories Weakened By Demand Not Weather-ISM
MNI (WASHINGTON) - The ISM manufacturing index fell for a seventh month to a 15-month low in October on lackluster demand while hurricane-related disruptions to transportation temporarily boosted the prices index into inflationary territory, survey chief Tim Fiore told MNI Friday.
The October ISM report suggests the U.S. factory sector continued to struggle coming into the final quarter of the year – not because of Hurricanes Helene and Milton that put thousands of people out of work across the southeast, but due to a lack of healthy order books going back months, Fiore said.
"The weather had less of an impact than expected. It’s difficult to determine how much impact came from the hurricanes. It could have impacted prices and production by one point," he said in an interview.
The production index fell 3.6 points to 46.2, its biggest drop since April 2021, and the prices index rose 6.5 points to 54.8. Supplier deliveries, which would have been the first metric hit by weather disruptions, was steady, Fiore said.
"More companies reduced output as they forecast in May for Q4. That’s by far the prominent reason," he said.
TRANSITORY PRICE SURGE
Business plans have for months indicated reduced output, which goes hand in hand with falling employment as factories continue to cull their ranks, Fiore said. The employment index added 0.5 point to 44.4 and has been in contractionary territory for five straight months.
"If it was the hurricane, you wouldn’t see employment coming down that strongly," he said. "We’re looking at reduced output as predicted since May."
The rise in prices last month also largely reflected surcharges for expedited freight to move product before and after the hurricanes, as well as oil rigs in the Gulf of Mexico temporarily taken offline, and isn't expected to last.
"This is a blip," Fiore said. "I don’t see it as foundational or fundamental factors."
POST-ELECTION INFLATION CONCERNS
Clarity on the Fed's plan for lowering interest rates in light of expansionary fiscal policy by the incoming U.S. president will be crucial for the manufacturing sector, Fiore said.
Both Donald Trump and Kamala Harris have big spending plans that could stoke inflation though divided Congress could put a check on spending and tax cut proposals. (See: MNI INTERVIEW: US Faces Growing Fiscal Dominance Risk-Leeper)
"Both candidates have fiscal policies that will make it harder for the Fed to reduce rates," Fiore said, adding he expects the FOMC to follow through on promised rate cuts with a quarter point at each of the remaining two meetings in the year before it takes a breather to assess the direction of fiscal policy.
"In 2019, manufacturing was starting to contract even before pandemic in large part because of the overhang of tariffs put on China and Europe," Fiore said, adding if Trump is elected again, he will likely make good on the promise of across-the-board tariffs on imported goods.
"After 25 months of declining backlog and contracting new orders, we need to be convinced rate reductions are staying in place."