MNI INTERVIEW: US Manufacturing Downturn Not Over - ISM Chief

U.S. manufacturing contracted for the eighth consecutive month in June and will not recover in the short term with revenue and employment expected to continue to come down, Timothy Fiore of the Institute for Supply Management told MNI.

"I personally think it's going to go lower," Fiore said about the ISM manufacturing PMI, also refraining from reiterating past guidance of seeing the PMI in a 47 to 51 range. "I just don't see any reason why it won't go lower."

Fiore, chair of the ISM Manufacturing Business Survey Committee, said he is seeing panelists back off factory plans on the lack of new orders and the continual decline in backlog that is causing increased layoffs in the sector.

DEMAND CONCERNING

The ISM manufacturing index fell 0.9pp in June to 46.0, below Bloomberg expectations of 47.1 and the lowest level since May 2020. The ISM measure of new orders contracted for the tenth consecutive month, but increased 3ppts to 45.6, around where Fiore expects new orders levels in coming months. Readings below 50 indicate contraction.

The survey picked up a larger number of industries contracting strongly, with 44% of industry sectors registering PMI of 45 or less.

"That's the highest number that I've recorded since I've been tracking this for about a year," Fiore said, noting the slowdown includes chemicals and computers coming in under 43. "That means 31% of manufacturing GDP is contracting under 43."

The ISM PMI is "concerning" and the "fact that there is no real demand" is a "concern," he said. "The only positive thing in the whole report here really is that customer inventories recovered slightly from the prior month."

"Without demand coming back we are going to continue on this path" of contraction, Fiore concluded.

LAYOFFS RISING

The resulting downward pressure on goods prices also appears to be intensifying, with the decline in the prices paid index to 41.8 in June, from 44.2 in May and 53.2 in March. Fiore said the price index could continue to move down and repeated that could leave inflation on a closer path to the Fed's 2% inflation target.

The ISM employment subindex fell 3.3ppts to 48.1 in June. "People are using layoffs more now than they were in May and that will probably continue," he said. "I don't want to say we're on a trend here but I would not be surprised if the employment number in July is more towards 46 or 45."

"The most extreme action to take to reduce your expenses is through headcount reduction in layoffs and we're now seeing more and more of those occur," he said. "That's all in line with the fact that companies are looking at their second half and the plan for the production side is not going to be that much different than what we saw in Q2."

Asked if there is a way to square claims from some commentators that economic growth is rebounding amid a continuing manufacturing recession, Fiore said: "I'm an advocate that the manufacturing PMI leads us in and leads us out [of recessions] and I guess my only comment is that we're not being led out yet."