MNI INTERVIEW: US Manufacturing Faces Hard Landing Risk- ISM

MNI (WASHINGTON) - U.S. manufacturing activity and employment are facing an increased risk of a more severe slowdown in coming months, with little hint of relief in the outlook until the Federal Reserve begins to lower interest rates, ISM survey chair Timothy Fiore told MNI Thursday. 

"Manufacturing is headed for continual contraction at probably moderate levels, whereas up to this point in the two-year decline it's been a marginal kind of contraction," Fiore said in an interview, indicating Fed Chair Jerome Powell knew about the weak ISM report on Wednesday.  "We could end up in a moderate to hard contraction on the manufacturing side, even though the general economy may not ever see that." 

The ISM manufacturing composite gauge was weaker than expected in July, falling by nearly two points to 46.8, the softest reading since November, and largely driven by sharp falls in the employment, new orders, and production indices, with employment plunging to 43.4, from 49.3, its lowest level seen since the midst of the pandemic.

The ISM chief said interest rate uncertainty is a major factor behind the weakness, and survey respondents do not see clarity until the Fed moves on interest rate reductions and until after the November presidential elections. He would have liked to have seen a Fed cut this week. 

The market is now pricing just shy of four consecutive Fed cuts after the ISM report, but Fiore doubted the Fed would initiate a series of consecutive rate cuts, even if it "would be enough to kind of get things going" in the manufacturing sector by the end of the year. He added that one or two cuts are likely not "going to jog anything really loose."

"It's not like Chairman Powell didn't know this number yesterday," Fiore told MNI. "We try to give them a heads up so they are not blindsided. There's no benefit of the Fed being blindsided by anything."

PROLONGING THE PAIN 

The Fed waiting to reduce interest rates in September is "not a deadly decision," but it is "going to prolong the pain" in manufacturing, he said. (See MNI INTERVIEW: Fed Could Be Forced To Play Catch-Up-Coronado)

Fiore said a 46.8 in the manufacturing ISM PMI corresponds to 1.2% US GDP growth, and he doesn't seem much upside to either the headline figure or the employment index in the short-run. 

"It's probably going to hang where it is and stay there for several months, because once you start laying off it's going to continue on," he said. 

SEEKING CONFIDENCE

For months, Fiore has said manufacturers were gauging the outlook and judging whether to increase layoffs. 

"People have been ready for this, and they pulled the trigger. Here we go," he said, noting that seasonal adjustment factors also boosted the new order level number up almost two points. "You can kind of get a feel for how bad this is."

More than half of the manufacturing sector was contracting at a 45 or less in July, while 87% of the sector was in some form of contraction, Fiore said. That's the biggest number since September 2022 and likely won't turn around until there is greater confidence around interest rates and the presidential elections, Fiore said.