MNI INTERVIEW: US Manufacturing Heads For Mild Contraction-ISM

U.S. manufacturing is on the path to a mild contraction after activity grew at the slowest pace in more than two years in October, Institute for Supply Management chair Timothy Fiore told MNI Tuesday, adding that he sees scope for prices to continue to fall further.

"I think we're going to end up in contraction, but that doesn't mean we're headed for a recession," he said. "We are seeing a gradual shift."

Fiore's view of the manufacturing sector has darkened since the summer. The ISM manufacturing PMI is likely to settle in a range around 48 to 52 but not crater further to the low 40s, he said in an interview.

The ISM manufacturing index decreased 0.7pp to 50.2 in October, better than expectations but the lowest since May 2020. Readings below 50 indicate contraction.

The underlying composition was firm, with production up 1.7pt to 52.3 and new orders up 2.1pt to 49.2. The decline in the PMI reflected larger declines in the supplier deliveries sliding 5.6pt to 46.8 and inventory falling 3.0pt to 52.5.

FED HIKES

While some weakness is linked to the Federal Reserve's tightening campaign to fight inflation, Fiore said, there is scope for additional tightening that could put the economy in a mild recession.

But Fiore pushed back against more extreme Fed tightening, given that the ISM's prices paid measure fell by 5.1pt to 46.6, the lowest since May 2020. Over the past seven months, the index has decreased 40.5 percentage points and Fiore said he is expecting scope for further decreases to the low 40s.

"You now have a better buyer-supplier balance when it comes to pricing and they can now negotiate a bit, whereas over the last two years you had take it or leave it," he said.

Fed officials have warned the FOMC will raise interest rates to dampen demand and see inflation fall back to target and ex-officials have told MNI that may now mean raising rates to 5% or above. (See: MNI: Ex-Officials Now See Fed Rate Peak At 5% Or Higher)

The October ISM report showed employment bouncing 1.3pp to 50 but there are signs that labor demand is flagging.

"For every three companies, we've got two that are still hiring, but we've got one that's freezing or turning down," Fiore said, adding that earlier this year it was closer to nine to one. "Our panelists continue to use hiring freezes and attrition to moderate the long term headcount in anticipation of future output softening."