MNI INTERVIEW: US Manufacturing Nearing Growth Phase, ISM Says

The U.S. manufacturing sector is gradually stabilizing and edging closer to a new phase of expansion as new orders posted their strongest reading since May 2022, Institute for Supply Management chair Timothy Fiore told MNI.

"I think we are in the beginning of a demand growth cycle," said Fiore in an interview, adding the headline ISM measure could start to signal expansion for the sector as early as the first quarter. "I still think we're looking at a PMI at 50 or greater in March."

The ISM manufacturing composite gauge rose by 2 points to 49.1 in January, well above consensus, and the highest reading since October 2022. The improvement was driven by a sharp jump in the new orders index, up 5.5 points to 52.5. It was only the second expansionary reading in 20 months and a sign the sector is starting to regain its footing.

SLOW AND GRADUAL

Fiore emphasized the process of recovery for the factory sector, which according to ISM has been in contraction for 15 months, is just taking hold, adding growth will return only slowly.

"We're beginning to climb out, but I'd need another month to say we are climbing out but all we can see is stability or upside. The climb out is going to be like more of a 747 rather than an F-22," the ISM chief said. "It's going to be slow and gradual. The fundamentals are saying that demand is returning. The question is how fast and how much?"

Fiore said the Federal Reserve's communications Wednesday largely eliminating upside risks to interest rates will help growth this year. "Panelist companies are much more willing to invest in working capital, especially in the first half of 2024," he said. (See: MNI INTERVIEW: Ex-Fed's Lockhart Sees No Rush To Cut In 1H)

WEAK EMPLOYMENT

Despite the prospect of a manufacturing rebound, employment remains depressed. The ISM employment index ticked down 0.4 points to 47.1, and Fiore said firms are laying off more workers than they are hiring for the first time in three years.

"Companies really don't think that the market is going to grow at any significant rate until the second half of the year, but it's not going to contract in the first half," he said.

The prices paid index jumped almost 8 points to 52.9, the highest since April. Still, Fiore said the ripple effects from events in the Red Sea and the Middle East are manageable.

"Our biggest issue is price and inflation settling at levels that are unacceptable," he said. "With demand coming back, that's going to fuel price growth discussions in 2024."