MNI INTERVIEW: US Manufacturing Rebounds, Price Hikes Concern

The U.S. manufacturing sector looks to have embarked on a new growth cycle after a year and a half of contraction but rising prices for a third straight month could set off concern at the Federal Reserve about a resurgence in inflation later this year, Timothy Fiore, chair of the Institute for Supply Management's manufacturing survey, told MNI.

The March ISM manufacturing headline index far exceeded market expectations at 50.3, up 2.5 points from February and rising above the break-even 50 level for the first time since September 2022. Output as measured by the production and employment indexes surged, adding a combined 7.7 points to the headline index, and new orders crossed back into expansion territory. The Baltimore bridge collapse won't have a huge impact on shipping lines due to other options nearby, Fiore said.

The only negative in the report was the prices Index, which jumped to 55.8 from 52.5 in February after eight months of decreases. The higher rate of increase means more companies reported raw material price hikes last month.

"The manufacturing PMI tends to lead the overall economy by six to nine months," Fiore said in an interview. The average length of expansions for the sector over the past 20 years is about 32 months, with the shortest around 28 months. "So if we really are in an expansion, which I'm 80% confident that we are, then we're likely looking at at least a year, if not two years or more of an expansion cycle."

"The biggest issue now is the price structure and inflation," he said. "As long as inflation stays in a reasonable band, then the Fed is likely going to stay where they are. If inflation gets outside that band, and if they have to do something more drastic, that won't be good for us." (See: MNI POLICY: Fed's Rate Cut Timeline Shaken By Inflation Bumps)

FACTORS ALIGN

Factory employment contracted for the sixth month in a row but at a slower rate in March. "We were overstaffed and have been reducing headcount pretty aggressively," Fiore said. Layoffs accounted for 76% of reductions in March, up from 50% in February, signaling "time is urgent now on headcount reductions, which probably means they're going to end soon," Fiore said. By June, overall manufacturing employment may be expanding again, he said.

Demand indicators were positive last month, and comments about "softening" were at their lowest since May 2022, Fiore said. Purchasing managers surveyed also showed more willingness to invest in inventory.

"We've been waiting for this," Fiore said. "We were likely on a path of soft landing and most likely we're going to start to reinvest in working capital, but it's taken a bit of time to do that."

HARBINGER OF INFLATION?

The March ISM report all else equal could shorten the odds of a June start to rate cuts, Fiore said. The bigger fear is disinflation progress stalls out and causes the Fed to reverse course on rate cuts, he said.

The rolling three-month average of the ISM prices index is around 53, not as concerning as March's 55.8, the highest since July 2022. "It’s foundational stuff. We’ve fluctuated with energy markets," he said. "Hopefully this isn't a harbinger of much higher inflation numbers for March."

Growth forecasts for manufacturing this year were positive even before Fed Chair Jerome Powell signaled in December that interest rates were likely at their peak for the cycle, Fiore noted. Likely rate cuts this year offer a tailwind on top of that.

"What is driving our expansion is the fact that people think that they're capped out on interest rates and we would have grown anyway," he said. If the Fed keeps rates at the current level for longer, "it's not that big of a deal," he said. "If rates go up, that could be an issue."