MNI INTERVIEW: US Manufacturing Set For 4Q Rebound - ISM Chief

U.S. manufacturing activity contracted for the ninth consecutive month in July but there are finally signs emerging that suggest the sector could be on a slow path to eke out some growth near the end of the year, Timothy Fiore of the Institute for Supply Management told MNI.

"We're probably in the manufacturing contraction trough, and from here we'll probably start to build out," the ISM manufacturing survey chief said in an interview. "I don't see a spike, but I do see a slow recovery here back towards the 50 number" in the PMI. "We could be in a trough period here below 50 for two or three more months."

Fiore said it is a positive sign manufacturers increased layoffs in July. "Up to July we had a lack of demand and now we are seeing revenue and output adjusting to a new reality. We had been burning off backlog and we are now destaffing. We are rightsizing factories to future demand," he said.

"I don't see any reason to think the PMI will go below 46," he added. "We're getting much more into a normal supply-demand environment."

NEW ORDERS BOTTOM

The ISM manufacturing index increased 0.4pp in July to 46.4, below market expectations for 46.9. The ISM measure of new orders contracted for the eleventh consecutive month, but increased 1.7pp to 47.3. The measure is up from 42.6 in May. Readings below 50 indicate contraction.

Demand appears set for a rebound, Fiore said, noting a change from last month's pessimistic tone. "I think we've seen the bottom here on the new orders and the backlog contraction side. I think the output side now is where all the focus is and I think panelists are taking the necessary actions to de-staff and rightsize consistent with the next half-year worth of output."

"The new order number kind of drives everything. Getting a number above 50 is going to be really important here in terms of stopping layoffs, managing production output, and seeing supplier delivery numbers come up. You'll see inventory first come up, maybe followed by supplier delivery, and then the new order number and then that will bring backlog with it."

The ISM chief has followed five attributes to gauge manufacturing, including the percent of industries with their own PMI under 45, chemical products, the hire-to-fire ratio, transportation, and lead times. Fiore said in July three of the five improved, up from just one in the last few months.

RIGHTSIZING STAFF

Fiore doesn't expect factory employment conditions to continue to worsen after falling below 50 for a second straight month. The ISM employment subindex dipped 3.7pp to 44.4 in July, its lowest reading in three years.

"We've probably taken lots of the action that we wanted to. I don't know why people would be waiting for August to do it again. Maybe there's a desire here to make sure you rightsize to enter Q4 so you're ready when you enter the first half of next year."

Prices remain in contraction and at a fast rate, Fiore said. The prices paid index increased 0.8pp to 42.6. Panelists’ comments indicate a buyers’ market, as sellers move to filling order books to support their weak backlogs. (See: MNI INTERVIEW: Powell Opens Door To End Of Fed Hikes-Weinberg)