RPT-MNI INTERVIEW: US Factories Seen Contracting Thru Year-End

(Story first published Sept. 3)

MNI (WASHINGTON) - U.S. manufacturing activity will likely continue to contract in coming months but the risks of a harder landing appear smaller now that interest rates are on their way down, ISM survey chair Timothy Fiore told MNI Tuesday. 

The ISM manufacturing composite rose 0.4 point in August to 47.2, reflecting a return to stockbuilding, with mixed readings across other major components. Markets had anticipated a bigger rebound to 47.5. 

"I don't expect it to get a lot worse. I don't expect this getting below 45. I do expect this to stay below 50 probably for a couple of more months," Fiore said in an interview. "I don't think we're terrible here, but I don't think we're great." Fiore expects the PMI to rise in the first quarter of 2025 to just above 50 as the Federal Reserve begins cutting rates and uncertainty surrounding the U.S. presidential election comes to an end. 

Still, Fiore said the headline PMI index likely overstated the manufacturing outlook in August. Adjusted with inventory levels seen in recent months would put the PMI around 46, he said. "That's a much more accurate reflection of really where we are." 

WEAK DEMAND

The new orders index contracted for the fifth consecutive month in August, down 2.8 points to 44.6. "Right now, demand is non-existent," said Fiore. Employers have been forced to reduce their worker ranks as a result, he said.  

"We released a lot of people last month. We released a lot of people this month," Fiore said. "The fact that 66% of my comments are layoffs, they see it as a bit more urgent. They're willing to tap people on the shoulder and tell them they don't have a future or they're willing to basically push them out the door."

"We need demand. We need an order book," he said. "Without that confidence factor, you're less likely to hold on to those people, more likely to let them go, and I think we're in that environment right now."

Rate cuts from the Federal Reserve should help lift demand but the effects will take time. "If the Fed came along next week and cut interest rates a percentage point, I'm not sure you'd see a big impact on manufacturing for three or four months. I just don't see it. I think we lost that opportunity for interest rates to spur demand in a reasonable period of time."

INFLATION PUT TO BED

The survey's measure of prices paid by manufacturers increased to 54.0 from 52.9 in July, reversing eight consecutive months of decreases.

Fiore declared post-pandemic inflation defeated. "The commodity markets are going to be accommodative. I don't see prices as a big issue in the near term at all," he said. (See MNI POLICY: Fed Increasingly Convinced It Defeated Inflation)